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Source: RF Statistical Service The growth of cash in circulation in December of the past year (by 1.2 per cent) at the background of increased mandatory reserves (by 13.1 per cent), coupled with some reduction in mandatory reserves (- 0.5 per cent) has resulted in extension of monetary base in narrow definition (cash + mandatory reserves)12 by 12.per cent (see Fig.2). At the same time, the foreign currency reserves of the RF Central Bank also grew by 2.per cent and amounted, as of January 1, to USD 476.4 bln. Within the first two weeks of January those reserves have increased by 0.4 per cent more and reached the level of USD 478.4 bln. A greater portion of the national liquidity inflow was accumulated in the RF Stabilization Fund, which volume as of January 1, amounted to RUR 3849.1 bln (11.8 per cent of GDP) (+ RUR 132.1 bln against December 1of 2007). Within the relevant period of preceding year the volume of the RF Stabilization Fund has grown by RUR 157.4 bln.

Such an expressed growth of Stabilization Fund is explained by crediting the amount of RUR 151.9 bln.

12 Monetary base in a narrow definition is a monetary instrument (an indicator of monetary supply volume), which is fully controlled by the RF Central Bank. The Monetary base in narrow definition includes the cash in circulation, issued by the Bank of Russia (and the balance on the accounts of credit organizations), balances on the accounts of mandatory reserves of the funds in the national currency attracted by credit institutions in national currency, deposited with the Bank of Russia.

Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2006 - 2007.

2740 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Fig. 2.

Source: RF Central Bank Indicators of Ruble`s Exchange Rate Dynamics within January 2005 - December 38 135,130,125,120,115,110,105,100,20 95,Official USD/RUR exchange rate (end pf period) Official EUR/RUR exchange rate (end of period) Value of the two-currency basket Real effective exchange rate index (right scale) Fig. 3.

Source: RF Central Bank, authors estimates.

billion rubles billion dollars 3-9.11.2-8.06.6-12.01.4-10.08.6-12.10.8-14.12.24-30.11.16-22.12.17-23.02.10-16.03.21-27.04.12-18.05.23-29.06.14-20.07.25-31.08.15-21.09.17- Jul Jul Jul Jan Jan Jan Sep Sep Sep Mar Nov Mar Nov Mar Nov May May May In December, the inflow of foreign currency into the country was continued as a result of high oil prices, as well as due to renewed capital inflow from private sector. As a result, the ruble real effective exchange rate started to grow again: while in August-September it practically stayed at the same level of 129.4 129.613, in December it has grown to 131.3 (see Fig. 3).

In December, the US dollar has strengthened in the world currency market at the background of crises in the global financial market, when international investors, "attracted by quality", were allocating their funds in the US government bonds. USD strengthening has resulted in its growth against RUR in the RF national currency market: by the end of December the dollar rate was RUR 24.55 (as compared with RUR 24.35 as of December 1). Despite the significant strengthening of dollar against ruble, the value of two-currency basketin December has increased only by 6 kopecks. As a result, EURO rate at the end of December has declined to RUR 35.93.

According to the information of the Federal Treasury, payments under external debt in December of the past year have made USD 665.1 million. The amount of USD 468.9 million was addressed to external debt redemption and USD 196.2 million was paid for the services thereof. Herewith, USD 88 million was spent to cover the debt of Russia, 99.1 million for the World Bank and EBRD loans, USD 159.6 million for loans raised upon bonds, USD 200 million under intergovernmental agreements, USD 118.4 to cover the debt of former USSR.

In January, the information was distributed that the Bank of Russia has initiated direct OTC REPO operations in the RF domestic market with the bonds, issued by non-resident entities outside Russia and included in the Lombard List of the Bank of Russia, but not admitted to public circulation in the Russian Federation.

Thus, the RF Central bank continues to expand accessibility for refinancing operations to credit institutions of Russia.

At the same time, since January 15, the Central Bank again increased the threshold of mandatory reserves for the banks to the level, which was in effect three months ago. We should remind, that a temporary reduction of that threshold was made by the Bank of Russia in response to the acute shortage of liquidity in the RF interbanking credit market. As the situation in the market has been stabilized in December, the raising of the threshold is, in our view, entirely justified measure in monetary and credit policy.

Financial MarketsN. Burkova In January the Russian financial market dynamics was entirely determined by the situation in the world financial markets, based on the negative news background, provoked by the information on financial losses of the top global financial companies, as well as the new recession trends in the US economy. Oil prices decline in the world market has served as an additional negative factor for the Russian securities. Those trends were explicitly observed in the Russian stock market. At the end of the month the decision of the US FRS to decrease the interest rate has provided positive effect over the Russian stock market. However, in a short while that trend was replaced with further downgrading in the market quotations. There was noted a decline in investors' activity in the market of derivative financial instruments, RTS in particular, whereas the MICEX market of short-term contracts demonstrated a steady growth of investors' activity.

Government securities market In January the Russian Eurobonds have demonstrated some decline in the yield as a result of the negative situation in the top world markets. Moreover, there was noted an insignificant downgrading of an average daily turnover in the secondary market. The market activity was rather low till the end of the month, when the expectations for further reduction of the base refinancing rate in the United States were confirmed (up to 3.5 per cent from January 21, 2008). Herewith, a fairly high level of primary placements was observed in January.

The level of 2002 is accepted as 100 per cent.

Two-currency basket is the RF Central Bank operational indicator in its foreign currency policy. Currently the share of EURO in the currency basket makes 45 per cent, USD 55 per cent.

In the course of preparation of the survey, there were used analytical materials and surveys published by Zenith Bank, ATON investment company, MICEX, and the materials presented at web sites of Russian issuing companies.

As of January 25, 2008 (as compared with the level of December 21, 2007), the Russian Eurobonds RUS 30 yield to maturity made 5.43 per cent per annum (decreased by 2 p.p versus December 21, 2007), RUS-10 4.81 per cent per annum (-1.2 p.p.), RUS-18 5.32 per cent per annum (- 5 per cent), RUS-28 5.79 per cent per annum (-1.7 p.p.). As of the same date, the yield to redemption of the Russian Eurobonds made: for the seventh tranche of external currency debt bonds 4.52 (17.1 p.p. decline as compared with the level of December 21, 2007), for the fifth tranche 4.13 per cent (-22. 2 p.p.) (Fig. 1 and 2).

FIG. 1.

Minfin bonds' yields to maturity in November 2007 - January 5,75% Tranche 5 Tranche 5,50% 5,25% 5,00% 4,75% 4,50% 4,25% 4,00% FIG. 2.

Yields to maturity of the Russian eurobonds with maturity in 2010, 2018, and 2030 in November 2007 - January 6,5% RUS-2030 RUS-2010 RUS-2018 RUS-6,0% 5,5% 5,0% 4,5% 4,0% 3,5% 3,0% 2,5% 2,0% January, a smooth decline in the yields was observed in the ruble debt market. The debt market activity was also low, largely due to sustained negative situation at the external markets in general and the information on financial losses of a number of the top global banks in particular, disclosed in January.

Within the period from December 22, 2007 to January 25, 2008, the total turnover of GKO- OFZ secondary market amounted to approximately RUR 84.97 billion with an average daily turnover of RUR 4.billion. (against RUR 99.87 billion with an average daily turnover of RUR 4.99 billion in December 2007).

A number of auctions on additional OFZ placement were held in January 2008. The auction on placement of OFZ series 46020 was held on January 18 for the amount of RUR 6.94 billion, actual placement made RUR 5.95 billion with an average weighted yield of RUR 6.81 per cent per annum. Three more auctions on placement of OFZ series 26200, 46022 and 46021 were held on January 23 for the amounts of RUR 8 billion, 9 billion and 8 billion, actual placement made RUR 2.7 billion, 5.85 billion and 7 billion with an average weighted yield of RUR 6.22, 6.53 and 6.38 per cent per annum accordingly.

As of January 28, 2008, the GKO-OFZ market amounted to RUR 1069 bln at face value and to RUR bln at market value. The duration of the GKO-OFZ market portfolio was 2100.85 days, having reduced by 3.43 days as compared with preceding month, when that duration was. 2104.28 days (as of December 24, 2007).

Equity Market Stock market situation in January high volatility in the world markets has provoked lower activity in the Russian stock market.

The world stock market decline has affected the results of the bids and led to substantial decrease in market indices, in particular, the MICEX index, especially in the middle of the month. The volume of trades also decreased slightly as compared with December 2007. The utmost effect on the market was provided by the information on the US debt market, where earlier this month a number of publications on macroeconomic statistics showed a deterioration in the USA economy forecast, decreased retail sales and import prices, which led to a decrease in marked value of the US securities. However, the US FRS decision to decrease the refinancing rate to 3.5 per cent per annum (to 0.75 p. p.) has provided some positive impact on the market.

Throughout January a strong downward dynamics in the Russian stock market was noted. As a result, the MICEX index started to get down from January 16, having reached the level of 1570.90 points on January 23, equal the decline indicator of 16.8 per cent, noted at the beginning of 2008. Some MICEX index upgrading, started from January 24, has reflected a general growth trend in the stock quotations of Russian companies (Fig. 3).

FIG. 3.

Dynamics of MICEX Index and trading volume 150 2 000,The total volume of trading (roubles, 140 1 900,billion) MICEX Index 130 1 800,120 1 700,110 1 600,100 1 500,90 1 400,80 1 300,70 1 200,60 1 100,50 1 000,40 900,30 800,20 700,10 600,0 500, poi nts ro ub les, b illi on 01.11. 22.11. 12.12. 09.01. 29.01. 16.02. 13.03. 02.04. 20.04. 14.05. 01.06. 22.06. 12.07. 02.08. 22.08. 11.09. 01.10. 19.10. 09.11. 29.11. 19.12. 17.01. In general, within the period from December 25, 2007 through January 28, 2008, the MICEX index has declined by 14.8 per cent, i.e., by 283 points in absolute terms. Within the same period the turnover of trades in shares, included in the MICEX index, made about RUR 1165 bln at an average daily turnover at the level of RUR 61.3 bln (as compared with about RUR 1338 bln at an average daily turnover at the level of RUR 61.3 bln in earlier period from November 24 through December 2007). Therefore, the investors activity in the stock market in December has explicitly downgraded as compared with the preceding month. The indicators of maximum and minimum turnover in the market trades in January made RUR 135.5 bln (as of January 22) and RUR 37.7 bln (as of January 10), accordingly.

As of monthly results (from December 25, 2007 through January 28, 2008), practically all blue chips have shown an explicit decline in their market values. The leaders in terms of downfall rates were shares of Rosneft (downgraded by 22.39 per cent), Surgutneftegas (by 22.15 per cent), RAO UES of Russia ( by 19.75 per cent), LUKOIL (by 18.15 per cent), Tatneft (by 14.41per cent), Sberbank of Russia (by 13.66 per cent). Some lower decline rates were noted in the shares of Gazprom (12.52 per cent), Nornickel (12.23 per cent), Mosenergo (8.94 per cent) and Gazprom Neft (7.99 per cent). The only exception in terms of downgrading made the shares of Rostelecom, which went down by 1.87 per cent.

FIG. 4.

Dynamics of the Russian Blue Chips from December 25, 2007 to January 28, 2,50% 0,00% -2,50% -5,00% -7,50% -10,00% -12,50% -15,00% -17,50% -20,00% -22,50% -25,00% Change in price (%) In January the MICEX turnover leaders16 were: Gazprom(40.1 per cent), Nornickel (12.9 per cent), LUKOIL (9.7 per cent), Sberbank of Russia (8.4 per cent) and RAO UES of Russia (6 per cent).

Total share of transactions with the above companies shares (blue chips) made 87.6 per cent of gross turnover in the classical MICEX stock market in the period under review.

In terms of capitalization, as of January 28, the top five leaders of the domestic stock market were17:

Gazprom (RUR 8195 bln), Sberbank of Russia (RUR 2283 bln), Rosneft (2202 bln), LUKOIL (RUR 1817 bln), RAO UES of Russia (RUR 1316 bln).

Futures and options market In January 2008 the investors activity in the MICES futures and options market has expressly decreased (nearly doubled) as compared with the preceding month. Thus, in that period the total turnover in the MICEX futures market amounted to approximately RUR 253,2 bln (513 transactions, 10.2 mln of contracts) against about RUR 132.5 bln (322 transactions, 5.28 mln of contracts) in December 2007.

An adverse situation was observed in the RTS futures market, where the investors activity in January has declined as compared with the preceding month. Thus, in the period from December 25, 2007 through Janu In the classical stock market.

According to RTS data.

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