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Moreover, by decision of the Board of Directors of the Bank of Russia as of My 26, the threshold of allocations to the Fund of Mandatory Reserves is increased from July 1 of the current year: from 5.5 per cent to 7 per cent per annum under the debts of Russia to foreign credit organizations, from 4.per cent to 5 per cent under the banks ruble obligations to individuals, and from 5 per cent to 5.5 per cent under other liabilities of credit organizations. At the same time, the Central Bank increases averaging ratio of mandatory reserves, which enables to soften the effect of raising the threshold of obligatory reserves replenishment. The upgraded standard rates of deductions to the Fund of Mandatory Reserves is intended to hinder excessive monetary supply and restrain inflation rates. The utmost upgrading of mandatory reserves threshold was applied to the national banks debts to non-residents.

Apparently, this is explained by the motivation of the Bank of Russia to reduce the banks external indebtedness in order to enhance their financial stability in case of further problems in the global financial market. It is worth mentioning that significant debt liabilities of Kazakhstan and Iceland have already provoked serious problems in their national economies. At the same time, it is worth noting that mandatory reserve requirements amendment is far from the most effective measures of monetary and credit policy due to its delayed and inertial effect those changes provide in economies, which are far more difficult to be assessed than operations in the open market or refinancing rate changes.

Thus, the RF Central Bank has taken measures aimed at tightening monetary policy. In our view, in the situation of a significant inflation acceleration and rapidly growing monetary demand, those measures are well justified. At the same time, the Bank of Russia should continue to monitoring the interbank credit market to avoid liquidity crisis. Moreover, it's also worth noting that the above measures will fail to provide a significant effect over the inflation processes in case of a sustained trend of a vast-scale inflow of private capital and high prices for energy sources. In the background of exogenous growth of monetary supply, the only effective measure to suppress inflation could be an explicit ruble strengthening.

Financial MarketsN. Burkova In May the situation in the Russian financial markets was getting improved in general as a result of favorable trends in the global commodity market, inspired by a new upsurge of oil prices. This fact, despite the corporate news on some global international financial companies writing-off losses in the first quarter of 2008, has resulted in the growth of the basic Russian stock indices by 11-12 per cent as compared with the preceding month. Upgrading trends were especially expressed in the Russian stock market, where the investors' activity has increased by more than 30 per cent within the month.

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

Government securities market In April the Russian Eurobonds have demonstrated in general a decreasing dynamics in the yields as a result of inflation expectations, relatively negative situation in the top world markets at the background of the corporate news on writing-off losses by some global international financial companies in the first quarter of 2008. The decision of the Bank of Russia to upgrade refinancing rate by 0.25 percentage points up to 10.5 per cent per annum at the end of April to curb inflation and further restrain the monetary supply was insufficient to inspire explicit changes in public debt market.

FIG. Minfin bonds' yields to maturity in March - May 4,50% Tranche 5 Tranche 4,25% 4,00% 3,75% 3,50% 3,25% 3,00% 2,75% 2,50% 2,25% 2,00% Fig. Yields to maturity of the Russian eurobonds with maturity in 2010, 2018, and 2030 in March - May RUS-2030 RUS-2010 RUS-2018 RUS-6,25% 5,75% 5,25% 4,75% 4,25% 3,75% 3,25% 2,75% 2,25% As of May 27, 2008, the Russian Eurobonds RUS-30 yield to maturity has declined from 5.49 to 5.40 per cent per annum as compared with the level of April 21, 2008 (by 1.6 per cent), RUS-18 from 5.34 to 5.32 per cent per annum (0.4 per cent), RUS-28 from 6.0 to 5.9 per cent per annum (1.01.03.05.03.10.03.13.03.18.03.21.03.27.03.01.04.04.04.09.04.14.04.17.04.22.04.25.04.30.04.08.05.14.05.19.05.22.05.27.05.01.0 3.2 0 0 05.0 3.2 0 0 10.0 3.2 0 0 13.0 3.2 0 0 18.0 3.2 0 0 21.0 3.2 0 0 27.0 3.2 0 0 01.0 4.2 0 0 04.0 4.2 0 0 09.0 4.2 0 0 14.0 4.2 0 0 17.0 4.2 0 0 22.0 4.2 0 0 25.0 4.2 0 0 30.0 4.2 0 0 08.0 5.2 0 0 14.0 5.2 0 0 19.0 5.2 0 0 22.0 5.2 0 0 27.0 5.2 0 0 per cent), RUS-10 from 4.07 to 2.57 per cent per annum (by 36.8 per cent), having demonstrated the utmost decline among government Eurobonds as per results of the month.

On the same date, a reverse trend was observed in the yields of external currency debt bonds. Thus, the yield to redemption of the seventh tranche of external currency debt bonds has grown from 4.18 to 4.32 per cent per annum (by 3.3 per cent) against April 21, 2008 (see Figs 1-2). The fifth tranche was redeemed on May 14 by the Foreign Trade Bank, acting as a payment agent, providing deposit services to the RF Ministry of Finance; the redemption was made in the amounted of USD 2.47 bln.

Therefore, upon redemption of the fifth tranche, there remains only the seventh tranche of external currency debt bonds in circulation in the amount of USD 1.75 bln with maturity on May14, 2011.

Throughout May, a high volatility was observed in the yields of the government ruble bonds. While the yields of the Russian Eurobonds has declined, the yields of Investors activity in the secondary markets was lower as a result of their high involvement in the primary auctions.

A number of auctions on additional OFZ placements were arranged in the period from April 22 to May 27, 2008. Thus, two auctions on additional placements of OFZ series 26200 and 46022 were held on May 23 for the amount of RUR 6 billion and RUR 10 billion, actual placement made RUR 5.billion and RUR 9.67 billion with an average weighted yields of 6.70 and 7.23 per cent per annum, accordingly. Two auctions on additional placements of OFZ series 25062 and 46021 were held on May 7 for the amount of RUR 13 billion and RUR 9 billion, actual placement made RUR 3.53 billion and RUR 2.10 billion with an average weighted yield of 6.51 and 6.81 per cent per annum, accordingly. Moreover, two auctions on additional placements of OFZ series 26200 and 46020 were held on May 14 for the amounts of RUR 8 billion and RUR 6 billion, actual placements made RUR 2.73 billion and RUR 3.53 billion with an average weighted yield of 6.67 and 7.28 per cent per annum, accordingly.

As of May 27, the GKO-OFZ market amounted to RUR 1094.54 bln at face value and to RUR 1089.41 bln at market value. The duration of the GKO-OFZ market portfolio was 2183.82 days, having increased by 11.59 days as compared with preceding month, when that duration was 2183.82 days (as of April 27, 2008).

Equity Market Stock market situation The trends of the global commodity markets, based on oil price steady growth within May, which has reached a new historical peak of USD 135.09 per barrel at the second half of the month, were the key factors in the stock market dynamics. The positive dynamics inspired the growth of the majority of securities quotations in the Russian stock market in May, as well as the market stock indices upgrading, in particular, the MICEX index (over 11 per cent) as compared with preceding month. Besides, on May 19, 2008 the RTS index has reached the historical peak of 2487.92 points. The volume of trades has significantly increased as well (nearly by 300 per cent against April indicator.

Throughout May a strong volatility was observed in the Russian stock market. Thus, a trend of MICEX index growth was several times replaced by short-term periods of its reduction within the month. Such MICEX index upgrading has reflected a general growth trend in the quotations of the Russian companies' equities (see Fig. 3).

In general, within the period from April 28 to May 27, 2008, the MICEX index has grown by 17.per cent in absolute terms and made 287.28 points (within the year, from April 27, 2007 to May 27, 2008 the MICEX index has downgraded by 17.41 per cent). Over the same period the turnover of trades in shares, included in the MICEX index, made about RUR 1,323.19 bln at an average daily turnover of RUR 66.16 bln. (against RUR 1,099.07 billion with an average daily turnover of RUR 52.34 billion in the preceding period of March 28 April 27). Therefore, the investors daily activity in the stock market in May has increased as compared with the preceding month by about 26 per cent.

The indicators of maximum and minimum turnover in the market trades in May made RUR 107.82 bln (on May 15) and RUR 23.05 bln (on May 4), accordingly.

As of monthly results (from August 28 through May 27), practically all blue chips have shown a steady growth in their market values, excluding Rostelecom and GMK Nornickel which have downgraded in May by 2.01 0.18 per cent accordingly. Thus, the utmost growth rates were demonstrated by "Tatneft", the value of which has grown by 19.10 per cent, followed by "Gazprom Neft" (17.64 per cent), Surgutneftegaz (by 16.87 per cent) and LUKOIL (by 16.59 per cent). Some lower growth rates were observed is shares of Gazprom (by 12.73 per cent), RAO UES of Russia (by 11.74 per cent), Sberbank of Russia (by 10.34 per cent) and Mosenergo (by 7.83 per cent) (See Fig.

4).

FIG. Dynamics of MICEX Index and trading volume 140 2 000,The total volume of trading (roubles, 130 billion) 1 900,MICEX Index 120 1 800,110 1 700,100 1 600,90 1 500,80 1 400,70 1 300,60 1 200,50 1 100,40 1 000,30 900,20 800,10 700,0 600,FIG. Dynamics of the Russian Blue Chips from April 28 to May 27, 20,00% 17,50% 15,00% 12,50% 10,00% 7,50% 5,00% 2,50% 0,00% -2,50% Change in price (%) In May the MICEX turnover leaders were: Gazprom (31.4 per cent of the total turnover), LUKOIL (16.8 per cent), Sberbank of Russia (14.2 per cent), GMK Nornickel (9.2 per cent), and Surgutneftegas (5.6 per cent). Total share of transactions with the above companies equities (blue points rou bles, b illion 01.03.21.03.09.04.26.04.17.05.05.06.25.06.12.07.01.08.20.08.06.09.25.09.12.10.31.10.20.11.07.12.26.12.23.01.11.02.29.02.20.03.08.04.25.04.16.05.LU Koil Tatneft R os neft R ussia Gazprom R ussia R AO U ES M osenergo R ostelecom Sberbank of Gazprom neft GM K N otN ikel Surgutneftegas chips) made about 90 per cent of the gross turnover in the MICEX stock market in the period from April 28 to May 27.

In terms of capitalization, as of May 27, the top five leaders of the domestic stock market were:

Gazprom - RUR 7,421.9 bln, Rosneft - RUR 2,175.1 bln, LUKOIL - RUR 1744.3 bln, RF Sberbank - RUR 1,625.5 bln, GMK Nornickel - RUR 1,285.8.

Futures and options market From May 1 to 27 the investors activity in the MICEX futures and options market has somewhat increased (nearly by 7 per cent) as compared with the preceding month, while the number of transactions has grown nearly 2.5-fold. Thus, in that period the total turnover in the MICEX futures market made about RUR 339.6 bln (1787 transactions, 13.9 mln of contracts) against about RUR 316.5 bln (739 transactions, 13 mln of contracts) in April. Herewith, in May the utmost growth was observed in RUR/USD futures contracts, which amounted to RUR 333.1 bln (533 transactions, 13.mln of contracts). The explicit growth of the number of transactions in the MICEX futures and options market in May was basically inspired by the increased volume of futures transactions with MICEX index (4.5-fold more than April indicator).

Similar situation was observed in the RTS futures market, where the investors activity in May has expressly increased (nearly by 30 per cent) as compared with the preceding month. Thus, in the period from April 28 through May 27, the total turnover in the RTS futures and options market amounted to approximately RUR 1250.4 bln. (1958 transactions, 22.7 mln of contracts) against about RUR 949.0 bln (1832 thousand of transactions, 19.6 mln of contracts) in April. The greatest demand, as before, was for futures: the volume of trading in futures in the period under review was RUR 1029.0 bln (1880 thousand of transactions, 17.1 mln of contracts). Options enjoyed a far lower demand, with the volume of trading at about RUR 221.4 bln (78 thousand transactions, 5.6 mln of contracts). The highest daily level of trading in the RTS futures market was RUR 93.3 bln (as of May 14), the lowest level of RUR 15.7 bln was observed on May 4.

In addition, since May 19, 2008, there was introduced a new financial instrument in the FORTS futures market, "Shares of electric power companies" futures with maturity on December 15, 2008. From 1 July, the basic asset of that futures will be the "basket" of 23 securities of the companies from RAO UES of Russia assets, namely: OGK-1 (OGK is power-generating company in the wholesale electricity market), OGK-2, OGK-3, OGK-4, OGK-6, TGC-1 (TGC is regional power-generating company), TGC-2, TGC-4, TGC - 6, UGK TGK-8, TGK-9, TGK-10, TGK-11, TGK-14, Volzhsk TGK, Eniseysk TGK, Mosenergo, Kuzbassenergo, FSK (federal network company), HydroOGK, INTER RAO UES Holding, MRSK Holding (MRSK is the Interregional Distribution Company) and RAO Eastern Energy Systems. "Shares of electric power companies" futures is addressed at the support of the electric power companies securities liquidity upon discontinuation of RAO UES trades in the stock market since June 6.

Corporate bond market In May, volatility was observed in the dynamics in quotations of securities, traded in the corporate debt market. Due to the long May holidays, the investors activity in market has explicitly declined (nearly by 20 per cent as compared with preceding month). However, the number of issues placements in May has also decreased nearly twice against the preceding month.

From April 22 through May 27 the price index of corporate bonds, traded on MICEX2, has grown by 0.31 points (by 0.28 per cent), as well as the index of the ten most liquid corporate bonds has upgraded by 0.37 points (by 0.32 per cent) (see Fig. 5).

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