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D.Polevoi Monetary Policy in the Russian Federation in June Inflation kept declining in Russia in June 2006. The key factors responsible for such decline were of monetary character, namely the parameters of underlying inflation rate and consumer price index coincided to account for 0.3%. The volume of wide monetary base did not exceed 1.3% in June 2006.

The volume of golden and foreign exchange reserves of the Russian Federation reached $255 billion US dollars.

The value of consumer price index accounted for 0.3% in June 2006 ( as opposed to 1.6% in June 2005 ( see Figure 1 )). An increase in the prices of fee-based services provided to the general public had a major effect on the price growth in June 2006, as was the case in last June : the prices grew by 0.7% ( as opposed to +0.9% in June 2005 ). In June 2006, prices of sanatorium medical therapy services ( + 4.8% ), passenger transport services ( +1.5% ), and medical service ( +1.2% ) grew faster as compared to other prices. It should be noted that it is the seasonal factor that was responsible for such a considerable growth in prices of sanatorium medical therapy services.

In June 2006, Prices of food products remained the same ( + 0.7% in April 2005 ). Stable prices of food products resulted from decline in prices of white sugar ( -1.2% ), fruits and vegetables ( - 0.6% ), milk and dairy products ( -0.3% ), sunflower oil ( - 0.2% ), and butter ( -0.2% ). The highest price rise was recorded in alcohol beverages ( +0.4% ) due to a drastic reduction in the offer of these products in the market. The prices of these products are expected to keep growing even faster in July 2006.

Prices of non-food products grew up by 0.3% in June 2006 ( as opposed to 0.5% in June 2005 ). The growth in prices of textile materials ( + 0.6% ), building materials ( + 0.6 % ) and washing and cleaning agents ( + 0.6% ) was responsible for the price rise of non-food products in June 2006.

The value of the reference consumer price index 2 grew by 0.3% in June 2006 ( as opposed to 0.5% over the corresponding period of the previous year ). The value of the consumer price index is estimated to account for 0.3% in July and -0.2% in August 2006, according to the IETs bulletin of model analysis of socio-economic performance forecasts in the Russian Federation.

Figure The Growth Rate of the CPI in 2002 - 2006 (% per month).

3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% Data source : the Federal State Statistics Service.

The 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 Federal Sate Statistics Service of the Russian Federation.

Jul Jul Jul Jul Jan Jan Jan Jan Jan Oct Oct Oct Oct Apr Apr Apr Apr Apr The wide monetary base3 grew by Rb 43,3 billion to reach Rb 3.29 trillions ( + 1.3% ) in April 2006. The volume of wide monetary base equaled Rb 3.24 trillion as of June 1, 2006. Let us consider the movement of the wide monetary base by component.

Active cash money including cash balances at credit organizations accounted for 2.39 trillion rubles as of July 1 (as opposed to + 6.7% on June 1, 2006 ), correspondent accounts of credit organizations with the Bank of Russia amounted to Rb 430.9 billion ( - 4.7% ), mandatory reserves amounted to Rb 190.2 billion rubles ( + 3.9% ), banks deposits in the Bank of Russia accounted for 108 billion ( - 51.6% ), the value of the bonds of the Bank of Russia held by credit organizations was Rb 164,2 billion ( + 20.1% ), and currency transactions reserves deposited with the Bank of Russia amounted to Rb 6.1 billion (-40.2%).

In June 2006, the growth in the volume of active cash money ( + 5.7% ) with simultaneous increase in mandatory reserves ( + 3.9% ) resulted in that the monetary base ( cash money + compulsory reserves )4 widened by 5.4% ( see Figure 2 ). In addition, the RF gold and foreign exchange reserves of the Central Bank of the Russian Federation grew in June 2006 ( + 1.3% ) to reach $250.6 billion US dollars as of July 1, 2006. The reserves grew by another 2% to reach the amount of $255.7 billion US dollars over the first two weeks in July 2006. Most of the inflowing liquidity was accumulated in the Stabilization Fund of the Russian Federation, whose volume reached Rb 2006.8 billion as of May 1, 2006 ( as compared to + Rb 137,8 billion as of June 1, 2006 ).

It should be noted that the amount of golden and foreign exchange reserves of the Russian Federation by the end of August 2006 is expected to exceed the amount of $280 billion US dollars, according to the IETs bulletin of model analysis of socio-economic performance forecasts in the Russian Federation.

Figure 2.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2005 - 2006.

1750 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Data source : the Central Bank of the Russian Federation.

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.

billion rubles billion dollars 1-7.09.3-9.11.2-8.06.9-15.06.5-12.01.19-25.05.21-27.07.11-17.08.22-28.09.13-19.10.24-30.11.15-21.12.17-23.02.10-16.03.21-27.04.12-18.05.23- to the information from the Federal Treasury, in June 2006, of the Russian Federations expenditures on repayment of its foreign debt amounted to $1,03 million US dollars, of which $0.million US dollar were paid in repayment of the foreign debt, and $0.33 million US dollars were paid for debt service. The biggest amounts were paid in repayment of debts under intergovernmental agreements ( $0.6 billion US dollars ), loans raised upon bonds ( $0.28 billion US dollars ), loans extended by the IBRD and the EBRD ($0.08 billion US dollars ), Russias external debt ( $0.05 US dollars ), and Russias debt due to the Paris Club of Creditors.

P.Trunin Financial Markets In July 2006, the situation in the Russian financial market remained stable enough. Trading activity remained low due to a traditional summer holiday season. At the same time, the market of debts denominated in rubles and foreign exchange was growing thus partially offsetting the downward trend of the previous several months. With regard to the stock market, shares were quoted within a fairly narrow range in spite of favorable internal news and another upward trend of oil prices. All things considered, no significant movements are likely to happen until fall, because investors would wait until the upcoming meeting of the US Federal Reserve System to be held in August 2006, which is going to make a decision on the value of the interest rate.

Government Bond Market The conditions in the market of the Russian bonds denominated in foreign exchange were improving throughout the entire moth of July 2006. Risks of sharp growth in long-term interest rates on the basic assets represented by US long-term government bonds thus also restricting the demand for the Russian long-term Eurobonds. Nevertheless, However, bonds managed to grow insignificantly by the end of the first week.

During the second week, investors had to keep watching attentively the escalation of the conflict in the Middle East area. As a result, investors increased transfers of their funds from developing markets to less risky assets which are traditionally represented by US government bonds. This resulted in further fall in the yield of the US long-term bonds, but the Russian bonds were the least affected by the widened spread, because of extremely high credit- related indicators for the Russian Federation. In the middle-term period, however, taking account of the Middle East conflict aggravation, this could result in downward trend for Russian securities, because investors would then withdraw from the Russian market. Russian securities kept growing throughout the entire third week of the month, because, among other things, investors were expecting the Russias sovereign credit rating to be upgraded in fall after the completion of the deal on partial repayment of the Russias debt due to the Paris Club of Creditors on August 21.

According to the data available as of June 23, the yield to maturity of the RUS 30 and RUS Russian Eurobonds accounted for 6.44% and 6.62% per annum respectively. The yield of Russian Eurobonds on the similar date was as follows: 4.76% for 8 tranche Minfin Bonds, 6.19% for 7 tranche Minfin Bonds, 6.15% for 5 tranche Minfin Bonds, and 6.02% for RUS-07.

The condition in the market of government bonds denominated in rubles improved insignificantly in the beginning of the month due to an insignificant growth in the Eurobonds segment, as well as stabilized ruble based liquidity. At the same time, however, significant volume of the primary offer was the constraining factor. The demand markedly came short of the offer at auctions. However, the primary offer kept growing till the middle of the month: issuers did their best to borrow funds at the lowest rates possible. Altogether these factors constrained activity in the secondary market, taking into account that the RUR stopped gaining against the USD. As a result, the value of bonds denominated in rubles declined insignificantly during the second week of the month. Values of bonds denominated in rubles kept growing gradually in the beginning of the second week of the month under the support of a Our review is based on analytical materials and reviews made by Zenit Bank, ATON Asset Management Company, MICEX, the Central Bank of Russia, as well as official web-sites of numerous Russian corporate issuers.

fairly favorable situation in external markets, as well as an extremely high level of liquidity in the Russian banking sector.

Figure Minfin bonds' yields to maturity in May - July 6.5% Tranche 5 Tranche 8 Tranche 6.0% 5.5% 5.0% 4.5% Figure Yields to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in May - July 6.8% USD-2030 USD-2007 USD-6.5% 6.3% 6.0% 5.8% 5.5% 5.3% 5.0% the period between July 3 and 24, 2006, the total secondary GKO-OFZ market turnover totaled nearly Rb 41.7 billion with an average weighted turnover being Rb 2.6 billion ( as compared to nearly Rb 119.88 billion with the average weighted turnover being Rb 7.5 billion in June 2006 ). Hence trading activity in the sector of Russian government bonds denominated in rubles decreased considerably in July as compared to the previous month.

An auction was held on placement of OFZ PD government bonds denominated in rubles ( issue 25059 ) in the primary market on July 19, with issuance volume being Rb 10 billion with a demand of Rb 14,54 billion at market value. As a result, the bonds were actually placed at Rb 9.96 billion with an average yield of 6.63%.

As of July 26, 2006, the GKO-OFZ market volume accounted for Rb 813.41 billion at par value and Rb 805.08 billion at market value. Duration of the market GKO-OFZ portfolio was 1979.6 days.

Corporate Security Market Stock market condition. In general, the condition in the Russian stock market throughout the entire July can be characterized as a summer-related slack. However, in spite of low indicators of the movement of basic indices at the end of the month, daily movements happened to become highly volatile at some short periods of the same month.

Though at the end of the first week of the month the Russian stock market grew insignificantly, the overall market condition could classified a stagnation. Trading turnover were falling gradually, and quotations of some shares became highly volatile. The situation remained the same throughout the second week of the month. In spite of the that the RTS index fell insignificantly, quotations were kept within a fairly narrow range of the attained levels. The market was slightly supported by another growth of oil prices and gold due to the military conflict in the Middle East. However, in spite of that the outbreak of hostilities has not yet adversely affected the Russian stock market, it could be affected in the meddle-term period by affecting trends in the developed markets, for which further escalation of violence may result in price growth of raw materials and, as a consequence, growth of inflation risks.

In addition, investors were expecting the upcoming G8 summit and reacted with care to the statements made by the participants in the threshold of the summit.

By the beginning of the second week of the month, the market condition remained unchanged regardless of a series of events which could have had a potential effect on investors behavior in the stock market. For instance, secondary auction of Rosnefts shares was held in the Russian market, whose initial public offer became one of the most significant events of the month in the stock market.

However, quotations of the shares changed insignificantly and even fell slightly upon the auction.

Perhaps, this was due to the agreement between the company and banks ( underwriters ) on support of its shares in the western markets in the nearest month. Under the circumstances, Russian investors were reluctant to get rid of the purchased shares or, otherwise, apply for purchase. Moderately positive news came from the United States, comments made by the head of the US Federal Reserve System were considered by most analytics as a signal in favor of interest rate growth. By the end of the week, YUKOS shares showed the most significant movement in response to the news on resignation of S.

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