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In mid-September, in a situation of the growing financial instability the Bank of Russia reduced by 0.25 % the minimum rates both on operations related to provision of liquidity on the open market (Lombard auctions and direct REPO auctions) and most of its permanent operations (Lombard loans, direct REPO operations, gold-secured loans, non-market assets or sureties). Simultaneously, the Bank of Russia increased interest rates on permanent deposit operations by 0.25 %. Thus, the Central bank of Russia reduced ever more the spread between the rates on loans and deposits which factor is to contribute to higher efficiency of its interest rate policy.

Also, as the situation with liquidity on the banking market was getting worse the Bank of Russia made a decision to expand the banks refinancing opportunities. From November 1, the Central Bank of Russia resumed extension of loans secured with non-market assets or sureties for the period from 91 days to 180 days at the rate of 7.5%. In addition to that, from the above date the term of the gold-secured loans was extended to 180 days. Thus, the instruments of refinancing which the Bank of Russia used for backing the liquidity of banks during the 2008-2009 crisis became available again to commercial banks.

Section The Monetary and Budget Spheres Source: Rosstat, the Central Bank of the Russian Federation, the IEP calculations.

Fig. 6. The rates of the Central Bank of the Russian Federation on the main operations related to provision and absorption of liquidity, as well as the rate on the inter-bank lending market in the 20082011 period On November 25, the Bank of Russia declared that from December 5, 2011 the minimum ratings which the securities issuers were required to have in order to be included in the Lombard list of the Central Bank of Russia would be lowered. Also, starting from December 1 the Bank of Russia stopped applying a discount in calculation of the cost of a security in direct REPO operations for the period of up to six calendar days with federal loan bonds and bonds of the Bank of Russia. And finally, from December 1 the adjustment ratio which is applied for adjustment of the cost of the federal loan bonds which are accepted as security for loans of the Bank of Russia was raised from 0.98 to 1. The decisions made were aimed at providing commercial banks with more opportunities to attract refinancing from the Bank of Russia.

The activities of the Bank of Russia in the second half of the year were aimed at support of the banking sector and demonstrated that in case of worsening of the global economic situation the Central Bank of Russia was prepared to make up promptly for the shortage of liquidity.

In general, to our opinion, judging by the results of 2011 the Bank of Russia has made progress in its switchover to inflation targeting by means of interest rates. However, it is to be noted that the external factors were favorable for doing that. In particular, the total surplus of the balance of payments was insignificant, a good harvest contributed to reduction in prices on agricultural products and no urgent measures to support the financial sector or cool the economy were required. At the same time, the efficiency of further steps in introduction of inflation targeting will depend to a great extent on the global economic situation which remains highly uncertain. However, it is believed that the policy of the Bank of Russia aimed at both reduction of its interference in the functioning of the foreign exchange market and management of the money supply by means of the interest rates is a correct one.

In conclusion of this section, it is to be noted that early in November the Bank of Russia submitted for consideration to the State Duma the draft Guidelines for the Unified State RUSSIAN ECONOMY IN trends and outlooks Monetary and Credit Policy in 2012 and the 2013-2014 period. In the next three years, the Central Bank of Russia is planning to complete the switchover to inflation targeting. Within the frameworks of the strategy of the consistent reduction of the growth rates of prices, a goal was set to reduce the inflation rate to 4%5% a year by 2014. According to the Central Bank of the Russian Federation, the main objective of its interest rate policy consists in reduction of its direct interference into the exchange rate mechanism and creation of conditions for a switchover to the floating exchange rate regime. With interference of the Central bank of the Russian Federation into functioning of the foreign exchange market becoming less substantial, the interest rate management policy will have a key role to play in the process of monetary and credit regulation. The decision on changing of interest rates will be normally passed on a monthly basis with the analysis of inflationary developments taken into account.

Other important objectives set by the Bank of Russia in the mid-term prospect are as follows:

Support of financial stability (for that purpose the Bank of Russia will pay a particular attention to a timely identification and evaluation of the risks taken by banks and ensuring of transparency in credit institutions activities); it is believed that within the frameworks of attainment of the above goal a particular attention is to be paid to the issues of the macroprudential regulation and counter-cycling supervision over commercial banks;

Development of the infrastructure of the financial markets and expansion of their capacity;

it is believed that the best contribution of the Central Bank of the Russian Federation in solution of that issue is ensuring of financial stability and the low rate of inflation which prompts economic agents to saving;

Raising of information openness by the Bank of Russia in the sphere of the monetary and credit policy; in the past few years the Bank of Russia has made large progress in making its policy transparent and at present it is catching up with the worlds best prototypes; at the same time it has got the potential for upgrading the quality of the analytical work and analysis of the macroeconomic situation.

2.1.4. Balance of Payments1 and the RUR Exchange Rate In 2011, continuation of the soft monetary and credit policy by leading global economies and rising tensions in the Middle East and North Africa prompted growth in prices on primary products. As a result, the export of products of the fuel and energy complex from the Russian Federation rose by 34% as compared to the previous year. At the same time, at year-end the capital outflow from Russia turned out to be much higher than it was expected by the Government and the Bank of Russia which situation points to the fact that the risks of investment into the Russian economy are high. As a result, at year-end the countrys balance of payments was quite strong, however, in the mid-term prospect its vulnerability to the foreign economic market situation is apparent.

According to the preliminary evaluation of the 2011 balance of payments of the Russian Federation published by the Central Bank of the Russian Federation, the current account balance amounted to $ 101.1bn, which is an increase of 44% as compared to 2010 (Table 4). The trade balance rose by 31% (from $151.7bn to $198.1bn) with export of goods increasing by Analysis of the balance of payments was carried out on the basis of preliminary data of the Central Bank of Russia. http://cbr.ru/statistics/print.aspxfile=credit_statistics/bal_of_payments_est.htm&pid=svs&sid=opb Section The Monetary and Budget Spheres 30% (from $400.4bn to $ 21.4bn) and import, by the same 30% (from $248.7bn to $323.3bn).

The share of the export of oil, petroleum products and natural gas amounted to 65.3% of the total value of export and increased by 1.9 % as compared to 2010. It is to be noted that in 2011 the volume of both the export and import turned out to be the record-high in the entire latest history of the Russian Federation.

Thus, as in the previous years the main factor which determined the value of the current account balance was the trade balance which in its turn depended to a great extent on movement of prices on energy carriers and other important goods of the Russian export on global markets. On the basis of the data shown in Fig. 7, it is seen that such a relation between the global prices on oil and the trade balance as was observed in the 20022010 period was evident throughout 2011 as well.

The deficit of the balance of services amounted to $37.1bn and rose (in absolute value) by 27% as compared to 2010. The export of services amounted to $55bn and rose by $9.9bn as compared to the previous year (+2%). In 2011, the import of services rose by 24% and amounted to $92.1bn.

In 2011, the balance of labor remuneration increased in absolute value and amounted to $9.4bn (as against $8.5bn in 2010). In 2011, the deficit of the balance of investment income rose by 18% as compared to 2010 and amounted to $47.3bn. Investment income receivable rose from $ 3.7bn to $39.3bn. Growth in income receivable as regards non-financial institutions from $ 61.7bn to $73.1bn determined the growth in the total income receivable from $73.8bn to $ 86.6bn.

In 2011, the balance of current transfers1 amounted to $3.2bn (against $3.6bn in 2010).

So, in 2011 the main factor behind preservation of a considerable current account balance of the balance of payments of the Russian Federation was growth in prices on the main commodities of the Russian export. In particular, the average annual price on Brent oil increased by 40%. It is to be noted that in 2011 growth in the external private sector debt of the Russian Federation renewed (see Table 4). If in 2010 the external debt of banks and the non-financial sector decreased by $27bn, in 2011 the growth in their debt amounted to $51.3bn. As regards the external public debt, it did not change much within the year and decreased by $1.3bn. A favorable situation on the market of energy carriers permitted to form the state budget with a surplus and do virtually without borrowings on the foreign market. In the short-term prospect, growth in the external debt, both private and public, due to a shortage and high cost of financial resources on the domestic market, as well as the budget deficit can be expected.

According to the information of the Central Bank of Russia, the current transfers increase the level of the disposable income and consumption of goods and services on the part of recipients and decrease the disposable income and potential consumption opportunities of the donor, for instance, humanitarian aid in the form of consumer goods and services. The current transfers are recorded in the current account. Transfers which are not current by definition are capital ones. Capital transfers result in changes in the volume of assets and liabilities of the donor and the recipient and are recorded in the capital account. If the donor and the recipient are residents of different countries the capital transfer results in a change in the level of national wealth of the economies they represent. An example of capital transfers may be a free of charge transfer of the title to property to capital assets and debt forgiveness.

RUSSIAN ECONOMY IN trends and outlooks Table The main items of the balance of payments and the dynamics of the foreign debt in the 20092011 period (billion $) 2009 2010 Index I Q. II Q. III Q. IV Q. Year I Q. II Q. III Q. IV Q. Year I Q. II Q. III Q. IV Q. 1 YearCurrent account 9.7 8.0 15.1 15.9 48.6 33.6 18.5 5.5 12.7 70.3 31.2 21.9 18.4 29.6 101.Capital and -32.4 3.3 -26.7 12.2 -43.5 -11.6 9.2 -6.6 -16.5 -25.5 -15.9 -8.7 -20.2 -30.5 -75.financial instruments accountChange in the 30.5 -14.2 9.1 -28.8 5.1 -16.6 -26.1 -2.7 8.6 44.8 -10.1 -12.9 1.8 8.6 -12.foreign exchange reserves (+ means reduction, while -, growth in the reserves) Net errors and -7.8 2.9 2.6 0.6 -1.7 -5.5 -1.6 3.8 -4.8 -8.0 -5.2 -0.3 0.1 -7.7 -13.omissions Change in the 19.1 51.5 6.3 -60.3 16.6 -34.2 19.6 7.9 -6.7 -13.3 20.7 29.2 -11.8 11.9 50.external debt of the RF (+ means growth, while -, debt reduction) Change in the 0.2 -1.5 -2.0 -3.7 -7.1 -2.4 4.1 9.4 2.5 13.7 1.3 0.0 -2.7 0.0 -1.external public debt of the RF Change in the 19.0 53.0 8.4 -56.6 23.7 -31.8 15.5 -1.5 -9.2 -27.0 19.4 29.2 -9.1 11.8 51.external private sector debt of the RF Source: The Central Bank of Russia.

Source: The Central Bank of the Russian Federation, ICE Stock Exchange and the IEP calculations.

Fig. 7. Trade balance of the Russian Federation and the global oil price index in 2006 Preliminary evaluation.

Preliminary evaluation.

Without taking into account foreign exchange reserves.

Section The Monetary and Budget Spheres In 2011, capital and financial instruments account balance grew considerably in absolute value and amounted to $75.3bn. In 2011, the balance of capital transfers amounted to $0.1bn.

So, in 2011 the deficit of the financial account amounted to $75.2bn.

Growth in liabilities of Russian economic agents to foreign economic agents amounted on a year-on-year basis to $ 65bn which figure is 50% higher than the index of the previous year ($ 44.4bn).

In 2011, external liabilities of federal regulatory authorities rose by the mere $ 0.3bn, while the reduction in external liabilities by the constituent entity of the Russian federation amounted to $0.8bn. A reduction in liabilities of monetary regulation authorities did not exceed $0.3bn.

In 2011, liabilities of the non-financial sector of the Russian Federation to non-residents increased by $58.2bn as compared to + $24.9bn in 2010. Consequently, foreign investors believe that investments in Russia are quite attractive with the existing level of return. Noteworthy, in 2011 direct investments into the non-financial sector amounted to $48.5bn as against $37.8bn in 2010, while portfolio investments decreased by $4bn ($5.1bn a year before). In 2011, the volume of the loan debt of the non-financial sector to non-residents increased by $15bn.

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