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In January-May 2008 gas export was equal to 92.4 bln cu.m. (117.8% on 2007), of which to non-CIS countries 75.5 bln cu. m. (126.5%), to CIS countries 16.9 bln cu. m. (90.4%). The decrease in gas supplies to CIS countries was caused by the reduction in Russian gas supply to the Ukraine.

High import growth rates were mainly provided by the increase in machinery, equipment and transport vehicles import both from non-CIS countries (growth by 65.9%) and from CIS countries (growth by 45.4%).

The share of this goods group in the structure of the Russian import reached 53.3% in January-May 2008, the share of non-CIS countries in import structure was equal to 56%, and from CIS countries to 29.1%.

The growth of machinery and equipment import was stimulated by intensified investment activity in the country.

The proportion of textile, textile goods, footwear and mineral products has also increased. The share of chemistry industry production, rubber, metal and goods thereof, foodstuffs and agriculture raw materials, timber and pulp-and-paper goods has decreased.

The value of foodstuffs and agriculture raw materials import exceeded in January-May 2008 the import value of January-May 2007 by 26%, import from non-CIS countries rising by 24.4%, and from CIScountries by 42.3%.

Value indices of textile, textile goods and footwear went up by 1.5 times, chemistry industry production by 1.4 times.

The countries that are the members of the European Union remain the main trading partners of Russia, as well as the biggest countries of Asia-Pacific region. The volume of foreign trade turnover with the EU countries, according to the customs statistics data, reached USD 155.97 bln over the first five months of 2008, having increased by more than 1.5 times. The share of the EU countries in the total foreign trade turnover was equal to 53.4%.

The proportion of the Asia-Pacific Economic Cooperation in the foreign trade turnover in January-May 2008 has increased up to 19.4% (growth by 1.3 percentage points) and was equal to USD 56.6 bln.

The significance of Asia-Pacific region for Russia is defined by wide opportunities for Russian high-tech production export, including weapons and military equipment, as well as by the fact that there is a considerable investment potential in the countries of the region.

The share of CIS countries in Russias foreign trade turnover has decreased from 15% to 14.9% in January-May 2008, goods turnover having increased by 44.7%.

Despite high growth rates of reciprocal trade with the countries of the Commonwealth, there are still many unsolved problems. For instance in the middle of July 2007 the RF Ministry for Trade and Economic Development sent a diplomatic note to the Ministry for Foreign Affaires of Belorussia, enlisting the number of measures taken by Minsk, that hinder Russian goods accessing to the Belorussian market. Currently there are 23 limitations in effect in Belorussia concerning Russian trade and economic partners.

For instance, the Russian party is of the opinion that the replacement of import quotation of tobacco, seafood and alcohol in Belorussia by the institute of special importers is equivalent to quantitative restriction and does not correspond to the principles of the free trade. Besides. The Ministry for Trade and Economic Development holds that it is a discrimination measure concerning Russian goods that there is a requirement for compulsory presence in shop assortments goods produced in Belorussia, though these requirements should have been abolished. The fact that the government of Belorussia gives its customs bodies the task on the level of import is also regarded in Russia as a violation of the free trade regime. It is also mentioned in the note that the necessity to observe some figures for import result in its reduction. There are also complaints included in the Russian ministrys document concerning Belorussian requirements for Russian exporters making copies of the certificates.

Meanwhile, having signed in March 2007 Agreement on measures for trade and economic collaboration development between Russia and Belorussia, both the countries took the responsibility for equal access of Russian and Belorussian goods to their markets.

At the same time, according to the forecast balance on milk and dairies for 2008-2012, approved by the Council of Ministers of the Union State, it is envisaged that supply of dairy from Belorussia to Russia is to decrease over 5 years by 11%. By 2012 step by step decrease of dairies supply from Belorussia to Russia from 2.8 mln tons to 2.5 mln tons is envisaged. The limitations for Belorussian supplies are accounted for by the interests of the Russian agro-industrial complex, whose development program implies increase in milk production in Russia by 12.1%. Such a solution for the issue of Belorussian milk supplied to Russia also does not perfectly meet the principles of the common trading space, whose creation the construction of the Union State of Russia and Belorussia assumes.

At the same time volume limitations have not been applied to Belorussian meat supplies to the Russian market. According to the forecast balance meat and meat products export for Belorussia to Russia is to be maintained at the level of 115 thousand of ton yearly until 2012. At the same time the Council of Ministers has not only taken into account the prospects for the Russian meat production but also the fact that it is beef that comprises the biggest proportion of Bellorussian meat exporting. And it is beef that compared to pork and poultry production is more expensive and takes the longest time to be paid off, and with whose production Russia has biggest problems, and existing internal demand cannot be satisfied without import.

Starting with 1 July 2008 export duty rates for wheat and barley export were abolished. It should be remembered that the Government made the decision on introduction of the seasonal export duty rate for wheat and barley on 8 October 2007 (duties introduced on 12 November). Export duty rate for wheat was established at the rate of 10% of the declared value, but no less than Euro 22 per ton, for barley 30%, but no less than Euro 70 per ton. This measure was caused by the sharp growth of world prices for grains.

This measure was however insufficient, and in January Russia increased export duty rates for food wheat up to 40% (but no less than Euro 105 per ton). Now, when there are good prospects for next harvest, duty rates have been abolished. According to the preliminary forecast of the Ministry of Agriculture, gross grain harvest in Russia will reach 88.9 mln tons this year. Wheat harvest may be of the record-breaking value over the last 30 years and may reach 52.4 mln tons (in 1980 there were 50.3 mln tons and in 2007 49.4 mln tons harvested). Thus, export potential of grains this year may be 19 mln tons.

Duties abolition is, however, necessary but not sufficient condition for export development, since present day situation at the world market of grains is strikingly different form that a year ago. In 2007 prices at the world market piloting, there were practically two gamblers Russia and the USA that supplied with grains the whole Mediterranean. At present it is expected that there will be increase in production in all the main exporting countries: the EU, Ukraine, Australia, Canada. According to the forecast of the International Grains Board, in 2008 1.7 bln tons of grains will be harvested, including 645 mln tons of wheat, which exceeds the current world demand for it (610620 mln tons).

Monetary Policy and Inflation P. Trunin As a result of June, CPI index in the RF was equal to 1%, for the first time in the current year not exceeding CPI value over the corresponding period of the previous year. The increase in consumer prices however reached 8.7%, which is by far over the prices growth rates in 2007. Against the background of rapid inflow of currency into the country real effective ruble exchange rate went up by 0.2% and international reserved of the Bank of Russia by 4.2%. In order to decrease monetary supply growth rates and inflation the Bank of Russia will increase interest rates for credits and deposits in the RF Central bank by 0.25 percentage points.

In June the value of consumer prices index was equal to 1% (1% in June 2007) (see fig. 1). Thus, June has been the first month of the current year, in which prices growth rates did not exceed that of the previous year. The same as in February-May it was the foodstuffs becoming more expensive (+ 1.1%) that made the biggest contribution in prices growth in June. Thus, prices for basic food commodities continued growing rapidly. In June the most considerable increase in prices was observed for cereals and legumes (+ 6.4%), pasta (+ 2.9%), sunflower oil (+ 2.7%), bread and bakery goods (+ 1.9%), meat and poultry (+ 1.9%) and white sugar (+ 1.2%). At the same time prices for eggs in June continued dropping on average throughout the country they became by 11.2% cheaper over the month.

The growth in prices for paid consumer services rendered to the population continued in June - it made 1.1% as a result of the month. The most significant increase in prices was registered for services of sanatoriums and health centers (+ 7.3%), foreign tourism (+ 3.8 per cent), passenger transportation (+ 3.2%) and personal services (+ 1.3%). There was no decline in prices observed for any group of services.

In June a growth in the prices for non-food goods was also observed, prices for which increasing by 0.7%.

It was motor petrol (+ 4.3%), construction materials (+ 1.2%), medicines (+ 1.1%) and detergents and cleaning agents (+ 1.1%) that were becoming more expensive at fastest rates. At the same time, the prices for TV and radio sets decreased by 0.3%.

Thus, as a result of June inflation in the Russian Federation slowed down a bit, but the gap between inflation and prices growth rates registered in the corresponding period of 2007 remained considerable (8.7% against 5.7%). As we predicted in the previous reviews, some drop of monetary supply at the beginning of this year (monetary base M2 increasing only by 0.6% in January-April of the current year as compared with 11.2% growth in the corresponding period of the previous year) as well as increase in agriculture goods supply led to inflation deceleration in the summer. At the same time inflation inertia stays rather explicit, the fact that provides serious grounds to expect that in 2008 the value of CPI will exceed the level registered as a result of the preceding year.

In June 2008, the growth in the basic consumer price index2 was equal to 0.9% (as compared with 0.4% registered in the respective period of the preceding year). In accordance with our estimates in July the value of CPI made from 0.6% to 0.8%t, whereas by the end of the year the CPI value may reach from 13 per cent to 14 per cent. In June 2008 basic consumer price index was equal to 0.9% (0.4% over the corresponding period of the previous year). According to our estimations, in July CPI was 0.6-0.8%. It should be noted that in July the RF Ministry for Trade and Economic Development increased once again the official forecast for CPI value this year from 10.5% to 11.8%, in our opinion, however, as a result of 2008 CPI may reach the level of 13-14%.

Over June 2008 monetary base (according to broad definition3) increased by RUR 293.4 bln up to RUR 5422.9 bln (+ 5.7%). By 1 June 2008 the volume of monetary base in the broad definition was RUR 5129.bln. Let us consider the dynamics of the monetary base in the broad definition component by component.

The amount of cash in circulation (as adjusted for cash balances of crediting organizations) made RUR 4.1 trillion by July 1 (a 2.4 % growth on May 1). On the same date, the amount of accounts of crediting organizations with the Central Bank of Russia made RUR 592.4 bln (+ 8.9%), the amount of mandatory reserves was at RUR 360.3 billion (+ 2.8%), the amount of banks deposits in the Bank of Russia made RUR 369.3 billion (+ 56.7%), the value of the Bank of Russia bonds held by crediting organizations was RUR 23.7 billion (+ 19.7%). Thus, in June the increase in the excess reserves of commercial banks made more than RUR 180 bln; it should be noted that the same is in May the highest growth rates were demonstrated by banks deposits in the RF Central Bank. The growth in the amount of reserves was facilitated by a significant inflow of foreign exchange in the country as a result of sustaining high prices for oil and private capita; inflow.

The Basic Consumer Price Index (BCPI) is an indicator reflecting the inflation rate at the consumer market. It leaves out of account the seasonal (prices of fruits and vegetables) and administrative (tariffs on regulated types of services etc.) factors, calculated by the RF Federal Statistics Service.

According to the broad definition RF Monetary Base includes, alongside with cash in circulation issued by the Bank of Russia and the Ruble denominated balances of mandatory reserves relating to the borrowings made by credit organizations deposited with the Bank of Russia, also the funds in credit organizations correspondent accounts and banks' deposits with the Bank of Russia 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: Federal State Statistics Service Fig. 1 CPI Growth Rates in 2002-2008 (as percentage a month) Thus, the situation regarding the bank liquidity is quite stable at this point of time, the evidence of which is low interest rates at the market of inter-bank credits, small amounts of REPO transactions between commercial banks and the RF Central Bank, as well as low demand for federal budget funds placed by the RF Ministry of Finance on the auction basis to the deposits with commercial banks.

In June, the amount of cash in circulation increased by 2.4%, while mandatory reserves growing simultaneously by 1.4%, which resulted in the increase in the monetary base in the narrow definition (cash plus mandatory reserves) 4 by 3% (see Fig. 2). At the same time, in June there was a growth observed in the amount of gold and foreign exchange reserves of the RF Central Bank by 4.2%, which was equal to RUR 568.3 bln by 1 July. Over the first three weeks of July, the amount of gold and foreign exchange reserves increased by another 3.5% and reached the level of USD 588.3 bln. At the same time, the sterilization of liquidity entering the country at the accounts of the RF Government with the RF Central Bank persisted:

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