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INSTITUTE FOR THE ECONOMY IN TRANSITION RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES February 2002 MONTHLY BULLETIN Moscow 2002 Institute for the Economy in Transition, 1996. Licence, 02079 19 2000 .

5 Gazetny pereulok, Moscow 103918, Russian Federation Phone: (095) 203-88-16 Fax: (095) 202-42-24 E- Mail: todorov@iet.ru Monetary Policy...............................................................................................................................3 Financial Markets.............................................................................................................................5 Investment in the real sector...........................................................................................................14 Loan disbursement to the real sector in 2001.................................................................................16 The real sector: factors and trends..................................................................................................18 The IET Industrial Survey: February 2002....................................................................................20 Foreign trade...................................................................................................................................21 Military Expenditures of Russia in 2002........................................................................................23 2 Monetary Policy The final CPI growth values in January 2002 exemption from VAT), prices for services by appeared to be much higher than we assessed in our 7.5%. The latter (the highest monthly rate of prices previous report. The inflation rate in the first month growth for services noted since January 1996) was of 2002 (based on CPI) reached 3.1% (about 44% caused primarily by the price rise for housing (by annualised). That is the highest monthly price 8.8%), communications (18.0%), and railway growth rate during last three years (since February transportation (18.9%).

1999). It should be noted that price growth in However, yet in early February 2002 the weekly January 2002 mostly fell on the last two weeks of rates of CPI growth fell sharply (see Fig. 1). In our the month, after the RF Government decided on view, the inflation rate in February did not exceed limits of increase in natural monopolists prices and 1.5%. Specifically, after two first months of tariffs. The commodity structure of the CPI growth the consumer price growth rate lags behind the proved the assumption on leading role played by respective value of 2001 (4.6% against 5.2%).

administrative and seasonal factors in determining Taking into account that the RF Government has no consumer price growth rate, while contribution of plans to renew increase in regulated prices until monetary factors appeared secondary in this the end of the year and the rate of monetary regard. Specifically, the food stuff price index grew expansion in 2002 will be slower because of by 2.8% (at the same time prices for fruits and smaller positive trade balance, we expect the year vegetables rose by 16.6%), the non-food goods inflation rate in 2002 to be below the respective price index by 1.2% (prices for medicines grew value of 2001. Namely, we forecast that consumer by 5.2%, mainly because of abolition of their prices will grow by 1516%.

FIGURE 1.

Consumer Price Index in 2001 and 1,1% 0,9% 0,7% 0,5% 0,3% 0,1% -0,1% In February 2002 the Russian Central Bank third week of the month the reserves once again fell renewed the policy of a slow accumulation of by $600 million. In our opinion, that was explained foreign reserves (see Fig. 2). By February 18 the by the sale of foreign exchange to the RF Ministry foreign reserves increased by $600 million as of Finance to repay on the foreign debt (Russias compared to late January 2002 and by $100 million payments on its debts to the Paris Club amounted as compared to the end of 2001. But, during the up to $1.3 billion). During the first three months of % a week 1-7.1.2-8.7.9-15.4.7-13.5.4-10.6.3-9.12.15-21.1.12-18.2.12-18.3.23-29.4.21-27.5.18-24.6.16-22.7.13-19.8.10-16.9.24-30.9.8-14.10.5-11.11.11-17.2.29.1-4.2.26.2-4.3.26.3-1.4.30.7-5.8.27.8-2.9.22-28.10.19-25.11.17-23.12.14-20.01.28.01-3.02.31.12.01-6.1.February the increment of narrow monetary base base is currently at 2.5% smaller than it was as of amounted to 3.5%, but, taking into account the January 1, 2002.

reduction in money supply in January, the monetary FIGURE 2.

Dynamics of Monetary Base and Foreign Reserves of the RCB in the second half of 2001 and 710 39,38,680 38,37,650 37,36,620 36,Monetary Base (bln. rub.) 35,Foreign Reserves (bln. doll.) 590 35,FIGURE 3.

Money multiplier (M2/Reserve money) in 1998 through 2,1,1,1,1,1,1,In late 2001 and early 2002 the money multiplier the level of 1.671.69 (see Fig. 3). By the end of renewed its growth after a half-year stabilisation at January 2002 the M2 to reserve money ratio reached bln. dollars bln. rubles 2-8.7.3-9.9.9-15.7.6-12.8.1-7.10.3-9.12.4-10.2.16-22.7.23-29.7.13-19.8.20-26.8.10-16.9.17-23.9.24-30.9.8-14.10.5-11.11.7-13.01.11-17.2.18-24.2.30.7-5.8.27.8-2.9.15-21.10.22-28.10.12-18.11.19-25.11.10-16.12.17-23.12.24-30.12.14-20.01.21-27.01.29.10-4.11.26.11-2.12.28.01-3.02.31.12.01-6.1.Jan Jan Jan Jan Jan Sep Sep Sep Sep July July July July Mar Mar Mar Mar Nov Nov Nov Nov May May May May the level of 1.74, i.e. the level of September 1998. sectors demand for additional financing for the Notably, the new period of larger money sake of investing in the envisaged new period of multiplication in the economy coincided with a economic growth. This assumption can be also recession in real sector (seasonally adjusted proved by the stabilisation (and, even, some industrial production index has gone down since decline) of money multiplier on the eve of November 2001). Therefore, one can suppose the recession in 2001.

S. Drobyshevsky.

bank lending expansion matched mainly the real Financial Markets The market for government securities. the same time, it is worth noting, that in January The tendency to growth in prices of all securities and February 2002 the RF Ministry of Finance was still there in the market for the Russian foreign bought back a portion of Minfin 4th issue in the debt in February 2002(see Figs. 1 and 2). By late secondary market. That operation, along with preFebruary yields to maturity of the Russian debt scheduled payments of the Bank of Russia to the liabilities peaked their historical maximums. IMF, somewhat lifted the burden of the problem Specifically, the yield rate on the fourth issue of 2003: nowadays, the estimated amount of Minfin bonds (maturity in 2003) fell to 6% payments due on foreign debt in 2003 roughly annualised. Therefore, investors estimate the accounts for $15 billion, i.e. it is comparable with default risk premium price on this issue at the level the amounts due in 2001 and in 2002. However, it of 1% annualised, as yield to maturity on the is impossible now to analyse which proportion of eurobonds of similar maturity is about 5% yields decrease was attributed to reduction in annualised. The yields on other Minfin issues have country risk and which to the rise in demand for fell below 10% annualised, and the highest yield on securities in the second market under buyback.

eurobonds does not exceed 10.5% annualised. At FIGURE 1.

Minfin bonds' yields to maturity in November 2001 through February 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% Tranche 4 Tranche 5 Tranche 6 Tranche 5% 01.11.06.11.12.11.15.11.20.11.23.11.28.11.03.12.06.12.11.12.17.12.20.12.27.12.08.01.11.01.16.01.21.01.24.01.29.01.01.02.06.02.11.02.14.02.19.02.22.02.28.02.FIGURE 2.

Yields to maturity of the Russian eurobonds with maturity in 2003, 2007 and 2028 in November 2001 through February 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% USD-2003 USD-2007 USD-In January and February 2002 one can see an expectations of a further upsurge in the Russian unprecedented fall in yields along with extremely stock market.

low trade volumes in the GKO-OFZ market. In total, in February the RTS Index grew by 3.Specifically, despite of higher inflation rates, in points (1.12%) with trade volumes accounting for some weeks the nominal average-weighted GKO- about $247 million. The fall in trade volume OFZ yield to maturity slid to 13.514.0% amounted up to 40% compared to the previous annualised, while the turnover in the secondary month, the average daily turnover in the RTS made market dropped below one billion roubles. Hence, up $13 million. On February 15, the trade volume the monthly trade volumes in 2002 are the lowest came down to its annual minimum $7.25 million.

one since spring 1999, when the market just The stock index fluctuated within a narrow range of reopened after the 1998 crisis. 282 to299 points. Though it was twice over the Stock market. month on February 12 and February 26 that the The side trend, which sprang up in the Russian Index was dangerously close to the psychological stock market as early as in late January, lasted until level of 300 points, it failed to overstep it though.

late February. The absence of a clear tendency and During the first decade of the month the stock index any important events encouraged a rise in the gained 10.8 points and on February 12 reached the number of speculative intraday deals, and the highest level noted in February 298.32 points., It RTS Index shimmied within a narrow band. fell consequently in mid- February to the months However, positive news from the S&P in late minimum value 282.56 points (February 20). The February and growing investors hopes for month ended up with the side trend around the level recovering of the world economy induce of 292 points.

01.11.06.11.12.11.15.11.20.11.23.11.28.11.03.12.06.12.11.12.17.12.20.12.27.12.08.01.11.01.16.01.21.01.24.01.29.01.01.02.06.02.11.02.14.02.19.02.22.02.28.02.FIGURE 3.

The total volume of trading ($) The RTS Index The leaders among blue chips (on February 28) 11.62%) and Surgutneftegas (-8.39%). It is worth were stocks of Sibneft (33.09%), MMC noting the highest growth of quotations was fixed Norilsky Nickel (23.8%), Rostelecom (8.93%), among second echelon stocks. Thus, stocks of YUKOS (8.83%) and Sberbank (6.8%). The list Tulenergo soared with 66.7%, common stocks of of stocks. prices of which fell down, is open with AvtoVAZ 54.15%, preferred stocks of those of LUKoil (-14.12%), Mosenergo (- AvtoVAZ 40.74%.

FIGURE 4.

Dynamics of the Russian Blue Chips between January 31 to Febriary 28, 40% 30% 20% 10% 0% -10% -20% Change in price (%) points mln US dollars 01.03.30.03.27.04.30.05.28.06.26.07.23.08.20.09.18.10.16.11.17.12.17.01.14.02.l l t a a i ft f e m m as os e si k o rgo k ssi s n ne ro k eg t b t U Ni ne f UKo zp Ru e e Ta Si Ru or L f S stele tn Ga N o u Mos k g K Ro UE n a ur S rb GM e RAO b S In February the share of RAO UES Russia Those were followed, though with a great gap, common stocks in the total RTS turnover was between them, by futures on LUKoil stocks 24.81% (in January 30.12%), the share of 8.5% (490 million roubles, 2.5 thousand deals) and LUKoil stocks was 18.9% (19.89%), YUKOS futures on RUIX investment index 7% ( 9.98% (8.6%), MMC Norilsky Nickel 7.21% million roubles, 907 deals). The most traded (4.6%), Surgutneftegas 7.41% (7.86%). options were those of RAO UES Russia: the Overall, in February, the total share of the top five respective trade volume equalled 0.8% of the total most liquid stocks in RTS dropped to 69.2% (in turnover in the FORTS (46 million rouble, January 71.34%). deals).

As far as the period between February 1 to In February the RTS listing reflected certain February 28, 2002is concerned,, the trade volume changes. The second level list was expteded by on Gazprom stocks via RTS terminals exceeded stocks of Lenenergo and Centretelecom, while $33.6 million (54.6 million stocks). In total 3.7 stocks of Aeroflot were downgraded from the thousand deals were struck. The quotations of first level list. Therefore, as of end of February, the Gazprom stocks grew by 11.4%. total number of stocks in the RTS listing was 28, Despite of stagnation of the spot stock market, including 7 ones in the first level list and 21 in the term stock market continued its growth. In the second level list).

February, the turnover in the FORTS amounted to In February the biggest top-5 (according to the 5.7 billion roubles (30 thousand deals, 1158.6 NASMP data)Russian corporations in terms of thousand contracts). These figures well outrun the market capitalisation were: Gazrpom $15.January indicators: the number of deals surge by billion, YUKOS $15.3 billion, 24%, the turnover by 46% (in roubles) and by Surgutneftegas $12.6 billion, LUKoil $10.64.8% (in contracts). As of February 28 the total billion and RAO UES Russia $6.45 billion.

open interest peaked its historical maximum in the External factors. On February 3, while FORTS 689.5 million roubles, i.e. 20% higher addressing to the World Economic Forum in New than in January (580 million roubles). York, Prime Minister M. Kasyanov stated that The futures section of the FORTS ended up with Russia could turn down restrictions on oil export.

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