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D. Polevoy Monetary and Credit Policy In the current year deflation did not take place: as of September results, consumer price index has grown by 0.1% (7.3 per cent since the beginning of 2006, 0.3 per cent in September of 2005 (see Fig..1). In September the growth of monetary offer has been reduced: the rate of monetary base growth in narrow definition did not exceed 1.7 per cent. Though inflation was decreased in comparison with the preceding months, the expected reduction of cost for fruit and vegetable products did not take place. It was caused by growth of prices for nonfood products (by 0.8 per cent) and chargeable public services (by 0.5 per cent).

A considerable growth of prices for nonfood products was brought up by the growth of costs of petrol (by 2,7 per cent), construction materials (by 2,1 per cent) and footwear (by 1 per cent). In September further reduction of prices for TV and radio equipment was observed (by 0,1 per cent). Though the rate of growth of petrol cost was kept up on a rather high level, it has nevertheless dropped down twice in comparison with the August level. It should be noticed that in view of autumn-winter reduction of petrol consumption, one can expect further reduction of the rates of its growth. The growth of construction materials cost was caused, first of all, by considerable increase of consumers demand due to implicit growth of construction volume in the country.

As to the chargeable public services, in September the utmost growth was noticed in fees for education (by 7,1 per cent), culture organizations (by 2,6 per cent) and preschool services (by 1,5 per cent).

One should notice that the expressed rise of price for education is explained by the seasonal demand.

In September the prices of transport services have been decreased after a long period (by 2.5 per cent), as well as health-resort services (by 1.6 per cent). In general, chargeable public services costs have grown in September by 0.5 per cent.

Average prices of foodstuffs in September have been diminished by 0.6 per cent countrywide. Naturally, the most expressed reduction was observed in the cost of fruit and vegetables (by 11 per cent).

Besides, sugar price has been decreased for granulated sugar (by 3 per cent). In August, under the impact of introduction of the Unified Government Excise Identification, a reduction of supplies of alcohol products and growth of the production cost for the suppliers was kept up; the prices for alcohol raised by 1.1 per cent.

The growth of the basic index of consumer pricesTF FPT in September 2006 made 0.8 per cent (as comP pared to - 0.8 per cent in the same period of preceding year). Therefore, in September acceleration of the basic inflation rate was continued, which is explained by speedy growth of monetary offer in the current year. The trend of basic inflation growth cant be neglected, especially with regard to the growth of monetary base in broad definition, which rose three-fold within the first three quarters of the current year in comparison with the relevant period of preceding year.

According to the bulletin of approximation short-term estimates of the RF socio-economic indicators, published by IET, the growth of consumer price index in October is expected in the amount of 0.5 per cent.

PT TP The consumer price index is an indicator which reflects inflation level in the consumer market without regard to seasonal ( prices of fruit and vegetables) 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.

P P The monetary base (broad definition) 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.

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% T Fig. 1. The Rate of CPI in 2002 2006(% per month).

T T Source: Federal State Statistics Service.

In September 2006 the monetary base (in broad definition) has been increased by RUR 2 billion and amounted to RUR 3,484.2 billion (plus 0.06 per cent). The volume of the monetary base in broad definition made RUR 3482.2 billion on September 1, 2006. By individual components the dynamics of the monetary base in broad definition looked as follows. As of October 1, cash in circulation with regard to the fund balances of credit organizations made RUR 2.57 trillion (plus 2.1 per cent versus September 1), correspondent accounts of credit organizations with the Bank of Russia amounted to RUR 443.7 billion (plus 20.5 per cent), mandatory reserve amounted to RUR 205.8 billion (plus 0.per cent), bank deposits with the Bank of Russia accounted for RUR 109.6 billion (minus 52.2 per cent), the value of bonds of the Bank of Russia held by credit organizations made RUR 159.6 billion (minus 5.1 per cent), and currency transactions reserves deposited with the Bank of Russia amounted to RUR 0.1 billion (minus 66.7 per cent).

In September the growth of the volume of cash in circulation (by 2.1 per cent) and mandatory reservs (by 0.8 per cent) has led to an increase of monetary base in narrow definition (cash plus mandatory reserves)TF FPT by 1.7 per cent (see Fig.2). However, gold and foreign exchange reserves of the RF P Central Bank have grown (by 2.4 per cent) and made on October 1 RUR 266.2 billion. Within the first three weeks they have been increased by 0.4 per cent and reached the amount of USD 267.3 billion.

The major part of incoming liquidity has been accumulated in the RF Stabilization Fund, the value of which has reached as of October 1, 2006 RUR 1.894 billion (plus 163.4 versus September 1, 2006).

It should be noticed, that according to the IET bulletin of model analysis of short-term socioeconomic performance of the RF, the amount of gold and foreign exchange reserves should overcome the level of USD 270 billion by the end of November 2006.

PT TP It will be recalled that monetary base (broad definition ) 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.

Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Oct Oct Oct Oct Apr Apr Apr Apr Apr Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2005 - 2006.

2380 1900 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) T Figure 2. Dynamic Changes in Monetary Base (narrow definitionT) and gold and foreign exchange reserves in the RF in 2005 2006.

Source: RF Central Bank Monetary base in narrow definition (RUR bln) Gold and foreign currency reserves (USD bln) According to the information of the Federal Treasury, expenditure on repayment of external debt in September of the current year has made USD 1.2 billion. USD 509.5 billion were addressed to repayment of the external debt and USD 678.5 million for the debt services. Herewith, USD 925.3 million were spent for loans raised upon bonds, USD 176.5 million for the World Bank and EBRD loans, USD 86.2 million for the federal debt of Russia.

At a conference arranged by Vedomosty newspaper in October, Aleksey Ulyukayev, First Deputy of the Central Bank Chairman has noticed that the Bank of Russia is going together with strengthening the rouble position in nominal terms, to raise the bank interest rates for the purpose of reduction the inflation. Mr. Ulyukayev has mentioned that the rate on REPO operations has good chances to become a key instrument in the Russian financial market. It should be mentioned that in the current year the Bank of Russia has already raised the interest rate for credit organizations three times, as an instrument of attraction monetary funds. Mr. Ulyukayev has also informed that Japanese yen will be included in the list of the foreign currencies for allocation our national gold and foreign currency reserves, together with US dollar, English pound and Euro.

Since October 2006, the refund rate of the Bank of Russia was established in the amount of 11 per cent. It should be noted, that currently the refund rate does not provide an expressed influence over the RF monetary market, as the banks have an opportunity to make loans with both, the RF national banking market and external banks for lower interests. However, in future the situation migh change as a result of growth of the international interest rates, as well as the efforts taken by the Russian Central Bank to expand the opportunities of interest rates as an instrument of monetary and credit policy.

P. Trunin billion rubles billion dollars 1-7.09.3-9.11.2-8.06.5-12.01.4-10.08.6-12.10.22-28.09.13-19.10.24-30.11.15-21.12.17-23.02.10-16.03.21-27.04.12-18.05.23-29.06.14-20.07.25-31.08.15- MarketsTF FPT P In general the situation in the Russian financial market was quite stable. The activities with ruble and foreign currency operations was reduced and accompanied by some growth of yield to maturity.

The basic factors of moderately negative dynamics were the growth of the US bonds yield and strengthening of the US dollar in the external and domestic markets. As to the securities market, the positions were more or less restored against the September fall. However, no considerable growth was observed due to uncertain forecasts about oil securities quotations.

Government securities market In October in the market of the government Eurobonds a gradual growth of yield to maturity in regard to the traded issues was observed. In the beginning of October, the investors again paid their attention to the growing interest risk, related to difference between the US government bond yield to maturity to the basic interest rate. In this background, the value of the US securities was getting down, which provoked a gradual slow-down in the Russian sector. One of the factors of attraction to the investors becomes the issue of Moody review of the Russian economy, expected in the nearest time and further upgrading of their RF sovereign rating, which is one point lower than S&P rating.

Within the second week of October the yield to maturity of the US bonds was growing, as the strong macroeconomic statistics and the USA IRS have confirmed the expectations that in the nearest future the interest rate will not be reduced. However, the depreciation of the Russian Eurobonds was restrained by an increased demand for securities of developing countries. As a result, the factor of growth of the US bonds interest rate was somewhat downgraded, what resulted in a noticeable drop of prices. At the beginning of the second part of the month the situation in the Russian Eurobond market has been more or les stabilized. The incentive of this factor became a rather stable demand of investors for the bonds of developing markets in the background of raising yield to maturity of the basic assets.

As of October 27, the Russian Eurobonds RUS 30 yield to maturity made 5.76 per cent per annum, RUS-18 5.89 per cent per annum. As of he same date, the yield to maturity of the Russian Eurobonds made: eight tranche of external currency debt bonds 4.26 per cent, seventh tranche bonds 5.54 per cent, fifth tranche bonds 5.64per cent, RUS-07 5.45 per cent.

Within the month the external and domestic factors were negatively affecting the attraction of RUR securities to the investors. Thus, the September inflation rate happened to be far less than the estimated level, which has decreased the probability of further RUR rate strengthening against USD. This factor was also supported by the positive US statistics, which has supported USD in the world currency market. In the background of considerable volume of primary offer, the activity in the secondary market of government bonds in October was quite low.

In the period of October 1-20 the total turnover in the secondary market of GKO-OFZ made about RUR 38.01 bln, with an average daily turnover at the level of RUR 2.7 bln. On October 18 an auction for the placement of OFZ-AD series 25059 was held. The issue volume was RUR 11 bln, demand for the bonds at a market value amounted to RUR 50.067bln. As a result, a total of RUR 8.89 bln worth of bonds were placed, with an average weighted yield of 6.26 per cent per annum.

As of October 27, the GKO-OFZ market amounted to RUR 848.84 bln at face value and to RUR 846.32 bln at market value. The duration of the GKO-OFZ market portfolio was 1949.71 days.

PT TP In preparation of the report analytical materials and reviews of Zenit bank, ATON IK, MICEX, CB of Russia and official Internet web-sites of the Russian companies- emitters were used.

Minfin bonds' yields to maturity in August - October 6.5% Tranche 5 Tranche 8 Tranche 6.0% 5.5% 5.0% 4.5% 4.0% Yields to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in August - October 6.8% USD-2030 USD-2007 USD-6.5% 6.3% 6.0% 5.8% 5.5% 5.3% 5.0% Equity Market Stock market situation.

In October the Russian stock market has compensated the fall of September. The beginning of the month was characterized by a noticeable growth of quotation volatility. As a result, in the first week of the month the RTS index was practically unchanged. Shares of oil and energy companies demonstrated a worse dynamics, whereas quotations of Sberbank of Russia and telecommunication companies, on the contrary, were supporting the bond indices. External factors were moderately positive; the risk of the slow-down of US economic growth was dismissed by recent statistical publication, while prices have been stabilized after OPEC declaration on an intention to reduce the supplies of black gold to the world market.

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