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Section 2. Monetary-credit and Budgetary Sphere 2.1. Monetary Policy In analyzing the processes in the monetary sphere and the Central Banks policies in year 2002, the overall decrease in attention to the developments in that sector of the Russian economy should be regarded as the key factor of analysis. In particular, the issues of monetary and currency regulation (perhaps, with the exception of the debates around new draft Federal Law "On Currency Regulation and Currency Control") remained in the background throughout the year in comparison with changes in the tax field, reforms of the public sector and natural monopolies, Russia's joining the WTO, structural policy and slowdown of growth rates in the real sector of the economy.

Against the background of significant changes in the aforementioned fields, the situation in the monetary sphere (inflationary processes, changes in the exchange rate of the Russian national currency and dynamics of demand for money) seem quite stable and predictable.

E.g., the consumer price growth rate was lower in 2002 as against 2001, nearing the values envisaged in the Federal Law "On the Federal Budget for Year 2002" and in "The Main Guidelines of the Monetary Policy for Year 2002". The dynamics of changes in the RUR / US$ nominal exchange rate remained smooth throughout the year, and the real RUR exchange rate growth remained moderate. The dynamics of RUR/ Euro exchange rate are characterized by greater volatility resulting primarily from fluctuations in the exchange rate of the single European currency against the US Dollar. Despite the change in the management of the Bank of Russia in March 2002, the politics of monetary authorities did not suffer any abrupt modifications and currency control liberalization continued.

At the same time, the set of monetary policy instruments remained in 2002 as limited as in the preceding years, not going beyond interventions in the foreign exchange market and accumulation of funds in the Federal Government's accounts with the CB RF. On the other hand, due to the weak relation between the monetary and real sectors of the Russian economy and lack of clearly defined monetary policy transmission channels, the issue of how urgent it is to expand the Central Bank's ability to implement its policy remains more theoretical than practical1.

On the whole, one may mark out the following important issues in the area of monetary and exchange rate policy (below we will expand on them in greater detail).

the growing role of non-monetary factors (increase in regulated prices of natural monopolies) in determining consumer price growth rates, accompanied by further slowdown of the rate of inflation;

smooth dynamics of the nominal RUR exchange rate, remaining low appreciation rates of the Russian national currency and accumulation of gold and currency reserves of the Bank of Russia;

change of the management of the CB RF;

policies of the monetary authorities in relation to currency control liberalization;

The possibility of existence of various monetary transmission channels in the Russian economy has been analysed in S. Drobyshevski and A. Kozlovskaya "Domestic Factors of the Russian Monetary Policy", IET Working papers, No. 45R, Moscow, IET, 2002.

RUSSIAN ECONOMY in trends and outlooks slowdown of capitalization of the banking system accompanied by relaxation of credit rationing and greater supply of money by the banking system by means of extending loans to the private sector;

growth of population confidence in deposits with banks.

Inflationary Processes in Year In 2002 the consumer price index growth was 15.1 percent, or 3.5 percentage points lower than in year 2001. Fig. 1 shows the month-on-month dynamics of CPI growth in 2001 - 2002. As one can see, in 2002 the intra-year inflation volatility increased. The commodity structure of consumer price growth looks as follows: consumer goods, 11.0 percent; nonfoods, 10.9 percent; services, 36.2 percent; The highest price growth rates, 20.4 percent, have been observed for petroleum, (- 8.6 percent in 2001); housing and communal services: 48.percent against 56.8 percent in 2001; medical services: 30.7 percent against 22.5 percent in the preceding year; public transportation services: 26.0 percent against 25.3 percent in 2001, and telecommunication services: 37.6 percent against 23.3 percent.

CPI Growth Rate 2001-2002 (% per month) 3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% Source: State Committee for Statistics of the RF Fig. In January 2002 inflation rate grew as usual. However, this year the January price fluctuation was greater than in year 2001 (see Fig. 1).

In the first month of 2002 inflation (measured by the CPI) amounted to 3.1 percent (ca.

44 percent p.a.). It should be noted that the January price growth occurred mainly in the two last weeks of the month, after the RF Government decided to increase prices and tariffs on the services of natural monopolies. The commodity structure of the CPI growth confirms the assumption that administrative and seasonal factors affecting the determination of the consumer price growth rate played the leading role while the contribution of monetary factors was insignificant. E.g., the index of prices for medicines grew 5.2 percent (which, to a great extent, Jul Jul Jan Jan Jun Jun Oct Oct Feb Feb Sep Sep Apr Apr Dec Dec Mar Mar Aug Aug Nov Nov May May INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru is explained by the repeal of the incentive rate of VAT for this class of goods; the index of service prices grew 7.5 percent. Such a high growth rate of service prices (the highest monthly growth rate of service prices since January 1996) has been caused primarily by a growth of prices for housing and communal services by 8.8 percent, prices for telecommunication services (18.0 percent) and railway transportation (18.9 percent).

However, in the beginning of 2002 the CPI growth rate began to decline sharply. At the end of the first two months CPI growth in 2002 lagged behind the respective figure for (4.6 percent as compared with 5.2 percent).

In May 2002 the CPI grew 1.7 percent, or 0.5 percentage points more than in the previous month. In the non-food group special attention should be drawn to a growth of prices for petrol that caused significant public response. In May the index of retail petrol prices amounted to 110.7 percent. Low octane brands of A-76 petrol (AI-80 etc.) grew in price by 12.5 percent, AI-92 (AI-93 etc.) grew by 10.5 percent and high octane brands (AI-95 and higher) by 6.3 percent. The growth of fuel prices was uneven from region to region. The greatest growth was observed in the Ulyanovsk oblast: 52.8 percent. Petrol prices continued to grow in June. The weekly growth from 3 till 10 June was 3.7 percent, from 10 till 17 June, 2.0 percent. Let us recall that a similar sharp increase in petrol prices in early summer was observed in 1999, which was related to the growth of petrol prices, in US Dollar terms, up to the level of 0.3 to 0.35 Dollars / liter after the Rouble devaluation. This level obviously reflects the equilibrium petrol price level in the internal market with the account for transportation costs and existing physical limitations on the volume of oil exports. Throughout the two last years petrol price growth rates lagged behind the US Dollar rate (although the difference in rates was significantly lower than in years 1998 - 1999), and, as we suppose, the present jump is of the same origin. Besides, in the spring of 2002 legal limitations on the volume of oil exports were removed, and, against a background of high oil prices on global markets, prices on the internal market also grew.

It is important to note that, besides the above-mentioned petrol prices, non-monetary factors affecting inflationary processes in the summer of 2002 include the decision of the RF Government of 20 June 2002 to increase tariffs on products of natural monopolies. In July 2002 tariffs on gas grew 15 percent.

Tariffs on electroenergy purchased on the Federal Wholesale Market of Electricity and Power grew 2.4 percent and tariffs on railway transportation grew 6.8 percent.

Thus, in the first six months of 2002 inflation in Russia (measured by CPI) was ca. percent (against 12.8 percent in the first six months of 2001).

A seasonal decrease in consumer price growth rates was observed in the period from July to September 2002 (as low as 0.1 percent in August, see Fig. 1); at the same time, prices for housing and communal services continued to grow significantly: the increase was 2.4 percent in July and 4.1 percent in August. In September the CPI was 100.4 percent, with the main growth, 0.3 percent, falling on the last week of the month. Prices for fruits and vegetables continued to decrease: the index for this product group was 90.1 percent in September.

The service price index grew 2.8 percent; the greatest growth, 10.9 percent, was observed for prices for education services, which occurred due to the beginning of the new academic year.

Prices for housing and communal services grew as before: the increase was 2.6 percent.

In October the CPI started to grow faster. According to the State Committee for Statistics of the RF, in October the consumer price index was 101.1 and in November - 101.6 percent. The seasonal decrease in prices for fruits and vegetables in November was soon replaced RUSSIAN ECONOMY in trends and outlooks by quick growth: the index for this commodity group amounted to 106.2 at the end of the month. The service price index grew 4.4 percent in the two months of the autumn. In this group, the greatest rise in prices was observed for passenger transport: prices grew 6.6 percent (this occurred primarily owing to urban transport) and telecommunication: prices grew 5.percent.

In closing we would like to dwell on the issue of monetary and non-monetary factors contributing to the rates of consumer price growth in post-crisis years. In particular it is important to note that in 2002, for the first time after the 1998 crisis, producer prices grew quicker than consumer prices. According to preliminary estimates, in 2002 the increase in producer price index was 17.1 percent.

To assess the relative contribution of monetary and non-monetary factors to the inflation rate in 1999 - 2002 we have formulated cointegrating relationship between accumulated indices of consumer prices and nominal money supply M2 (the level at the end of August 1998 is taken for one). This formula implies that non-monetary factors would include all inflationary components (with the exception of the increase in money supply proper), namely the increase in regulated prices and tariffs, change in demand for real cash balances and inflationary expectations2.

The results of assessing cointegrating relationship (in the assumption about the presence of an intercept and a linear trend) on the basis of monthly data demonstrate that a one percent increase in M2 entails CPI growth of 0.419 percent (the standard error is 0.081 percent), the linear trend slope is -0.057 percent per month, the standard error is 0.008 percent). Consumer price index growth decomposition, adjusted for the calculated contribution of monetary and non-monetary factors in years 1999 - 2002, is shown in Table 1 below.

Table Contribution of monetary and non-monetary factors to CPI growth in years 1999 - Other (nonMonetary Fac- CPI growth CPI growth CPI growth monetary) factors (share) (share) tors 1999 36.6% 22.7% 62.1% 13.9% 37.9% 2000 20.1% 23.7% 117.9% -3.6% -17.9% 2001 18.8% 13.1% 69.8% 5.7% 30.2% 2002 15.1% 8.6% 57.2% 6.5% 42.8% As is obvious from the results shown in the table, demand for money deterred inflation (i.e., demand for money grew due to increasing economic activity and lowering inflationary expectations) only in 2000, which resulted in CPI lowering by 3.6 percentage points against the value calculated on the basis of actual money supply growth in that year. Besides, in the greatest gap between the rates of growth of the consolidated consumer price index and M2 has been selected based on the results achieved in IET publications by S. Arkhipov and S. Drobyshevski "Simulation of Inflation Dynamics in Years 1992 to 1997"// Economy in Transition. Sketches of Economic Policy in the Postcommunist Russia in 1991 - 1997, Moscow, IET, 1998; and S. Drobyshevksi, A. Kozlovskaya "Domestic Factors of the Russian Monetary Policy", IET Working papers, No. 45R, Moscow, IET, 2002.

Both series (price index and money supply) are first order integrated series. The Johanssen conitegration test does not reject the hypothesis of one cointegrating relation between the variables under review (with the account for the linear trend). The estimated relation is P = M 2 + Trend.

t t INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru prices and tariffs regulated by the government (electroenergy, railway transportation, telecommunication etc.) was observed3.

In 1999, on the contrary, the tight monetary policy was the key factor containing inflation against a background of lowering demand for Rouble money balances and remaining high inflationary expectations after the 1998 Rouble devaluation. According to our calculations, if inflationary expectations and the demand for real Rouble balances had been low, the CPI would have grown 22-25 percent in 1999 (actual growth: 36.6 percent).

Calculations for 2001 - 2002 predicted that the consumer price growth caused by the expansion of money supply proper would be lower than the figures observed in reality. In our opinion, this occurred due to manifold growth of tariffs and prices for the services of natural monopolies in the course of those years. This factor contributed ca. 30 percent (5.7 percentage points) to closing inflation values in 2001 and ca. 43 percent (6.5 percentage points) to the closing value in 2002.

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