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2007 2006 Fig. 2. The total volume of the Reserve Fund and National Welfare Fund in 2006-2008, % in GDP As mentioned above, the period from IV quarter of 2007 to I quarter of 2008 is characterized by high expenditures of the budget funds due to the presidential election campaign. Reviewing Table 2, one can say that upon completion of political changes the federal budget expenditures growth is terminated and in case the trend to reduction of expenses, observed in March April of the current year is maintained, one can expect, that budget expenditures can be sustained at an average level of three preceding years, i.e., 16 per cent of GDP.

Less than 0.2 % of GDP.

The total volume of the Reserve Fund as of May 1, 2008 amounted to RUR 3 069.47 billion, i.e., 8.5 per cent of GDP, the volume of the National Welfare Fund made RUR 773.2 billion, or 1.2 per cent in GDP.

The value of exchange rate variance, applied to the balances of those funds accounts of the in the period from January 30 to April 30, 2008 was negative, -31 per cent of GDP. Therefore, the reduction of the total volume of the funds in terms of GDP share is continued and reached 0.98 per cent within April of current year. The negative dynamics in proceeds is explained by the fact that oil and gas revenue are to be accumulated to the estimated annual level and only then will be transferred to the Reserve Fund and National Welfare Fund.

Monetary and Credit Policy P. Trunin As of April results, the CPI level in the RF was further growing, having reached 1.4 per cent as compared with 0.6 per cent in the relevant period of preceding year. Therefore, the growth of consumer prices within January-April has reached 6.3 per cent, what actually made it impossible to achieve the Government's benchmark for annual inflation rate of 10.5 per cent. Private capital inflow to Russia has been resumed in April. RUR real effective exchange rate has grown by 0.3 per cent. To restrain the growth of monetary supply and inflation rates, the Bank of Russia has increased the mandatory reserve requirements to the obligations of commercial banks, as well as increased by 0.25 percentage points the interest rates on credits and deposits of the RF Central Bank. Since May 14 the Bank of Russia has changed the procedure of foreign currency interventions.

Consumer price index in April made 1.4 per cent (versus 0.6 per cent in April 2007) ( See Fig. 1).

Like in February-March, foodstuffs made the utmost input in consumer prices growth in April (+2.per cent). Therefore, prices for food products were rapidly growing. The utmost growth rates were observed in prices for sunflower oil (+8.6 per cent), bread and bakery products (+ 6.4 per cent) pasta (+ 6.1 per cent), for vegetables and fruit (+ 5.5 per cent). There was no decline in any category of foodstuffs.

In April the traditional upgrading of prices for commercial public services was continued and reached 0.1 per cent as of month results. Significant growth was observed in the cost of pre-schools (+3.3 per cent), international tourism (+2.2 per cent) healthcare (+ 1.9 per cent), health resorts (+1.per cent), consumer services (+1.6 per cent), gyms and other sports sites (+1.3 per cent). There was no decline in prices for any type of services in April as well.

In April, the growth was observed also in regard to non-food items, which average nation-wide prices have increased during the month by 0.9 per cent. The highest growth rates were noted in February for motor petrol (+4.3 per cent), detergents and cleaning agents (+1.8 per cent) and construction materials (+1.3 per cent). Herewith, no downgrading was observed in any type of non-food items.

Therefore, as of April results, consumer price index has grown against March level, what has aggravated the inflation upsurge and deepened the gap between the level of the current year prices growth rates and the level, noted in the relevant period of 2007. As we mentioned in earlier surveys, a sharp increase in budget expenditures at the end of 2007 is contributing to inflation in April-May of the current year. High inflation rate is also urged by continued growth of prices for food products in the world market. It is worth mentioning, that some downgrading of monetary offer growth rate at the beginning of current year (within January-April the monetary supply 2 has increased only by 0.6 per cent as compared with the relevant period of 2007), as well as grown offer of agricultural products might restrain the inflation in summer. Herewith, inflation inertia stays rather explicit, what provides serious grounds for higher CPI level in 2008 against the indicator of preceding year.

The basic consumer price index6 in April 2008 made 1.3 per cent (versus the level of the relevant period of preceding year 0.5 per cent). In our estimates, in May the CPI made 1.2-1.3 per cent, while Basic index of consumer prices is an indicator of the inflation level without regard to seasonal price reduction (fruit and vegetable products) and to administrative measures (tariffs for government-regulated services, etc.). It is estimated by the RF Statistics Service as per the year results, it can reach 13-14 per cent.

The Growth Rate of the CPI in 2002 - 2008 (% per month).

3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% Source: Rosstat In April 2008 the monetary base (in broad definition7) has been increased by RUR 100.7 bln, to RUR 4972.1 bln (plus 2.1 per cent). The volume of the monetary base in broad definition made as of April 1, 2008 RUR 4871.4 billion. Let us consider the dynamics of the monetary base in broad definition by components.

As of May 1, 2008, cash in circulation with regard to the fund balances in credit organizations made RUR 3.93 trillion (+ 3.6 per cent versus April 1), correspondent accounts of credit organizations in the Bank of Russia made RUR 606.8 billion (plus 1.8 per cent), mandatory reserves made RUR 345.billion (plus 1.9 percent), bank deposits in the Bank of Russia made RUR 70 billion (minus 43 per cent), the value of shares of the Bank of Russia with credit organizations made RUR 18.7 billion (minus 0.5 per cent). Therefore, in April further reduction of excessive reserves of commercial banks was observed. At the same time the volume of reserves is still at an acceptable level, what is evidenced by rather low interest rates in the interbank market, small REPO transactions between commercial banks and the Central Bank, as well as low demand for the federal budget assets, allocated by the Ministry of Finance in commercial banks on an auction basis. Apparently, the current interest rates for the deposits of commercial banks in the Bank of Russia do not ensure reasonable returns under the pressure of high inflation rates. It is worth mentioning, that in April-May the Ministry of Finance has arranged several auctions on placement the untied budgetary funds to deposits in commercial banks. At all auctions placements of budgetary assets have significantly exceeded the demand.

In April the amount of cash in circulation has increased by 3.6 percent, while mandatory reserve funds have grown by 1.9 per cent, what has led to the expansion of monetary base in narrow definition (cash plus mandatory reserve funds)8 by 2.7 per cent (see Fig. 2). Herewith, the volume of foreign currency reserves of the Central Bank of the Russian Federation in March increased by 5.4 per cent and amounted to USD 534.4 billion by May 1. Within three weeks of May, the volume of foreign currency and gold reserves has grown by another 1.2 per cent to the level of USD 540.8 billion. Herewith, The RF monetary base in broad terms with no regard to the cash issued by the Bank of Russia and the balance of Compulsory Reserve Accounts on credit organizations in national currency, deposited in the Bank of Russia, taking into account the assets of correspondent accounts and bank deposits, allocated in the Bank of Russia.

We should remind, that the monetary base in broad terms is not a monetary indicator, but an indicator of the Bank of Russia liabilities in national currency. The monetary base in narrow terms is a monetary indicator (one of the indicators of monetary supply), ultimately controlled by the Central Bank of Russia.

Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Apr sterilization of incoming liquidity at government accounts in the Bank of Russia was continued: the volume of public deposits has grown within April by 8.6 per cent and accounted to RUR 7.23 trillion.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2007 - 2940 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Source: Central Bank According to the Ministry of Finance, private capital inflow to Russia has been resumed in April. In addition, in April prices of energy sources continued to grow, which has urged further ruble strengthening in real terms. Thus, RUR real effective exchange rate has increased by 0.8 per cent as of April results (against -0.3 per cent in the relevant period of preceding year): the real effective exchange ruble rate made 134.2 (see Fig. 3). As a result, ruble strengthening in real terms against the twocurrency basket accounted to 2.3 per cent within January-April, as compared with 2.4 per cent within January-April 2007. According to our estimates, that indicator for the year of 2008 will reach 6.6 per cent.

In April, the dollar rate has somewhat increased against the major world currencies, which was the result of some favorable macroeconomic statistics, as well as a lower than expected basic refinancing rate, introduced by the U.S. FRS. The USD strengthening in the global foreign currency market has resulted in its upgrading against ruble: by the end of April the dollar rate was RUR 23.65, as compared with 23.52 on April 1. Despite US dollar strengthening against ruble, the value of the twocurrency basket has grown by 1 kopeck in April. As a result, EURO rate at the end of April has de 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.

billion rubles billion dollars 3-9.03.1-7.12.2-8.02.5-11.05.7-13.07.8-14.09.5-11.04.24-30.03.14-20.04.16-22.06.18-24.08.20-26.10.10-16.11.22-28.12.12-18.01.23-29.02.15-21.03.17- to RUR Indicators of Ruble`s Exchange Rate Dynamics 38 36 34 32 30 28 26 24 22 20 Official USD/RUR exchange rate (end of period) Official EUR/RUR exchange rate (end of period) Value of the two-currency basket Real effective exchange rate index (right scale) 36.89.

Source: Central Bank, authors estimates Since May 14 the Bank of Russia has changed the procedure of foreign currency interventions. In addition to intraday operations, aimed at maintaining the two-currency basket, the RF Central Bank will perform regular foreign currency interventions with regard to the national and external financial markets. This step was taken by the RF Central Bank in the framework of gradual transition to a regime of inflation targeting. We would like to remind, that under inflation targeting model, the basic objective of the Central Bank is the inflation, whereas the exchange rate of national currency depends on the demand and supply in the foreign currency market. Due to supplementary interventions, economic agents should get adapted to higher volatility of the exchange rate in nominal terms. In addition, greater exchange rate volatility will create certain barriers for currency speculators, seeking to make profit due to ruble rate growth.

On April 28, the Bank of Russia has decided to change the refinancing and interest rates on credits and deposit operations, performed by the Bank of Russia, as well as requirements to mandatory reserves. Thus, the refinancing rate was increased by 0.25 p.p., i.e., to 10.5 per cent per annum. Since the refinancing rate is the basic interest rate for all credit operations of the Bank of Russia, its amendment has resulted in a similar upgrading of other interest rates of the RF Central Bank.

Interest rate (% per annum) Credit type Before amendment Upon amendment Intraday 0 Overnight 10,25 10,7,25% for 7 calendar days; 7,5% for 7 calendar Lombard 8,25% for 1 cal- days;

endar day 8,5% for 1 calendar day Mortgage 9,25 9,Secured with assets 9,25 9,7,25 up to 90 7,5 up to 90 calendar Borrowing against bill pledging calendar days; days;

8,25 91 180 8,5 from 91 to calendar days calendar days RUR Jul Jul Jul Jan Jan Jan Jan Sep Sep Sep Mar Mar Mar Mar Nov Nov Nov May May May Moreover, the interest rate for cross-currency swap transactions has also been raised from 8.per cent to 8.5 per cent, while interest rates on direct REPO transactions increased by 0.25 p.p. (from 7.25 per cent to 7.5 per cent per annum for 1 day term and from 8.25 per cent to 8.5 per cent per annum for the period of 7 days.

This measure was taken by the Bank of Russia due to accelerated inflation in the second half of 2007 early 2008. At the same time, we should note, that aggravation of refinancing conditions by the Central Bank took place after the stabilization of the situation with liquidity in the national banking sector. The banking system without any problems has experienced the peak of tax payments for the first quarter of 2008, whereas the inflation within January - April reached 6.3 % as compared with 4.per cent in the relevant period of preceding year. That's why the bank has increased interest rates not only on credit, but also on deposit operations under standard conditions: "tom-next", "spot-next" and "on demand" from 3 per cent to 3.25 per cent per annum, "1 week "and" spot-week" from 3.5 per cent to 3.75 per cent per annum. This measure was taken by the Bank of Russia to attract credit organizations, and therefore, to sterilize excessive monetary supply. However, it should be understood, that due to an insignificant value of interest rates, set up by the RF Central Bank in the national financial market, those measures are rather psychological in nature and designed to demonstrate the CB high motivation for curbing inflation.

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