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-2009 2010 2011 * The World The USA Japan Germany The UK China Russia * jan. 2012 (2011 value).

Source: calculated on the basis of the data of the quarterly WEO IMF in the 20092011 period.

Fig. 35. The IMF quarterly forecasts of the real GDP growth in 2011, % More inconsistent are indicators of indices of the expected volatility as regards US equities and equities of developing countries (Fig. 36). In the second half of 2011, the above indices showed a considerable surge which can be taken as warning of growing risks on the equity market. However, in January 2012 the VIX index and the VXY index fell a great deal which situation is evidence of the fact that term market participants expect a drop in volatility of prices on equities of both US companies and companies from emerging markets in the next few months. At the same time, growth in the above indices does not always mean that the risks are getting higher. For instance, a surge of the index in May-June 2010 was not accompanied by the outflow of capital from funds which invest in Russia and other emerging markets.

Growth rates, % jul jul jul jan oct jan oct jan oct apr apr apr feb jun feb jun feb jun sep sep sep dec dec dec aug aug aug nov nov nov mar mar mar may may may RUSSIAN ECONOMY IN trends and outlooks VIX U.S. (S&P 500) Emerging Markets (VXY) Source: on the basis of the data of the WEO IMF January 2012 with reference to the Chicago Board Options Exchange.

Fig. 36. The index of expected volatility The above approach permits to identify conditions in which the funds of portfolio investors start to come back. It will take place once the IMF and other international financial organizations forecasts of economic growth rates of large countries are not revised downward and fluctuations of the VIX index have become less volatile. With the looming economic crisis in the European Union and lack of positive changes in the US economy taken into account, it is unlikely to happen in the first half of 2012. So, in that period the outflow of foreign portfolio investments will continue, but, probably, on a smaller scale.

3.5.3. Risks of Depreciation of the Ruble in the Mid-Term Prospect A trend of a slowdown of the inflow to Russia of new foreign exchange revenues which trend emerged in 2011 as well due to both stabilization of prices on the global commodity markets and the outflow of foreign capital which has continued for four years running, a transfer to a more flexible formation of the ruble exchange rate and a switchover by the Bank of Russia to targeting of the level of the inflation rate, primarily, by means of the instruments of the interest rate policy will eventually result in a situation where the dynamics of the money supply is no longer dependent on the foreign exchange reserves. The flow of foreign exchange revenues ceases to have a decisive effect on the money supply growth.

Generally, the above process is a positive one. In 2011, it resulted in the unprecedentedly low level of the inflation rate in this country. However, there is a risk that in case of shocks on financial markets advanced growth in the ruble money supply as compared to the foreign exchange reserves will result in a dramatic depreciation of the national currency. In case of a crisis on the global market or a panic on the domestic financial market when speculative demand by people and companies in foreign exchange has prevailed, the government and the Central Bank may lack foreign exchange reserves to meet such a demand and a devaluation of the national currency will be required.

The data shown in Fig. 37 gives an idea of the extent of such a devaluation. The above data shows the ratio between the official USD exchange rate in rubles as of the end of a month and the clearing rate of the US dollar which is determined by means of division of the points Financial Markets and Financial Institutions value of the money supply (2) by the value of the gold and foreign exchange reserve of the Russian Federation. From the end of 2009, the official ruble exchange rate started to fluctuate to a greater extent from the clearing rate, while in December 2011 the difference between those two rates reached the maximum level in the past decade. The clearing rate of Rb 49.per one US dollar can be regarded as a potential benchmark for the official ruble exchange rate in case of the most unfavorable development of the situation on the financial market; fortunately, such a development is highly unlikely. However, with the existing difference between the official ruble exchange rate and its foreign exchange provision, the monetary authorities or simply an invisible hand of the market will gradually weaken the ruble in the mid-term prospect. Such a scenario would be preferable for the domestic economy as well, since a smooth devaluation of the national currency is one of the most effective instruments of support of national manufacturers and it does not run counter to the WTO principles.

49,32,the clearing rate of the US dollar the nominal rate of the US dollar as of the end of the period 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -difference between the rates, Rb -Source: calculated on the basis of the data of the Bank of Russia and the Ministry of Finance of the Russian Federation.

Fig. 37. Dependence of the nominal USD exchange rate in rubles on the clearing rate 3.5.4. Risks of Accumulation of the External Debt by Banks and Non-Financial Companies The external debt of the non-public sector which is actually equal to the value of the entire gold and foreign exchange reserve of the Russian Federation (Fig. 38) is still one of the main risks of the financial system. A stable relationship between the size of the gold and foreign exchange reserves and that of the external debts of the private sector points to correlation between the above indices. On the one hand, centralization of a portion of the value made by the business in the form of the gold and foreign exchange reserve creates the required margin of safety for the financial system and limits the excessive appreciation of the ruble. On the other hand, in conditions of the global economy withdrawal of such an amount of funds from the RUSSIAN ECONOMY IN trends and outlooks revenues of the business creates inevitable difficulties for businessmen to maintain the expanded reproduction. To maintain it at the same level, they will need to compensate by means of external borrowings a portion of funds allocated to the states gold and foreign exchange reserves. It is for that reason despite the crisis and a pressure on the part of the government to make large state corporations reduce external borrowings a considerable reduction in the volumes of external borrowing fails to be achieved.

500 479 476 435 431,400 172,30 32 35 28 8 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 External debt of the private sector Gold and foreign exchange reserves, including the stabilization fund Value of assets of Russian businessmen participants in the Forbes rating of billionaires Source: on the basis of the data of the balance of payments for a number of years.

Fig. 38. Growth in debts of the private sector, financial surplus of the state and assets of Russian participants in the Forbes rating of billionaires In Fig. 39, the external debt data is provided separately in respect of banks and nonbanking companies. The external debt of banks increased from $144bn in 2010 to $164bn in 2011 (an increase of 13.9%). The debt of non-banking companies rose from $298bn in to $330bn in 2011 (an increase of 10.7%). The paradox of the situation with growth in the external debt of the private sector consists in the fact that the debt increased despite the considerable net outflow of foreign capital from Russia (about $85bn) and difficulties related to refinancing of external debts due to growing problems on global financial markets.

20 200 21 164 10 34 8 33 11 139 103 98 45 37 1998 2000 2002 2004 2006 2008 State authorities Monetary authorities Banks Non-financial enterprises Source: on the basis of the data of the balance of payment for the number of years.

Fig. 39. The external debt of the Russian Federation in the 1998-2011 period, billion $ billion $ Section Financial Markets and Financial Institutions 3.5.5. Operating Risks of the Stock Market and the Term Market In the past few years, the specifics of the stock market of equities consists in the advanced growth in the trading volumes as compared to assets of market participants and their customers. The data provided in Fig. 16 indirectly points to that fact; it shows growth in the number of anonymous transactions with a decrease in the size of the average transaction on the MICEX-RTS primary equity market. High-frequency trading is getting more popular. Annual contests for the name of the best private investor have actually turned into an indirect advertizing of high-frequency trading. The data on customers operations which is occasionally published in the mass media permits to believe that private customers with large brokerage companies renew on average their portfolio completely once in two-three days1. Unlike the developed markets, the tariff policy of Russian brokers does not imply any limitations on high-frequency trading by customers irrespective of the extent to which they are prepared to risks2.

Increased trading activity not only impairs often investment results of the bulk of private investors, but also creates higher operating risks to trading systems. In Section 3.2.5., the problem of frequent technical failures at Russian exchanges in 2011 was considered. Each year, the exchange actively makes efforts to process the ever-growing flow of bids in a situation where it is opposed by nearly 600 participants, some of which have got at their disposal enough resources no less than those of the exchange itself to buy state-of-the-art computers and software programs which permit to reduce frequency of trading decisions. It is to be noted that the effect of such a competition on growth in capitalization of issuers, attraction of new funds and upgrading of efficiency of investment is not clear at all. So, in the years to come due to operating problems in infrastructure organizations the issue of introduction of balanced measures to regulate high-frequency trading may be raised.

The RTS term market causes similar concerns. The number of transactions and trading volumes in the above market grow at a high rate (Fig. 40), while customers assets increase at a slower rate and the information on the number of participants in that market and their operating activities is not transparent.

It is to be noted that as compared to the earlier stage of development of the term market in the mid-2000s at present a lower level of surety of futures and options contracts is observed and the data in Fig. 41 points to that effect. Here is the information on the volumes of open positions on the futures and options market as well as surety of transactions in each market segment. The latter index is calculated by means of division of the monthly volume of open positions by the volume of trading in respective fixed-term contracts. From March 2009, recovery of trading volumes on the futures and options markets was accompanied by a drop in the level of surety of futures transactions from 10% of the trading volume in December to 5% at the present day while in the options market in the same period it fell from 146% to 74%.

BKS Makes Plans. Vedomosti, June 22, 2010.

Tariffs of US brokers imply charging of a flat brokerage fee in the absolute amount ($5 to $8 per transaction) of the sum of transactions which practice prevents persons who lack substantial assets in a brokerage account from high-frequency trading.

RUSSIAN ECONOMY IN trends and outlooks 7 000 000 28 000 26 000 6 000 000 24 000 22 000 5 000 000 20 000 18 000 4 000 000 16 000 14 000 3 000 000 12 000 10 000 2 000 000 8 000 6 000 1 000 000 4 000 2 000 - Futures trading volume Options trading volume Number of futures transactions Number of option transactions Source: on the basis of the data of JSC RTS.

Fig. 40. Trading volumes and the number of transactions on the RTS term market from September 9, 2001 through January 31, 300 000 250 200 150 100 50 - The volume of open positions on futures The volume of open positions on options Surety on the futures market, % Surety on the options market, % Source: on the basis of the data of JSC RS.

Fig. 41. Open positions and surety of deals on the RTS term market from February 1, 2001 through January 31, Trading volume, million Rb Number of transactions Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Jun-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Sep-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Dec-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-Mar-open positions, million Rb open positions/volume of transactions, % Feb-Feb-Feb-Feb-Feb-Feb-Feb-Feb-Feb-Feb-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-Aug-Nov-May-May-May-May-May-May-May-May-May-May-Section Financial Markets and Financial Institutions 3.5.6. Risks Related to REPO Deals Rapid development of the financial crisis on the stock market in August 2008 resulted in the crisis of the REPO market where a number of large market participants failed to meet their financial liabilities. The system crisis of non-payments was managed to be avoided thanks to interference by the Bank of Russia into in settlements and the problem of mutual nonpayments was fixed up. In the period that followed the crisis, the infrastructure of the exchange managed to solve the problem of establishment of a guaranteed system of settlements on REPO deals.

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