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The consumer price index grew by 0.5% ( as compared to 0.9% in July 2004 ( see Fig. 1)) in July 2005. Growth in the rates of fee-based services to the general public increased by 0.9% in June this year ( as compared to 1.4% in July 2004 ) and were mainly responsible for the price development in July ( for two successive months ). Hence the retardation of growth in the rates of fee-based services to the general public, which occurred in the beginning of the current year, was no longer observed. In July, rates of recreational and healthcare services, transportation services and preschool education services grew most of all by 2.1%, 1.8% and 1.5% correspondingly. It should be noted that the growth in the rates of recreational and healthcare services and transportation can be explained by a seasonal factor.

Prices of food products grew by 0.3% in July ( as compared to 1% in July 2004 ). White sugar, cereals and legumes, red meat products and poultry meat grew most of all by the end of the month by 3.4%, 1.1% and 0.9% correspondingly. Prices of such food-products as fruits and vegetables and milk butter dropped by 1.8% and 0.1% correspondingly. It should be noted that no deflation, which was predicted by the RF Government, occurred, though prices of food products grew very slowly.

Prices of non-food products grew by an average of 0.4% ( as compared to 0.6% in July 2004 ).

Prices of motor gasoline, cleansing agents and tobacco products grew most of all by 1.8%, 0.4% and 0.4%. It should be noted that prices of gasoline, which were stable in June, grew faster.

The reference consumer price index 5 grew by no more than 0.5% in July 2005 (against 0.8% in the corresponding period of the previous year). Hence inflation in July 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 August 2005 due to a decrease in prices of fruits and vegetables.

According to the preliminary estimates, the value of consumer price index accounted for 100.0 in August.

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.

Figure 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 base6 grew by 39,1 bln rubles to reach 2.35 trillion rubles ( + 1.7% ) in July 2005. The volume of wide monetary base equaled 2,31 trillion rubles as of August 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 1.81 trillion rubles as of August 1, 2005 ( + 3.2% as compared to July 1 ), correspondent accounts of credit organizations with the Bank of Russia amounted to 269,6 bln rubles ( - 4.6% ), mandatory reserves amounted to 142,1 bln rubles ( + 3.6% ), banks deposits in the Bank of Russia accounted for 30,02 bln rubles ( - 12.2% ), the value of the bonds of the Bank of Russia at credit organizations was 86,3 bln rubles ( - 7.4% ), RF Central Banks obligations for repurchasing of securities amounted to 0 bln rubles ( no changes as compared to July 1, 2005 ), and currency transactions reserves deposited with the Bank of Russia amounted to 7,9 bln rubles ( + 38.6% ).

The growth in the volume of active cash money ( + 3.2% ) with simultaneous increase in mandatory reserves (+ 3.6% ) in July resulted in that the monetary base ( cash money + compulsory reserves )widened by 2.4% (see Figure 2 ). In addition, the RF gold and foreign exchange reserves of the RF Central Bank were reduced ( - 4.6% ) in July and totaled 144,6 bln US dollars as of August 1, 2005.

The monetary base and the RF gold and foreign exchange reserves increased by 2.2% and 3.2% correspondingly during the first two weeks of August. The RF gold and foreign exchange reserves shank in July due to Russian foreign debt repayments covered by the RF Stabilization Fund which totaled 721 bln rubles as of August 1, 2005.

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.

Jul Jul Jul Jul Jan Jan Jan Jan Sep Sep Sep Mar Mar Mar Mar Nov Nov Nov May May May May Figure 2.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2003 - 1950 1450 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) The RF Ministry of Finance made transfers, 3,43 bln US dollars, in repayment of the Russian foreign debt in August this year. Principal repayment totaled 2.44 bln US dollars with the interest being 990 ml US dollars. On August 22, 2005, the Russian Federation transferred its final tranche, 2.3 bln US dollars, in early debt repayment to the Paris Club of creditors. Prior to that, on July 15 and 29, 2005, the Russian Federation already transferred about 13 bln US dollars in early repayment of its foreign debt.

Since August 1, 2005, the Bank of Russia established a structure of dual-currency basket, in which EUR accounts for 35% and USD for 65%, according to the Public Relations Department of the Bank of Russia. It will be recalled that in February 1, 2005 the Bank of Russia began to use the value of the currency basket, in which EUR accounted for 10% and USD for 90%, as an operational reference to rely on in pursuing its foreign exchange policy. A share of EUR increased up to 20% from March 15, and 30% from May 16. This measure was taken to reduce the RUR exchange rate volatility against the currencies of the key trade partners of the Russian Federation.

The Board of Directors of the Bank of Russia made a decision to issue a new denomination ( rubles ) of banknotes of the Bank of Russia according to the 1997 standard. The issue of 5000 rubles denomination is dictated by the cash turnover requirements and the average wages growth in this country, according to representatives of the RF Central Bank. The 5000 rubles denomination is scheduled to be put into circulation in 2006.

P. Trunin Financial Markets The Russian financial market was dominated by a positive movement in August 2005. In spite of a holiday season, the RF government bonds market experienced rally which was followed by a decline in yield. A decision made by Fitch to upgrade ( ) the sovereign credit rating for Russia has a significant impact on the Russian bonds market. This news along with strengthening Russian 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.

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..

billion rubles billion dollars 1-7.12.2-8.02.8-14.09.6-13.04.9-15.06.17-23.08.20-26.10.10-16.11.22-28.12.12-18.01.16-22.03.19-25.05.21-27.07.11-17.08.27.07-2.08.29.09-5.10.28.04-4.05.30.06-6.07.23.02-01.03.and improving ruble liquidity in the banking sector encouraged purchases and corresponding growth in quotations in the corporate and regional bonds market as well. Investors, however, focused on the stock market in August, which has been growing for four consecutive months as pushed up by a rapidly and steadily growing oil prices, favorable macroeconomic situation in the United States, as well as generally underestimated Russian assets as compared to other developing countries. Quotation of many blue chips hit new historical peaks as well as the RTS index.

Government Bond Market Quotations in the Russian Eurobonds market grew gradually in August 2005. A decision made by Fitch to upgrade one step up to the sovereign credit rating for Russia was chiefly responsible for upward movement in the Russian Eurobonds market during the first week of the month. Even though quotations of the base assets US Treasury Bonds declined throughout the entire week, Russian securities grew at fairly slower rates at the beginning. Later on, however, the situation stabilized and quotations of Russian bonds again was effected by the behavior of the base assets. The positive movement continued during the second half of the month, when the spread between Russian and US bonds was very close to minimum.

According to the data available as of August 26, the yield to maturity of the RUS 30 and RUS-Russian Eurobonds accounted for 5.23% and 5.54% per annum respectively. The yield of Russian Eurobonds on the similar date was as follows: 5.35% for 7 tranche Minfin Bonds, 4.22% for 6 tranche Minfin Bonds, 4.99% for 5 tranche Minfin Bonds, and 4.58% for RUS-07.

Figure 1.

Minfin bonds' yields to maturity in June - August 6.5% Tranche 5 Tranche 6 Tranche 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 01.06.03.06.07.06.09.06.14.06.16.06.20.06.22.06.24.06.28.06.30.06.04.07.06.07.08.07.12.07.14.07.18.07.20.07.22.07.26.07.28.07.01.08.03.08.05.08.09.08.11.08.15.08.17.08.19.08.23.08.25.08.Figure 2.

Yields to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in June - August 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% USD-2030 USD-2007 USD-A marked rally with growing quotations took place in the rubles state debt market in August. A few months of a relative slack in the market were followed by the rally which caused rubles government to grow. Statistics on declined inflation in Russia, from 0.6% in June down to 0.5% in July, as well as a marked strengthening of the Russian national currency infused investors with optimism. Obviously, the Fitchs upgrade of sovereign credit rating for Russia was another favorable factor. This resulted in the growth in quotations of bonds throughout the period of three weeks in the month at the backgrounds of a fairly high investment activity which is not typical of summer period. Medium-term and long-term OFZ federal bonds were in highest demand. Positive factors were represented by strengthening of the Russian national currency against the US dollar, high degree of liquidity in the Russian banking sector and the upward trend in the Russian Eurobonds market.

At the same time, however, market prices consolidated at their new levels at the end of the month after a fairly long period of growth. Some investors fixed their profits, which caused a downward trend in liquidity in the Russian banking sector. However, Russian ruble Eurobonds were supported twofold:

by a slight strengthening of the Russian national currency against the US dollar and new historical peaks reached by Russian Eurobonds. The information of the RF Ministry of Finance on the accomplished transfer of funds in repayment of a portion of its debt to the Paris Club of creditors, as well as the intention of the Russian Government to continue negotiations on repayment of the Russian foreign debt to the Paris Club and other creditors, received a positive response in investors.

In the period between August 1 and 26, the total secondary GKO-OFZ market turnover accounted for nearly 70.3 bln rubles with the average weighted turnover being 3.5 bln rubles ( as compared to 32.76 bln rubles with the average weighted turnover being 2.05 bln rubles in the first three of July ).

Hence the activity in the Russian ruble government bonds drastically declined in August as compared to July. One OFZP-AD placement (issue 25058) auction was held on August 3 during the month, its issuance volume being 8 bln rubles. The placement volume was 7.87 bln rubles with the average weighted yield being 6.98% per annum. OFZP-AD 46-17 (8 bln rubles volume) was placed on August 17. The action resulted in placement volume of 7.41 bln rubles with the average weighted yield being 7.61% per annum As of August 22, the GKO-OFZ market volume accounted for 646.38 bln rubles at face value and 638.12 bln rubles at the market value. Duration of the market GKO-OFZ portfolio was 1745.84 days.

01.06.03.06.07.06.09.06.14.06.16.06.20.06.22.06.24.06.28.06.30.06.04.07.06.07.08.07.12.07.14.07.18.07.20.07.22.07.26.07.28.07.01.08.03.08.05.08.09.08.11.08.15.08.17.08.19.08.23.08.25.08.Corporate Security Market Stock market condition.

The Russian stock market continued, since May 2005, to be dominated by the upward trend in prices of traded shares in August. The situation in the market remained favorable early in the month.

High prices of oil and metals, as well as a favorable degree of liquidity remained among the positive factors. A small negative correction took place in the market only after the news of the Fitchs upgrade (one point up to BBB) of sovereign credit rating for Russia, because stock market speculators decided to fix their profit generated from the previous upward trend. Nevertheless, the market continued to grow as early as the following day. Rostelekom shares grew up considerably after the news of agreement between MERT and MVD on a Sviazinvest privatization draft enactment. Prices of both Sberbanks preferred and common shares jumped up considerably after Fitch had upgraded its rating up to a sovereign level. The market showed mixed movements within the second week in the month: the growth in prices of shares early in the week gave way to a negative correction without any significant news at the end of it. It could be explained by that some investors decided to fix their profit after a fairly long-term market growth.

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