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Financing of the federal budget deficit at the expense of the market borrowings leads to a higher real interest rate for the borrowers (up to 2.5 3 pp. at the internal market), higher rates of inflation (due to final monetization of the debt by the authorities) and a slow credit activity of the banks. The CPI growth rates in this case will not drop below 7.9%. Even if the Central Bank curbs the nominal strengthening of the ruble currency, the real exchange rate of the ruble will exceed by 28% the level of 2008 summer by the end of 2013. The national debt will reach 21 -21.5% of GDP late 2013, this is close to critical values (in terms of the ability to serve the debt if the market situation changes) for such country as Russia whose national finances and the assessment of the country risks greatly depends on the oil price fluctuations.

RUSSIAN ECONOMY IN trends and outlooks The strengthening of the ruble also negatively influences the national payment balance.

Due to the fast growth of imports, the current accounts balance expects to become zero in 2013; given the absence of inflow of capital (as a result of low investment activity inside the country and enhancement of risks associated with the debt growth) this may lead to a negative payment balance and stabilization of the international reserves volume close to the pre-crisis maximum - $610 billion.

Summarizing the budget expansion case, we can note that this scenario suggests dependency of the RF economy on the oil prices and creation of conditions for a budget crisis in future. The imbalance of the RF budget system within the period under review (up to 3 years) is going to negatively affect the rates of economic growth, the payment balance, the speed of inflation reduction and the situation in the money circulation sector.

Section 3. Financial Markets and Financial Institutes 3.1. The Year of 2010: Recovery of Russian Financial Market The year of 2010 saw the continuation of the recovery of the national financial market which kicked off between March and April 2009. The two crises in Russias recent history (1997-98 and 2008-09) display substantial differences the major of which is that the 1997-crisis was a local one, while the latter crisis had a global nature. The crisis in the late 1990s was aggravated by the RF Governments obvious economic policy flunks. Having learned a bitter lesson, the Government managed to eschew a dj-vu in the late 2000s and secured a financial cushion; however, stagnation in the economic policy resulted in a high degree of the nations dependence on the external environment.

The 2008-09 crisis did not overrun the 1997-98 one in terms of intensity of the fall of stock indices (see Table 1). During the first crisis, the RTS index tumbled by 91.3%, while the MICEX one by 73.0%; meanwhile, the intensity of the fall of both indices in 2008-09 accounted for 78.2% and 68.2%, respectively. The length of the fall of stock prices during the recent crisis was shorter than during the previous one: while in 1997-98 the RTS index was falling for 14 months and the MICEX one for 13 months, the respective lengths in 20082009 were 8 and 7 months, respectively. That should be attributed primarily to the fact that during the recent crisis, it took oil prices just 5 months to hit the bottom vis--vis the month-long period during the 1997-98 crisis (see Fig. 6 below).

Table Quantitative Parameters of the Financial Crises of 1997/98 and 2008/09 in Russia Crisis 1997/98 Crisis 2008/1. fall from the peak 1.1. Intensity, % RTS index 91,3 78,MICEX index 73,0 68,1.2. Length, months RTS index 14 MICEX index 13 2. Recovery, months RTS index 59 MICEX index 8 Source: the RTS and MICEX data as of 31.01.The recovery of the MICEX index during the two crises in question took a pace different from the RTS one. During the 1997-98 crisis, because of the 5-fold depreciation of Rb., the MICEX index recovered just in 8 months, while the RTS forex index in 59 months. In 2008-09, Rb. depreciated roughly by 50%, and it won back roughly 50% of the depreciation during the subsequent appreciation. That is why both indices have been bouncing back roughly at the same pace the RTS index for 24 months in a row, while the MICEX one- for 25 months. As of early 2011, the recovery has not been complete as yet: as of 31 January 2011, the RTS and MICEX indices hit, accordingly, 76.0% and 85.9% of their pre-crisis peak RUSSIAN ECONOMY IN trends and outlooks values. With such market recovery rates in place in 2011, both indices are most likely to hit their pre-crisis values, which is why this time the ultimate recovery of the market would most likely to happen far sooner than in 1997-98.

Against the backdrop of the long-term financial crises of the past century (see Fig. 1) Russias financial crisis of 2008-09 appears clearly V-shaped. Gauged by the intensity of decline, it falls far behind the Russian crisis of 1997-98, which posted the record-breaking rates in this respect vis--vis most notorious crises of modern times, as well as the collapse of the DJIA in the times of the Great Depression of 1929-1933 and the fall of NIKKEI 225 in the late 1980s. The length of the cycle between the fall of the RTS index and its complete rebound was just 32 months. That was far shorter a period when compared with such past crises as Russia 1997/98 (73 months), South Korea- 1989 ( 184 months) and the Great Depression (304 months), as well as the crises that are far from being over: NASAQ-2000 (months) and NIKKEI-1989 (253 months).

Russia (RTS)- 1997;

US (DJIA) - 1929;

Russia (RTS) - 2008;

Korea-1989; 184 months 73 months 304 months 32 months; 76,0% US (NASDAQ-2000); months; 57,5% Japan-1989; 253 months;

26,3% months US-1907 US-1929 Japan-1989 Korea Russia (RTS) -1997 US-NASDAQ-2000 US-2007 Russia (RTS)-Source: by data of RTS, MICES, and www.finance.yahoo.com Fig. 1. Depth and Length of Long-Lasting Financial Crises in the World as of January 2011 (peak=110%) Against the backdrop of the most dramatic short-term turmoils over the past decades, such as the blue chips crisis in the US in 1987 and 2007, the 2000 collapse of the DJIA, the Mexican crisis, the 1997 crises in Indonesia and Brasil, the current Russian crisis proves more intense, albeit average in terms of its length (Fig. 2).

decline, as % Section 3.

Financial Markets and Financial Institutes US-2007 (DJIA) Russia (RTS)92008 hs; 85,4% - mont 32 months; 76,0% 0 months US-1987 US-2000 Mexico-1994 Russia (RTS) -Indonesia-1997 Brasil-1997 Russia (RTS)-2008 US-Source: by data of RTS, MICES, and www.finance.yahoo.com Fig. 2. Depth and Length of Short-Term Financial Crises in the World, as of January 2011 (peak=100%) Slovakia SAX Switzerland Swiss Mkt Japan Nikkei Finland Helsinki General UK FTSE France CAC Dow Jones Industrial Average Greece General Share Germany DAX Standard & Poor's 500 Stock Index Johannesburg All Share Spain Madrid General Czech Republic Canada TSE 300 Comp Belgium BEL-Australia All Ordinaries Warsaw Stock Exchahge Netherlands AEX General Denmark KFX Austria ATX Mexico IPC Nasdaq Comp Malaysia KLSE Comp S. Korea Seoul Comp Chile IPSA Hong Kong Hang Seng Venezuela IBC Pakistan Karachi Philippines PSE Comp Thailand SET Singapore Straits Times Hungary BUX Israel TA-Shanhai Stock Exchange Index India BSE 30 Sensex Brazil Bovespa Turkey ISE National-Peru Lima General Argentina MerVal 23,SHE index MICEX index -67,RTS index 22,-72,-60 -40 -20 0 20 40 60 80 100 120 Source: by data of RBK and WFE.

Fig. 3. Yield Rates of Stock Indices Worldwide in 20092010, as % decline, as % RUSSIAN ECONOMY IN trends and outlooks The 2008-09 crisis proved the Russian stock markets reputation of one of the riskiest markets in the world. It falls deeper than other markets, but bounces back at a faster rate. In 2008, the RTS and MICEX indices sank by -72.4% and 67.2%, respectively, thus outpacing all known stock markets worldwide in this regard. In 2009, on the contrary, they reaped the highest yields (see Fig. 3), with the RTS index posting a 128.6% growth and the MICEX index adding 121.1%. In 2010, the RTS index increased by 22.5% and the MICEX index - by 23.2%, which helped the Russian stock market to enter the Top-10 most lucrative markets worldwide.

In 2010, the aggregate capitalization of Russian corporations accounted for USD 938 bln., up by 8.9% vs. the previous year (Fig. 4). Meanwhile, the aggregate volume of trading at Russian exchanges hit the level of USD 1,114 bln. in 2010, up by 23.8% vs. the prior years figure. However, the market so far has failed to catch up with the 2007 figure of USD 1,206 bln.

and the 2008 one (1,405 bln.). The failure to do so can be ascribed to two factors: first, prices of most issuers papers have so far failed to recuperate to match their pre-crisis figures. As demonstrated below (Fig. 8), according to the Emerging Market Portfolio Researchs data, the 2010 volume of attraction of capital to international equity funds, whose activity strongly impacts the dynamics of Russias stock indices, reached the pre-crisis level only in the end of the year. The slowdown of growth in the number of active domestic investors in the stock market1 and measures on regulation of the rise in trading by means of automated processes FSFM and MICEX began to undertake since mid-2010 hindered growth in the volume of trading with securities at stock exchanges.

Capitalization (left axis) Volume of stock trade at Russian exchanges (left axis) Risk (st. square bias, 1998=100%)- to the right 100,1600 1400 86,78,1200 75,1000 60,800 47,600 42,41,41,41,400 35,176 200 106 93 4122 35 10 5 26,27,0 Source: by data of JSC RTS, S&P, IMF.

Fig. 4. Capitalization, Liquidity and Volatility of the Russian Stock Market Mazunin A., Smorodskaya P. Fondovyi rynok fizlitsom ne vyshel. Chislo brokerskykh schetov svidetelstvuyet o snizhenii sprosa na birzhevuyu torgovlyu. Kommersant, 23 December 2010.

% USD bln Section 3.

Financial Markets and Financial Institutes As in the times of the 1997-98 crisis, the beginning of the 2008-09 crisis was marked with a dramatic increase in the stock markets volatility. In 2008, the indicator of the standard bias of the daily yield rate of the RTS index made up 86.4% of the 1998 figure, while in 2007 it accounted for just 27.4%. In 2010, the indicator slid to 35.0% of its 1998 level, which roughly matches its average annual levels over 2004-2007, when the Russian stock market had been advancing steadily.

In 2010, the Russian stock exchange market managed to retain its global competitive positions in terms of trading with domestic JSCs shares. That was proved by data on the correlation between volumes of trading with stock and depositary receipts on Russian corporations shares on national and overseas stock exchanges presented in Fig. 5.

NYCEX and NASDAQ (CTCM) 4,3,4,4 4,8 6,2 3,5 4,5 2,6 3,6,8 0,7,1,0,9 0,1,0 German exchanges 2,1,1,2,19,22,17,23,6 23,34,29,80 29,4,46,LSE 0,1 7,0,70 0,0,5 0,43,1 0,3,6 6,0,0,34,60 41,9 0,0,1,43,RTS-Standard 8,0,1,50 30,7,3,4,11,49,0 2,40 70,4 2,44,42,5 73,St. Petersburg Exchange 26,70,6 70,59,8 69,36,42,0 1,59,38,11,19,9 1,RTS stock (T+0) market 20,15,3,RTS-Classic MICEX market Source: calculations by exchanges data.

Fig. 5. Specific Weight of Exchanges in Volumes of Trading with Russian JSCs Shares In 2010, the proportion of Russian exchanges in organization of trading with Russian corporations shares and DRs was at the same level as in 2009 and accounted for 77.9%. The key development became a notable increase in the proportion held by RTS in the respective volume it rose from 4.3% in 2009 to 8.0% in 2010. The increase was powered by a growing popularity of the RTS-Standard (RTSS) section, which dramatically changed the system of trades and settlements on the Russian stock market by enabling actors to dump the antiquated system of preliminary depositing of assets by participants in trading prior to the opening of the trading session. The MICEXs attempt to launch in 2010 an alternative system, that is, MICEX+, so far has failed to change the balance of forces. Meanwhile, the transition from the settlement-backing system and preliminary provisioning of assets to the system of guarantees of trade settlement by a clearing center as of the moment T+N put the market participants before the dilemma of modernization of their own system of guaranteeing clients transactions. The only viable option seems to be unification of the transactions guaranteeing systems at both exchanges, which became one of the factors expediting implementation of the decision on their merger.

.RUSSIAN ECONOMY IN trends and outlooks 3.2. Factors Determining the Dynamic of the Russian Stock Market An examination of the 2008-09 crisis and the financial markets subsequent recovery allows a greater understanding of key factors that affect prices of Russian shares. One of them is oil price. During both crises, a dramatic downfall in oil prices ultimately resulted in the collapse of the national stock market. Furthermore, the fall in stock quotations, as a rule, anticipates the downfall in oil prices, as international investors keep a close eye on superheated local markets and withdraw investments under a tiniest sign of a volte-face of trends.

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