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The achieved results demonstrate that at the present time the mere implementation of a consistent monetary policy is not enough to control inflationary processes. The share of price growth falling on non-monetary factors (first of all, increase of regulated prices) becomes comparable with the share occupied by the monetary component. In this connection it becomes ever more important to regulate the policy of the Bank of Russia with the policy of the RF Government in the field of regulation of tariffs on and prices for the services of natural monopolies (electroenergy, railways, gas), reforms of price subsidies for social services (housing and communal services, public transportation, education, medical services), tax policy (first of all, in respect of modification and indexing of indirect taxes, e.g. excise taxes) and customs policy in relation to imports (import duties).

Currency Market and the Dynamics of the Rouble Exchange Rate In 2002 the official Rouble exchange rate fell 5.46 percent, from 30.14 to 31.7844 Roubles for US Dollar. The official Rouble-Euro exchange rate fell 25.0 percent. from 26.62 to 33.1098 Roubles for Euro. The dynamics of the RUR / US Dollar exchange rate were rather smooth throughout the year while the Rouble - Euro exchange rate suffered significant fluctuations (see Fig. 2) in the wake of Euro rate changes in the global currency markets (see Fig.

3). Players in currency markets were active only for short periods of time.

Rapid growth of the US Dollar exchange rate was observed practically only in January 2002. After auctions on the forex market commenced, already on the first day the Dollar price grew 1.45 percent, or from 30.14 to 30.575 Roubles. Later on attacks on the Rouble exchange rate continued despite contracting excessive reserves of commercial banks. In January the Bank of Russia on many occasions made large-scale currency interventions in order to smoothen the dynamics of the Rouble exchange rate, and, according to indirect estimates, spent ca. 1.3 billion US Dollars from its reserves. However, the resulting decrease in foreign reserves turned out to be by far less significant, ca. 500 million US Dollars; obviously, the CB RF engaged in arbitrage transactions between the morning and the day-time sessions, buying the currency in case of Rouble exchange rate growth. Moreover, growth of the non-monetary component, gold in particular, was observed. The change of the Chairman of the Bank of Russia also affected the dynamics of Dollar quotations only to a small extent; besides, upon V. Gerashchenko's step-down the Rouble retained a certain trend towards nominal strengthen See: Russian Economy in 2000: Trends and Prospects. (Issue # 22). - Moscow.: IET, RUSSIAN ECONOMY in trends and outlooks ing. At the same time, in our opinion, the seasonal change of the situation around the balance of trade was the main factor contributing to stabilization of the foreign exchange market in the spring of 2002.

Dynamics of the Official RUR / US Dollar and RUR / Euro Exchange Rate 33,33,32,32,31,31,30,30,29,29,RUR/USD Exchange rate 28,28,27,RUR/EUR Exchange rate 27,26,26,Source: CB RF Fig. Dynamics of the Euro/Dollar Exchange Rate on the International Markets 1,1,1,1,1,1,0,0,0,0,0,0,0,0,0,0,0,0,0,0,0,Fig. roubles FOR THE ECONOMY IN TRNSITION http://www.iet.ru From March to May, as usual (for the first time this trend became apparent in the spring of 1995), the supply of currency in the market exceeds the demand and the nominal Rouble exchange rate either stabilizes or grows (with the exception for the 1998 case which resulted from the overall financial crisis in Russia). On the whole, in March - May 2002 the reserves of the Bank of Russia increased US$ 5.5 billion (15.2 percent), including the US$ 2.5 billion increase in May. At the beginning of June the reserves reached US$ 41.7 billion. In July the Bank of Russia changed the methodology of foreign reserves calculation by excluding short-term foreign liabilities from the reserves. In the Bank's view, this allowed "to increase the indicator's information capacity". Upon recalculation the reserves decreased ca. US$ 1.billion, however the overall dynamics of the indicator remained the same (see Fig. 4) D y n a m i c s o f N a r r o w M o n e t a r y B a s e a n d F o r e i g n R e s e r v e s i n 2 0 0 9 4 0 4 9 2 4 9 0 4 8 8 4 8 6 4 8 4 4 8 2 4 8 0 4 7 8 4 7 6 4 7 4 3 7 2 3 7 0 3 6 8 6 6 0 3 M o n e t a r y B a s e ( b l n. r u b. ) F o r e i g n R e s e r v e s ( b l n. d o l l. ) Source: CB RF Fig. In September 2002 the Bank of Russia published an Instruction establishing a new procedure for the mandatory sales of a share of exporters foreign currency proceedings, starting from 1 December 2002. In particular, this document entitles banks to carry out mandatory currency sales over-the-counter. In other words, a considerable share of foreign exchange market turnover is taken out of the Central Bank's control and the Rouble exchange rate is more subject to manipulation by all the parties to a transaction. The issue of the methodology for establishing the official rate of exchange of the Rouble against foreign currencies has not been cleared, though.

Against the background of the forthcoming loss of monopoly, MICEX decided in November to cut the commission on transactions with foreign currency on the SELT dramatically. The fee charged for transactions with US Dollars was decreased 30 times, from 0.percent down to 0.002 percent of the transaction amount. In addition, the Exchange cancelled the necessity to deposit cash beforehand in order to participate in an auction. Now, to carry out a transaction on the SELT it is enough to establish a reserve amounting to 1.5 percent of the intended transaction. At the end of 2002 the amount of foreign reserves of the Bank of bln. rubles bln. $ 3-9.6.1-7.7.8-14.4.6-12.5.9-15.9.2-8.12.11-17.2.11-17.3.25-31.3.22-28.4.20-26.5.17-23.6.15-21.7.12-18.8.23-29.9.7-13.10.4- ECONOMY in trends and outlooks Russia reached US$ 47.79 billion. The share of gold in the reserves does not exceed 7.85 percent.

In 2002 the trends in dynamics of the real RUR exchange rate were different, subject to the selected foreign currency (see Fig. 5). E.g., during the first ten months the real RUR exchange rate against the US Dollar (calculated on the basis of data on dynamics of the nominal RUR / US$ rate and the rates of CPI growth in Russia and the USA) increased 4.75 percent.

The increase of the real RUR / US$ exchange rate was 23.0 percent, as compared to September 1998. At the same time the real RUR / Euro exchange rate for the period from January - October 2002 decreased 6.21 percent, returning to the level of late 2000 - early 2001. In relation to the maximum 2002 value (February) the fall of the real RUR / Euro exchange rate reached 9.1 percent.

Dynamics of the Real Rouble Exchange Rate in 1998 - Real rouble/US$ exchange rate Real rouble/EUR exchange rate Real rouble effective exchange rate (IFS) Source: International Financial Statistics, calculations of IET Fig. The real effective Rouble exchange rate (calculated with the account of the export structure) actually changed in co-ordination with the real Rouble / Euro exchange rate. According to this indicator, the real depreciation of the Rouble in the course of the first nine months of 2002 reached 0.63 percent (in 2001 the real effective Rouble exchange rate grew 11.1 percent). In the end of July 2002 the real effective exchange rate fell to the level of September 2001. The maximum value of the exchange rate was achieved also in February (+36.2 percent as compared with September 1998).

The Policy of Monetary Authorities As we have already noted above, the change in the management of the Central Bank of Russia was the key news in respect of the policy of the monetary authorities. It should be mentioned that, following the replacement of CB RF Head, the monetary policy did not undergo any abrupt changes. Already in his first statements the new Chairman of the Central Bank of Russia S. Ignatiev confirmed that the policy of accumulating foreign reserves and keeping low rates of appreciation of the Russian national currency were priority directions. At Jul Jul Jul Jul Jan Jan Jan Jan Sep Sep Sep Sep Sep Mar Mar Mar Mar Nov Nov Nov Nov May May May May INSTITUTE FOR THE ECONOMY IN TRNSITION http://www.iet.ru the same time the Central Bank did not introduce changes to the claimed rates of increase in money aggregates in 2002 or speed up the process of currency regulation and capital control liberalization. In April 2002 a number of events directly related to the RF monetary policy occurred. On 1 April the Supreme Court of RF satisfied a claim by the Moscow Stock Exchange, which demanded to admit that the CB RF regulation on mandatory sales of currency proceedings by exporters exclusively through the authorized trade floor (in fact, on the SELT at MICEX) conflicted with the law. This ruling by the Court allowed exporters to sell currency within the limits of mandatory sales (50 percent) at any exchange authorized to carry out currency auctions and on the OTC market.

As it has been noted above, following a number of processes, the latest of which was won by the Central Bank (the ruling by the Presidium of the Supreme Court dated 01 August 2002), the Board of Directors of the Bank of Russia passed a decision on 23 August 2002 that the mandatory sales of a part of export proceedings may be carried out through authorized banks on interbank currency exchanges, directly to the Central Bank of the Russian Federation, on the OTC interbank currency market or to the authorized bank providing services to the resident. The monopoly of currency exchanges is thus liquidated.

In our view, economic consequences of such a course of affairs will be negative rather than positive. The only positive consequence would be the liquidation of MICEX's monopoly for this sort of operations and the resulting decrease in costs on currency conversion for all participants of the forex market (first of all due to a decrease in the exchange's commission fee) 4. At the same time, liquidation of the single foreign exchange market reduces the ability of the Bank of Russia to carry out exchange rate policy and support the exchange rate of the Russian national currency, for one thing. Secondly, it becomes easier for speculation-minded players to attack the Rouble and destabilize the market. Thirdly, it creates conditions for plotting various schemes of fictitious sales of currency proceedings by exporters to affiliated banks on the interbank market and small trade floors. Fourthly, the methodology of determining the official exchange rate of the Rouble against foreign currencies still requires elaboration.

On 9 April the Bank of Russia, for the first time since November 2002, reduced its refinancing rate. The new rate is 23 percent p.a.; this is the lowest figure since November 1997. It should be noted that, just as before, this decision by the CB RF was predominantly symbolic, being aimed at creating expectations of a further reduction of inflation and interest rates in the economy since the mechanism of refinancing is up to the present time virtually non-existent and the current interest rates on loans and treasury bills are far below the level of the refinancing rate. The next reduction of refinancing rate, down to 21 percent p.a., occurred on 7 August 2002.

In our opinion, the other significant event in the field of monetary policy was the RF Pension Fund's entering the internal debt market. In particular, in April 2002 the RF Pension Fund acquired in primary auctions GKOs and OFZs for ca. RUR 3 billion, thus creating a considerable portion of demand for the bonds. It is obvious that appearance of such a large institutional investor increases liquidity in the GKO - OFZ market and contributes to a further reduction of bond yields. In addition, investments by the RF Pension Fund of surplus funds in state bonds (on the stipulation that they are purchased from the CB RF on the secondary market) may be regarded as one of the measures aimed at sterilizing Rouble in As we have noted above, MICEX decreased its commission many times already in November 2002.

RUSSIAN ECONOMY in trends and outlooks terventions by the CB RF accumulating foreign reserves (this is similar to the RF Minfin's depositing funds received in bond auctions in accounts of federal agencies with the CB RF).

The Central Bank of Russia introduced a new instrument as part of the policy aimed at increasing the importance of interest rates as a means of monetary regulation. On 26 September 2002 a new type of transactions currency swaps were added to the existing system of refinancing of credit institutions. In the course of a currency swap the Bank of Russia will buy US Dollars for Russian Roubles on conditions "today" at the official US$ / RUR rate of exchange (base rate) with subsequent sale on conditions "tomorrow". In fact, this is lending to commercial banks overnight against a security in the form of foreign currency.

The directions, in which currency legislation would be liberalized, began to clear up in the autumn of 2002. The draft law adopted as a whole on 14 November provides for mandatory repatriation of currency proceedings within 180 days and for the Central Bank's right to impose limitations on capital operations: the so-called account regimen (list of allowed operations) and mandatory reservation of up to 20 percent of the transaction amount for a term of up to one year in case of importing the currency, and of up to 100 percent for two months in case of exporting the currency. The CB RF was also given a right to demand that residents undergo registration before opening currency accounts outside Russia. The upper limit of the mandatory sales of currency proceedings was fixed at the level of 30 percent. It is assumed that all limitations, with the exception of the 100 percent repatriation, will be canceled on January 2007.

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