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Table Financing of the RF Federal Budget Expenditures in the Period Between January and June 2005 ( as % of GDP ) Financing of expenditures April May June Nationwide issues, 3.70% 3.14% 2.69% of which central government and municipal debt service 1.90% 1.49% 1.22% National defense 4.32% 3.58% 3.09% National security and law enforcement 3.18% 2.65% 2.32% National economy 1.46% 1.29% 1.22% Municipal housing economy 0.05% 0.04% 0.04% Environmental protection 0.04% 0.03% 0.03% Education 1.15% 1.14% 1.00% Culture, cinematography and mass media 0.26% 0.26% 0.23% Health care and sport 0.61% 0.53% 0.47% Social policy 1.32% 1.13% 0.94% Intergovernmental transfers 9.25% 7.33% 6.12% Total Expenditures 25.33% 21.13% 18.12% It should be noted that at the end of June a share of financed federal budget expenditures accounted for 18.12% of GDP, which is markedly below the similar parameter at the end of May 2005. In addition, it should be noted that there was a trend for reduction of a share of financed revenues in the GDP in the period between April and June 2005. Intergovernmental transfers ( 6.12% of GDP ), national defense ( 3.09% of GDP ), nationwide issues ( 2.69% of GDP ), including central government and municipal debt service (1.22% ), and national security and law enforcement ( 2.32% of GDP ) received biggest volume of financing. Other expenditure items accounted for nearly 3.9% of GDP in total.

Table Execution of the RF Consolidated Budget in the Period Between January and April 2005 ( as % of GDP ) I II III IV V VI VII VIII IX X XI XII Taxes* 28.7% 23.6% 24.3% 26.5% 26.6% 25.9% 26.4% 25.9% 25.2% 25.4% 25.4% 25.5% Revenues 32.9% 31.3% 31.4% 33.6% 33.6% 32.7% 33.3% 32.5% 31.7% 32.0% 32.1% 32.1% Expenditures 18.3% 23.7% 26.0% 28.4% 28.4% 28.8% 29.1% 28.9% 28.4% 29.3% 29.7% 31.1% Deficit / 7.7% 5.4% 5.3% 5.2% 3.8% 4.2% 3.7% 3.3% 2.7% 2.4% 1.0% 14.6% Surplus I II III IV V VI VII VIII IX X XI XII Taxes* 25.6% 24.4% 25.6% 27.4% 27.1% 26.0% 26.1% 25.7% 25.0% 25.0% 25.1% 25.2% Revenues 32.0% 30.3% 31.5% 33.4% 33.6% 32.2% 32.2% 31.6% 30.9% 30.8% 30.7% 31.1% Expenditures 20.7% 25.3% 27.7% 28.8% 28.8% 28.6% 28.7% 28.5% 28.2% 27.8% 27.9% 29.7% Deficit / 11.3% 5.0% 3.8% 4.5% 4.7% 3.5% 3.6% 3.1% 2.7% 3.0% 2.8% 1.4% Surplus I II III IV V VI VII VIII IX X XI XII Taxes* 6.1% 21.8% 27.4% 27.4% 26.6% 27.2% 27.1% 26.4% 26.5% 26.9% 26.8% Revenues 30.6% 28.2% 29.8% 32.9% 32.9% 32.5% 33.1% 32.9% 31.9% 32.0% 32.3% 32.3% Expenditures 18.5% 22.8% 25.4% 27.3% 26.9% 27.0% 27.0% 26.9% 26.0% 25.9% 26.1% 27.8% Deficit / 12.1% 5.4% 4.4% 5.6% 6.0% 5.5% 6.1% 6.0% 5.9% 6.1% 6.2% 4.5% Surplus I II III IV V VI VII VIII IX X XI XII Revenues 48.8% 40.3% 40.3% 40.8% 38.8% Expenditures 22.2% 23.3% 24.9% 27.1% 26.5% Deficit / 26.5% 17.0% 15.4% 13.7% 12.3% Surplus At the end of the period between January and May 2005, the RF consolidated budget revenues accounted for 38.8% of GDP against 32.9% of GDP over the similar period in 2004. The RF consolidated budget expenditures declined slightly as compared to the similar parameter in 2004 ( 26.9% ) and accounted for 26.5% of GDP. Surplus of the RF consolidated budget accounted for 12.3% of GDP in the period between January and May 2005, which is twice as much as the similar parameter in 2004 ( 6.0% ). Hence there was a marked growth in the RF consolidated budget revenues in 2005 at the backgrounds of almost unchanged expenditures, which resulted in such a considerable growth in the budget surplus.

As of July 1, 2005 the value of the RF Stabilization Fund totaled 617,9 bln rubles against 954.5 bln rubles as of June 2005. Such a substantial reduction of the Stabilization Fund was caused by withdrawals to the amount of 430,1 bln rubles in repayment of the RF foreign debt to the Paris Club creditors in April.

Main Events in Budgetary Sector.

In the beginning of the month, the RF Minister of Finance . Kudrin advanced his opinion that the RF Government should pay a special attention to justification of investment project expenditures in the nearest future as well as their conformity to the three-year financial plan. His opinion is that the RF Government should refrain from assuming a great deal of obligations until specific goals are allotted.

In his speech during consideration of the 2006 draft RF budget at the Council of Federation on July 11, the RF Minister of Finance . Kudrin stated that by the end of the current year the RF Government plans to submit a proposal to the State Duma on differentiation of mineral tax. According to the Minister, amendments to the applicable legislation are scheduled to be developed as early as this year. At the same time, the Minister found it difficult to specify the date of introduction of graduated rate for mineral tax.

In his speech at the Council of Federation A. Kudrin noted that the RF Government should ensure a gradual decrease of the monetary base of Russia within the period between 2006 and 2008, which would allow creation of preconditions for reducing inflation in the years to come. In addition, he stated that non-monetary factors, particularly power energy and transportation rates, should be involved in coping with inflation.

The RF Minister of Finance . Kudrin stated in the mid-July that the RF Ministry of Finance would complete transfer of nearly 13 bln US dollars in early repayment of the RF foreign debt to the Paris Club creditors before July 15. The Minister also noted that early repayment will save 400 ml US dollars in 2005 and 800 ml US dollars in 2006 in terms of interest payments.

D. Polevoi Monetary Policy in the Russian Federation.

For the first time in the current year ( in June ), the value of consumer price index was less than the similar parameter in the previous year: consumer prices increased by 0.6% ( 0.8% in June 2004 ) in the average in the Russian Federation in June. Money supply continued to grow in the Russian Federation in June: the narrow monetary base increased by 3.4%. The RF gold and foreign exchange reserves increased by 1.7%. At the same time, the RF gold and foreign exchange reserves were reduced in July due to the Russian foreign debt repayment to the Paris Club of creditors.

The value of consumer price index accounted for 0.6% in June (0.8% in June 2004 (see Figure 1)).

An increase in the prices of fee-based services to the population had a major effect on the price growth in June ( for he first time since February 2005 ): the prices grew by 0.9% ( 0.9% in June 2004 ). In June, however, the prices of fee-based services to the population grew faster than in May of the same year ( + 0.8% ). The trend for price growth retardation was therefore stopped for this group of services. Prices of recreational and healthcare services, ( + 4.7% ), passenger transportation services (+ 2.5%) and medical services ( + 1.1% ) grew most. It should be noted that the growth in prices of recreational and healthcare services and transportation services are explained by the seasonal factor when the demand for these services normally grow in summer time.

The growth of food product prices contributed most to the growth of the consumer price index, by 0.7% ( as compared to 0.8% in June 2004 ). Prices of fruits and vegetables ( + 3.3% ), meat products and poultry meat ( + 1.6% ), white sugar ( + 1.5% ) and fish and sea food ( + 1.2% ) increased most by the end of the month. Prices of milk and dairy products ( - 0.4% ) and milk butter ( - 0.2% ) dropped as well. Therefore, price growth of fruits and vegetables continued to contribute most to the price growth of food products in June.

Prices of non-food products grew by the averaged of 0.3% ( as compared to + 0.7% in June 2004 ).

It should be noted that prices of motor gasoline remained the same in June.

The base consumer price index2 increased by nearly 0.5% in June 2005 ( against 0.5% during the similar period of the previous year ). Hence inflation in June was mainly caused by the growth in prices of fee-based services to the population due to a substantial increase in prices of recreational and healthcare services and passenger transportation services. We expect a certain retardation in consumer price growth rates in July thru August due to a decrease in prices of fruits and vegetables.

According to the preliminary estimates, the value of consumer price index accounted for 0.2 0.4% in July.

The reference consumer price index is an indicator which reflects inflation level in the consumer market without consideration of a seasonal ( prices of food products ) and administrative ( tariffs of regulated types of services, etc. ) factors. The reference consumer price index is normally calculated by the Statistical Service of the Russian Federation.

The Growth Rate of the CPI in 2002 - 2004 (% per month).

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% The wide monetary base3 grew by 39,7 bln rubles to reach 2.31 trillion rubles (+ 1.7% ) in June 2005. The volume of wide monetary base equaled 2,27 trillion rubles as of June 1 2005. Let us consider the movement of the wide monetary base by component.

active cash money including cash balances at credit organizations accounted for 1.76 trillion rubles as of July 1 ( + 4.1% as compared to June 1 ), correspondent accounts of credit organizations with the Bank of Russia amounted to 282,7 bln rubles ( + 3.9% ), mandatory reserves amounted to 137,2 bln rubles ( + 1.6% ), banks deposits in the Bank of Russia accounted for 34,4 bln rubles ( - 57.1% ), the value of the bonds of the Bank of Russia at credit organizations was 93,2 bln rubles ( + 7.5% ), RF Central Banks obligations for repurchasing of securities amounted to 0 bln rubles ( 2.1 bln rubles as compared to June 1 2005 ), and currency transactions reserves deposited with the Bank of Russia amounted to 5,7 bln rubles ( - 20.8% ).

The growth in the volume of active cash money ( + 4.1% ) with simultaneous increase in mandatory reserves ( + 1.6% ) resulted in that the monetary base ( cash money + compulsory reserves )4 widened by 3.4% ( see Figure 2 ). In addition, the RF gold and foreign exchange reserves of the RF Central Bank grew in June ( + 1.7% ) to reach 151,6 bln US dollars as of July 1. The narrow monetary base increased by 3.4%, while the RF gold and foreign exchange reserves shrank by 5% during the first three weeks of July. This situation was developed due to substantial amounts paid to the Paris Club of creditors in repayment of the Russian foreign debt.

This was accompanied by a reduction in the stabilization funds reserves by 336,6 bln by July 1, thus resulting in the balance of 617,9 bln rubles. It means that the Russian foreign debt was repaid by rubles from the fund that were exchanged into US dollars from the RF gold and foreign exchange reserves. This resulted in a simultaneous reduction of the stabilization fund and the RF gold and foreign exchange reserves.

The wide monetary base of the Russian Federation includes correspondent account balances deposited by credit organizations and banks with the Bank of Russia as well as active cash money issued by the Bank of Russia and account balances of compulsory reserves deposited with the Bank of Russia by credit organizations in borrowing funds in national currency.

It will be recalled that wide monetary base represents national currency liabilities of the Bank of Russia rather than a monetary aggregate. The monetary base is a monetary aggregate ( one of the parameters representing money supply volume ) which is fully controlled by the RF Central Bank.

Jul Jul Jul Jan Jan Jan Jan Sep Sep Sep Mar Mar Mar Mar Nov Nov Nov May May May May Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2003 - 2004.

1720 1450 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) P. Trunin Financial MarketsThe Russian financial market trends were favorable in general in July, while at the same time various market segments differed in their movements. Quotations in the government Eurobonds market varied in relation to those established at the beginning of the month. Prices in the ruble government and corporate debt market depended largely upon the USD/RUR exchange rate as well as liquidity level at the banking sector. On the contrary, the Russian stock market was growing steadily in July against which basic stock market indicators approximated their historical minimum levels. In spite of the summer holiday season, domestic and foreign investors were fairly active, which is explained by a favorable market trends at the global raw materials markets and capital markets, as well as a series of favorable corporate news.

Government Bond Market The situation in the Russian Eurobond market remained stable in July. Indeed, there was a shortterm negative effect on prices resulted from the terrorist acts in London.

At the second half of the month, yields grew against delayed respond to the downfall of US Government Bonds, Standard & Poors confirmed the Russian sovereign rating at BBB- with a stable forecast, which underlined political risks, economic growth retardation and growth of inflation. At the same time, the news had no impact on the market, since S&P is most conservative and the last agency to expect upward ratings from. However, the news on a 2% revaluation of the Chinese yuan resulted in downfall of US Government bonds followed by the similar trend for Russian Eurobonds. The downfall was caused by increased apprehension of investors that the Chinese Central Bank would reduce its exchange market interventions which would lessen the demand for the US currency.

According to the data available as of July 22, the yield to maturity of Russian Eurobonds accounted for 5.55% per annum for RUS 30 and 5.78% per annum for RUS-18. The yield of Russian Eurobonds was as follows on the similar date: 5.52% for 7 tranche Minfin Bonds, 4.21% for 6 tranche Minfin Bonds, 5.17% for 5 tranche Minfin Bonds, and 4.61% for RUS-07.

Our review is based on analytical materials and reviews made by Zenit Bank, ATON Asset Management Company, MICES, the Central Bank of Russia, as well as official web-sites of numerous Russian corporate issuers.

billion rubles billion dollars 1-7.09.3-9.11.2-8.06.5-11.01.9-15.03.20-26.07.10-16.08.22-28.09.13-19.10.24-30.11.15-21.12.16-22.02.21-27.04.12-18.05.23-29.06.14-20.07.29.06-5.07.26.01-1.02.30.03-5.04.Figure 1.

Minfin bonds' yields to maturity in May - July 6.5% Tranche 5 Tranche 6 Tranche 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% Figure 2.

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