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Therefore, in the second half of this year, inflation in Russia has somewhat slowed down. At the same time, financial instability in Russia, provoked by the global financial crisis, inspired a number of measures of government support to the financial sector, which can urge faster inflation. The growth of inflationary pressure can be inspired by conversion of the assets of the population from rubles into the US dollars, as well as prompt transfer of funds from bank deposits to cash form. In addition, the economic slowdown will inevitably lead to reduction in monetary demand, which will also result in higher inflation rates.

In September 2008 the consumer price index6 accounted to 1.4 per cent (versus 1.6 per cent in the relevant period of preceding year). According to our estimates, the CPI in October will make 0.8 per cent.

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: RF Statistical Service Within September 2008, the volume of monetary base (in broad definition7) has decreased by RUR 42.2 bln to the amount of RUR 5317.8 bln (-0.8 per cent). On September 1 the volume of monetary Basic index of consumer prices is an indicator of the inflation level without regard to seasonal price reduction (fruit and vegetable products) and to administrative measures (tariffs for government-regulated services, etc.). It is estimated by the RF Statistics Service.

The RF monetary base in broad terms with no regard to the cash issued by the Bank of Russia and the balance of Compulsory Reserve Accounts on credit organizations in national currency, deposited in the Bank of Russia, taking into account the assets of correspondent accounts and bank deposits, allocated in the Bank of Russia..

Jul Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Apr base in broad definition was RUR 5360 bln. Let us consider the dynamics of monetary base in broad definition by components.

The volume of cash in circulation, including the cash balances of credit institutions, as of October 1, 2008 was RUR 4.3 trillion (1.1 per cent growth as compared with September 1), the correspondent accounts of credit institutions with the Bank of Russia made RUR 702.9 bln (+15.2 per cent), mandatory reserves RUR 152.1 bln (-61.8 per cent), banks deposits with the Bank of Russia made RUR 126.4 bln (-55.9 per cent), the value of the Bank of Russias bonds held by credit institutions RUR 23.5 bln (-39.1 per cent). Therefore, in September, the growth of excessive reserves of commercial banks reached RUR 157.2 bln8, which was primarily the result of by the Central Bank measures on the bank system at the background of the global financial crisis. Monetary base reduction was primarily based on reduction of mandatory reserves of commercial banks due to reduced rates of mandatory reserves.

Currently the situation with bank liquidity remains rather tense due to massive capital outflow and sharp downfall in the Russian stock market, leading to significant reduction in the value of securities at the balance of credit organizations. At the same time, credits to commercial banks, provided by the Central Bank and the RF Ministry of Finance inspire massive purchases of foreign currency for the allocated funds, increasing downward pressure on the ruble and provokes further reduction of liquidity in the banking system. To reduce the attractiveness of such speculations in the currency market, the Central Bank has increased the rate of currency swap transactions in October, as well as the interest rates on deposits of the banks in the Bank of Russia.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2007 - 4050 3450 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Source: RF Central Bank The growth of the volume of cash in circulation in September by 1.1 per cent at the background of mandatory reserves reduction by 61.8 per cent led to the cut-down of the monetary base in narrow definition (cash+ mandatory reserves) 9 by 1.7 per cent (see. Fig. 2). Herewith, the volume of foreign currency reserves of the Central Bank of the Russian Federation has declined in September by 4.4 per cent and made on October 1 USD 556.1 bln. Within the following two weeks of October gold and foreign currency reserves have been reduced by another 7.3 per cent to the level of USD 515.7 billion, Under the excessive reserves of commercial banks with the CBR is understood the amount of correspondent accounts of commercial banks, their deposits with the CBR and the CBR bonds, held by commercial banks.

Wed like to remind, that the monetary base in the broad definition is not a monetary instrument, it reflects the obligations of the Bank of Russia in national currency. The monetary base in narrow definition is a monetary instrument (one of indicators of the volume of monetary offer), which is under total control of the CBR.

billion rubles billion dollars 1-7.03.3-9.05.4-10.08.6-12.10.8-14.12.9-15.02.5-11.07.6-12.09.25-31. 08.15-21. 09.17-23. 11.19-25. 01.22-28. 03.12-18. 04.24-30. 05.14-20. 06.16-22. 08.18-24. 10.2 7.10-2. 11.2 6.07-1. 08.2 7.09-3. 10.29.1 2.07-4.01.whereas the monetary base was extended by 2.1 per cent to RUR 4527.1 bln. Such significant reduction of reserves was caused by the sale of foreign currency by Central Bank to support ruble rate versus two-currency basket, as well as EURO decline against USD.

In September, the inflow of foreign currency to the country has considerably reduced, what resulted in considerable RUR reduction. Thus, real effective RUR rate has declined (like in the relevant period of preceding year); the real effective RUR rate index made 135.510 (See Fig. 3). As a result of RUR strengthening in real terms in the two-currency basket within January-September of the current year at 3.3 per cent as compared with 3.8 per cent within January-September 2007. In our estimates, in this indicator will be reduced to 3 per cent.

As of September results, the US has strengthened against EURO in the global currency market. As a result, the official USD rate against RUR has grown by 67 kopeks and by late September the dollar rate was RUR 25.25, against RUR 24.58 as of September 1. Herewith, ruble has got downgraded against the two-currency basket11, which rate has grown by 43 kopeks, from RUR 29.82 to RUR 30.25. As a result, EURO rate at the end of September has grown to RUR R 36.37.

Indicators of Ruble`s Exchange Rate Dynamics 38 36 34 32 30 28 26 24 22 20 Official USD/RUR exchange rate (end of period) Official EUR/RUR exchange rate (end of period) Value of the two-currency basket Real effective exchange rate index (right scale) Source: RF Central Bank, authors estimates In the first six months of this year, the external debt of Russia has grown by 13.7 per cent, from USD 463.5 billion (34.5 per cent of GDP) to USD 527.1 billion (32.8 per cent of GDP). Herewith, the public external debt has declined by USD 7.5 billion and made USD 38.9 billion (2.4per cent of GDP)as of July 1. The external debt of the private sector within January June has grown by USD 71.1 billion (+ 17 per cent) to USD 417.2 billion (31 per cent of GDP) to 488.3 billion dollars (30.per cent of GDP). Herewith, the external debt of the banking sector has increased by USD 29.1 billion (41 per cent of the total growth in private sector debt) and other sectors - by USD 42 billion (59 per cent of the total growth of private sector debt).

It is worth noting, that within the relevant period of preceding year the external debt of the banks has grown by USD 9.7 billion, what made 28.5 per cent in external debt of the private sector growth.

The level of January 2002 is accepted as 100 per cent.

Two-currency basket is the RF Central Bank operational indicator in its foreign currency policy. Currently the share of EURO in the currency basket makes 45 per cent, USD 55 per cent.

RUR Jul 0 Jul 0 Jul 0 Jul 0 Jan Jan Jan Jan Sep Sep Sep Mar Mar Mar Mar Nov Nov Nov May May May May Wed like to note, that in the current year the growth rate of private sector external debt has declined, primarily due to the global financial market crisis. At the same time, as of the first six months results, the growth rate of the debt still remains relatively high.

On October 10, the RF State Duma has adopted the law, allowing the Bank of Russia to provide non-secured credits to the Russian commercial banks. These credits can be granted to credit organizations with a credit rating no lower than the preset level for a period not exceeding 6 months. Herewith, the procedure and terms of such credits should be defined by the Central Bank regulations.

This measure is addressed to support the Russian banking sector, caught in difficult situation due to massive outflows of private capital from Russia, caused by the global financial crisis. So far, the RF CB could provide credits to the Russian commercial banks on pledge of securities, currency, right of claim under credit agreements or credit organizations guarantee.

However, due to the banks high demand for credits, they might be short of assets, required to secure credits from the Central Bank. In this situation, the CBR credits without security assists to enhance stability of the banking system. At the same time, it should be noted that such loans should be provided only in exceptional situations, to avoid negative incentives for the banks to take unnecessary risks and to prevent prompt excessive growth of monetary supply and inflation in Russia.

By the decision of the Board of Directors of the Bank of Russia of October 14 the rates of all types of deductions to mandatory reserve fund are decreased from October 15 of this year: for all types of liabilities to reserve fund the rate is set at 0.5 per cent. At the same time, the RF CB has allowed commercial banks to hold an extraordinary regulation of mandatory reserves 15 - 17 October. At the same time, rates are decreased only for a specified term, and from February 1, 2009 they will be upgraded to 1.5 per cent, and from March 1, 2009 - to 2.5per cent.

Moreover, the Bank of Russia has decreased the interest rate under its credits since October 15:

under 7-day lombard credits from 9 to 8 per cent per annum, in case the last two lombard credit auctions are recognized invalid;

under 30-days secured credits, provided by the Bank of Russia, from 9.5 to 9 per cent per annum.

The minimum interest rate on direct REPO transactions for a period of 90 days was set at 8.5 per annum (previously the rate was equal to 9.75 per cent per cent per annum). At the same time, the interest rate on foreign currency swap transactions was increased from 8 to 10 per cent per annum.

Therefore, the RF Central Bank has taken a series of measures, aimed at stabilizing the situation in the Russian financial market. Wed like to mention, that due to the large-scale outflow of capital from Russia and the oil prices downfall the banking system faced a shortage of liquid resources. The temporary decrease of deductions rates to the mandatory reserve fund will help the banks to release the funds, therefore reducing the strain in the financial market. Reduced rates on credits, provided by the Bank of Russia should also reduce the cost of assets attraction to the banks. As to increasing the interest rate on foreign currency swap transactions, this measure is aimed, apparently, at prevention speculations and ruble devaluation.

It is worth noting, that in order to enhance the attractiveness of deposits in the RF Central Bank to credit organizations, the Bank of Russia has raised the interest rates on deposit operations: from 3.per cent up to 4.25 per cent per annum on deposits under standard terms tom- next, spot-next and on demand, from 4.25 per cent to 4.75 per cent per annum under 1 week and spot-week terms, and from October 24 - up to 4.75 per cent per annum and 5.25 per cent per annum respectively.

Financial MarketsN. Burkova, E. Khudko In October the Russian financial market dynamics was determined by the negative situation in the global financial and commodity market. Tense expectations of the global financial crisis aggravation, downfall of the basic market indices, liquidity crisis growth, decline in the global economic growth and sustained downgrading of the world oil prices and further USD strengthening caused the downfall in the Russian stock market in October. The suspension of bidding at the Russian stock exchanges by In the course of preparation of the survey, there were used analytical materials and surveys published by the Zenith Bank, investment company ATON, MICEX, and the materials presented at web sites of Russian issuing companies.

the order of the Federal Service for Financial Markets several times a month and a number of anticrisis measures, taken by the Government of Russia, are not contributing to the general situation and investors reaction as well. Moreover, on October 23, Standard & Poor's Agency has downgraded the forecast for the Russian sovereign rating from positive to stable. These negative trends were clearly evident, particularly in the Russian stock market (decline in quotations of "blue chips" to per cent), as well as in reducing the main Russian stock indices in MICEX and RTS (over 50 per cent an average) as of month results. Negative trends were also recorded in corporate bonds market, urged by the events in external markets. Continued decline was recorded in the index of corporate bonds and the volume of the secondary bond market, growing number of canceled bond issues due to the failure to place any of them. Herewith, in this month, after a sharp downfall in September, an extensive growth of the total amount of placed bonds, mainly made by large companies was noted. It is also worth mentioning there was a decrease in the number and nominal amount of registered issues of bonds in October, which means the reduction in the internal market of corporate bonds in the near future.

Major national and external developments, affected the Russian financial market dynamics.

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