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It is worth reminding, that the Bank of Russia in November 2008 has carried out a gradual weakening of the RUR against the two-currency basket due to a sharp deterioration in external economic market because of the global financial crisis, which provoked the outflow of private capital from Russia and lower prices for basic goods of Russian exports. With a significant reduction of foreign currency to the country, maintaining of the old exchange rate could be achieved only for a limited period at the expense of international reserves. As the Bank of Russia was executing a gradual devaluation of the ruble, the purchase of foreign currency by economic agents has become a relatively low-risk and highly profitable tool, what has led to increasing demand for foreign currency and the need to spend more and more funds from international reserve assets.

Abrupt downfall of the ruble, accompanied by further support of the announced level, in our opinion, is the best option in this situation, as it allows the RF Central Bank to keep the reserves, as well as to reduce the devalvation expectations. Herewith, for the success of such policy, the key factor is the willingness of the Bank of Russia to support the new course. We should note, that this willingness is largely dependant on how accurate the Bank of Russia has estimated the value of the adequate RUR rate in the current macroeconomic conditions. According to our estimates, the RUR rate, estimated by the Bank of Russia is close enough to the value, allowing to maintain the balance between the supply and demand in the foreign exchange market. However, in the global financial crisis situation, many factors are difficult to be assessed. Therefore, in case of further reduction in energy sources prices the Bank of Russia will be forced to continue to downgrade ruble.

It should be also noted that, in order to facilitate the task of maintaining the new exchange rate, the RF Central Bank informed of its readiness to implement measures, aimed at limiting the outflow of capital from the country. Those measures are likely to include reduction of the volume of liquidity, provided to commercial banks, raising the interest rates, as well as administrative measures, such as compulsory reserve of funds to be withdrawn from the country by legal entities and the compulsory sale of foreign exchange proceeds of exporters.

In order to strengthen control over the use of funds of credit institutions, allocated by the State in the framework of anti-crisis support, the President of Russia Dmitry Medvedev signed a law on the appointment of authorized representatives of the Central Bank to the banks, which have received loans from Vnesheconombank and the Bank of Russia.

The following decisions were also addressed by the Central Bank to support the banking sector in crisis situation. In accordance with the applicable procedure, credit organizations are required to form reserves for possible losses on credits, depending on the assessed credit risk. Herewith, banks with good financial situation are required to reserve funds in the amount of 0 per cent, if credit is serviced at a high level, 1-20 per cent in case of the average level of service and 21-50 per cent, if the service is poor. On credits to companies with an average financial position there should be should reserved 1-per cent, 21-50 per cent and 50-100 per cent, depending on the quality of service. Finally, for the companies with a bad financial standing those rates are 21-50 per cent, 50-100 per cent and 100 per cent, respectively. Therefore, the amount of funds available to commercial banks for current operations are reduced due to the reserve formation.

In accordance with the revised requirements, credit organizations are provided the right not to impair the level of quality of credit services according to the above standards till 31 December 2009, in case of:

extension of credit redemption term or interest on the credit for 30 days versus the effective date;

loan restructuring (for example, in the event of a change in the loan currency, the term of the loan amendment (basic debt and (or) interest rate) in the period from October 1, 2008;

allocation of loans for debt repayment on a previously provided credit to the borrower from October 2008.

This measure was aimed at supporting Russian banks in a crisis situation and is justified, in our opinion. At the same time, it should be understood, that too liberal approach to assessing credit risks can reduce the financial sustainability. In other words, this measure should be regarded as a temporary support to the Russian financial system.

In order to mitigate the impact of the crisis, on January 19 the Board of Directors of the Bank of Russia has informed on the decision to transfer the deadline of the current mandatory reserve rate increase from February 1 and March 1 2009 to May 1 and June 1, 2009, accordingly. It should be reminded, that from mid-October of the last year, in response to an acute shortage of liquidity, the reserve rates for all types of obligations have been reduced to 0.5 per cent. Under the new order of the Central Bank, from May 1, 2009 the rate will be increased to 1.5 per cent, and from June 1 - by percentage point up to 2,5 per cent. Apparently, the Central Bank took this decision because of the difficult situation in the financial sector, caused by the global financial crisis. In the nearest future, Russian credit organizations will be faced with the rapid growth of non-recovered credits, that will worsen their financial standing. In this situation, withdrawal of liquidity from banks in the form of payments to the Federal Reserve Fund would only aggravate financial instability.

Finally, on January 19, 2009, the Board of Directors of the Bank of Russia decided to extend the term for secured credits to the banks to 365 calendar days. Previously, the maximum term of such credits was 181 days. Herewith, the interest rate on credits, provided for a term from 181 to 365 days, is set up at 13 per cent per annum. Therefore, the Central Bank continued its policy aimed at providing long-term credit resources to the banks. Herewith, the interest rate on such loans is set at a rather low level. Taking into regard that, according to our estimates, inflation in 2009 is significantly higher than 13 per cent, in fact, the actual interest rate on such loans will be negative. At the same time, the financial crisis is likely to last more than a year, and loans for the period of 365 days can be insufficient.

Financial MarketsN. Burkova, E. Khudko In January the Russian financial market dynamics was affected by the negative situation in the global financial and commodity market. Strengthening of the global liquidity crisis, general downward trend in the world oil prices, the lack of trades due to the long New Year and Christmas holidays, as well as the CBR foreign currency exchange rate policy, the deterioration of the Ministry of Economic Development forecasts for 2009, the conflict in Russia and Ukraine on gas supplies in the first half of January and the decline of foreign currency reserves within the first half of January have provoked the deterioration of the Russian stock market by 10 per cent. However, a number of anti-crisis measures taken by the Government of Russia have contributed to some improvement in investors expectations.

Volatile trends were explicitly observed in the Russian stock market. ICEX index has fallen down by 2 per cent within the month. The positive trend in the market of corporate bonds in January has been an increase in the number and total amount of registered issues, which allows to expect a speedy expansion of the market.

Government securities market Within January, the growing inflation, continued policy of the Bank of Russia in terms of ruble weakening, as well as Russia-Ukraine conflict on gas supply were decreasing attractiveness of government bonds to investors and resulted in low liquidity dynamics of the market.

As of January 26, the Russian Eurobonds RUS-30 yield to maturity has decreased as compared with the level of December 24 from 9,89 to 9.51 per cent per annum (by 3,84 per cent), RUS-28 from 10,99 per cent to 9,58 per cent per annum (by 12.83per cent), RUS-18 from 7.71 to 7.17 per cent per annum (by 4,58 per cent). As opposed to that, RUS-10 yield to maturity has demonstrated an adverse dynamics, having grown from a negative indicator 1,63 per cent to 2,56 per cent per annum.

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.

In January, there were no sales in the Ministry of Finance bonds (7-th tranche), except for January 13, when the yield to maturity was 4.60 per cent per annum, which is by 1.08 per cent lower than the earlier indicator (4.65 per cent per annum) a month before (on December 9) (See Fig. 12).

Fig. 1. External currency debt bonds yield to maturity in September-November Within the period from December 25 to January 26 the total turnover of GKO- OFZ secondary market amounted to approximately RUR 9.96 billion with an average daily turnover of RUR 0.59 billion. (about RUR 21.13 billion with an average daily turnover of RUR 0.92 billion in December), what demonstrated a decline of average monthly turnover by 35 per cent.

After the two-month absence of auctions, an auction on additional OFZ placement was arranged from December 25 to January 26. Thus, an auction on additional placement of OFZ series 25064 was held on January 21 for the amount of RUR 1.81 billion with an average weighted yield of 12.70 per cent per annum. Therefore, despite the average weighted yield on that OFZ additional placement was higher than the yield for other state bonds mentioned above, the actual additional placement reached 25 per cent of the total offer.

As of January 26, the GKO-OFZ market amounted to RUR 1145.83 bln at face value and to RUR 947.29 bln at market value. The duration of the GKO-OFZ market portfolio was 1791.22 days, having decreased (by 168.03 days) as compared with preceding month (as of December 24).

Stock market Stock market situation In January, negative external and domestic news background, downgrading of quotations of the world oil prices, waiting position of investors in view of the New Year and Christmas holidays, as well as significant RUR reduction against USD and the Euro as a result of monetary policy of the Central Bank of Russia have contributed to the investors activity decline in the Russian stock market.

The deterioration of the Ministry of Economic Development forecast for 2009 (including a decline in the Russian GDP by 0.2 per cent instead of the earlier estimated growth by 2.4 per cent and a downfall in export volume by 43 per cent), the conflict between Russia and Ukraine on gas supplies, the revocation of bank licenses due to their failure to repay their liabilities on time, reduction of the international reserves volume to USD 386.5 billion as of January 23 (versus USD 427.08 billion as of January 1) have resulted in general, to the market quotations downfall. However, measures, taken by the Gov ernment of the Russian Federation to support the national financial market had a positive impact on investors' expectations in general. In particular, it is worth mentioning:

signing of 13 agreements by the RF Central Bank with the major Russian banks on compensation of potential losses in the interbank crediting;

approval of the RF Government Strategy for the Development of financial markets in Russia until 2020;

increase from 20 January by the Central Bank term for credits, secured by assets, to credit organizations up to 365 days (180 days earlier);

Central Bank transfer the term the introduction of the increased rates of mandatory reserves for three months.

All those volatile factors have urged in January (from December 25 to January 26) the upgrading of a part of the most liquid securities in the Russian stock markets (up to 10 per cent), whereas a significant decrease in another part of securities quotations (up to 30 per cent), as well as a general downgrading trend in MICEX (by 2 per cent) and RTS market stock indices( by 17 per cent).

Throughout January a volatile dynamics was observed in the Russian stock market see Fig.3)..

Thus, at the first half of the month, a general trend to growth in the MICEX index was observed, which was replaced after January 13 by a downgrading trend. The minimum value of the MICEX index has reached 553.62 points on January 23 (which is by 1.5 per cent lower than the relevant indicator for the previous period). The maximum value for the month the MICEX index reached on January 13: 655.16 points (which is by 1 per cent lower than the relevant indicator for the previous period).

Fig. 3. MICEX and Trades Volume Dynamics In general, within the period from December 25 to January 26, the MICEX index has downgraded by 2.27 per cent, what makes about 14.22 points in absolute terms (within the year, from January 27, 2008 to January 26, 2009 the MICEX index has downgraded by 2.8 times). Over the same period the turnover of trades in shares, included in the MICEX index, made about RUR 285.24 bln at an average daily turnover of RUR 16.78 bln. (against RUR 590.73 billion with an average daily turnover of RUR 25.68 billion in the preceding period). Therefore, the average level of activity of investors in the stock market in January has significantly decreased as compared with the previous period (by 35 per cent), which is primarily associated with reducing the volume of trades at the end of December (starting form of 25 December), more than twice as a result of escape of the majority of investors from the market for the New Year and Christmas holidays. The indicators of maximum and minimum daily turnover in the market trades in September made, accordingly, RUR 28.59 bln. (as of January 26), the lowest level was RUR 8.45 bln. January 11.

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