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1). Similar to the previous month, in October the highest growth rates were noticed in regard to the prices for non-food goods, what happened due to the raised cost of petrol. The prices have grown by 1.5 per cent for construction materials, by 1.2 per cent for footwear, by 1.1 per cent for clothes and underwear, by 1.1 per cent for knitwear. High growth rate of price for construction materials was caused by the high demand and deficient offering. It should be noted, that according to the assumptions, under the impact of seasonal factor and reduced oil cost in the international market, in October petrol price went down by 0.4 per cent. Foodstuff prices in October have not been changed, whereas fruit and vegetables prices were getting lower (by 4.1 per cent), sugar by 9.3 per cent. Meanwhile, bread and bakery products prices went up by 1.3 per cent, as well as milk and dairy products (by 1.per cent).

As concerns chargeable public services, in October the utmost growth was noticed in public services of culture organizations (by 2.8 per cent), preschool education (by 1.5 per cent) and medical care (by 2.8 per cent). In October further reduction of prices was taking place in health-resort services (by 0.8 per cent). In general, chargeable public services prices have grown in October by 0.4 per cent.

The basic consumer price index3 in October 2006 made 0.5 per cent (versus 0.7 per cent of the relevant period of preceding year). Therefore, the basic inflation rate was slowed down in October. According to the bulletin of approximation short-term estimates of the RF socio-economic indicators, published by IET, the CPI in November made 1.1 per cent.

Fig. 1.

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% Source:Rosstat 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 Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr In October 2006 the monetary base (in broad definition4) has been increased by RUR 123.2 bln, to RUR 3361 bln (minus 3.5 per cent). The volume of the monetary base in broad definition made RUR 3482.2 billion as of October 1, 2006. Let us consider the dynamics of the monetary base in broad definition by components.

As of November 1, cash in circulation with regard to the fund balances in credit organizations made RUR 2.57 trillion (plus 0.4 per cent versus October 1), correspondent accounts of credit organizations in the Bank of Russia made RUR 61.3 billion (minus 4.1 per cent), the value of shares of the Bank of Russia with credit organizations made RUR 173.1 billion (plus 8.5 per cent), and the reserve funds for foreign currency operations, allocated in the Bank of Russia made RUR 0.1 billion (remained at the same level).

In October the increased amount of cash in circulation (by 0.4 per cent) and mandatory reserve funds (by 0.7 per cent) has led to the growth of monetary base in narrow definition (cash plus mandatory reserve funds)5 by 0.7 per cent (see Fig. 2).

In this background gold and foreign exchange reserves of the RF Central Bank have grown (by 2.per cent) and made RUR 272.5 billion as of November 1. Within the first three weeks of November they have been further increased by 2.4 per cent and reached the new peak, amounting to USD 278.billion. The major part of incoming liquidity has been accumulated in the RF Stabilization Fund, the volume of which has reached RUR 2,049.3 billion as of November 1 of 2006 (155.3 bln more as compared with October 1, 2006).

It should be noted, that according to the IET RF published model of short-term socio-economic forecasts, the volume of the accumulated gold and foreign exchange reserves by the end of the year of 2006 should overcome the level of USD 290 billion.

Fig. 2.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2005 - 2006.

2810 1930 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Source: RF Central Bank The RF monetary base in broad definition 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, is taking into account the assets of correspondent accounts and bank deposits, allocated in the Bank of Russia.

We should remind, that the monetary basis in broad terms is not a monetary indicator, but an indicator pf the Bank of Russia liabilities in national currency. The monetary base in narrow terms id a monetary indicator (one of the indicators of monetary supply), ultimately controlled by the Central Bank of Russia.

billion rubles billion dollars 1-7.12.3-9.02.1-7.09.3-9.11.7-13.04.9-15.06.20-26.10.10-16.11.22-28.12.13-19.01.17-23.03.19-25.05.21-27.07.11-17.08.22-28.09.13- to the information of the Federal Treasury, payments under external debt in October of the current year have made USD 144.5 million. The amount of USD 120 million was addressed to repayment of the external debt and USD 24.5 million was paid for the services thereof. Herewith, USD 71 million was spent to cover the debt of Russia, 59.5 million for the World Bank and EBRD loans, 11 million for the original debt of the former USSR, USD 1.6 million for loans raised upon bonds, USD and USD 1.4 million under intergovernmental agreements.

At the session of the RF Duma Committee in November, Mr. Aleksey Ulyukayev, First Deputy of the Central Bank Chairman has noticed that in case of the inflation level does not exceed 8.5 per cent as of the results of 2006, the Bank of Russia will reduce the refund rate by 0.25-0.5 p.p. It should be noted that currently that rate is established at the level of 11 per cent since October 23. At the same time Mr. Ulyukayev has pointed out, that according to the estimates of the RF CB, in the current year the value of the effective RUR rate in real definition will not exceed 9 per cent.

It should be noted, that the representatives of the Bank of Russia have mentioned earlier about the intention to use the interest rate as an instrument of monetary and credit policy. However, currently the refund rate has no expressed influence over the RF monetary market, as the banks, as a rule, have a chance to find sources of cheaper financing, than credits of the Russian Central Bank.

P. Trunin Financial Markets In November the situation was variable in different sectors of the Russian financial market. Thus, debt markets in general did not demonstrate any sustainable dynamics due to a strong impact of the American debt market, where the situation was suspended because of uncertain FRS interest rate policy. In addition, the ruble debt market was negatively affected within the month by the aggravated situation with liquidity in the banking sector.

As opposed to that, the Russian securities market has demonstrated extremely sustainable dynamics in November, regardless a short-term offset in the middle of the month, caused by a considerable drop of the world oil prices. In case the prevailing tendencies stay unchanged, one can expect a new historical peak of RTS index.

Government securities market In the market of Russian debt in foreign currency no expressed fluctuations were observed, and a decrease of yield to maturity was insignificant. The lack of the growth was caused again by the situation in the US debt market, where the macroeconomic statistics has confirmed a sustained high inflation risk, and therefore, lower probability of further decrease of interest rate. Bearing in mind that the yield to maturity of the US Treasury securities is explicitly downgraded versus the official refund rate, one cannot expect any expressed growth in both, underlying assets and in the Russian Eurobonds.

Some growth was noticed also during the second part of the month. The victory of democrats in parliamentary elections became the basic factor of that growth. The market was also supported in a way by a decreased primary offering upon a number of placements made by the large issuers (Gazprom, TNK). Nevertheless, further growth was restrained by the sustained high interest rates and the lack of breakthrough events.

At the beginning of the second part of the month the situation in the US debt market has been more or less stabilized, what however has not resulted in the growth of quotations of the Russian securities in foreign currency. It was caused mainly by the dynamics of oil quotations, the downgrading of which traditionally acts as a negative factor in the Russian basic assets.

As of November 24, the Russian Eurobonds RUS 30 yield to maturity made 5.58 per cent per annum, RUS-18 5.77 per cent per annum. As of the same date, the yield to redemption of the Russian Eurobonds made: eight tranche of external currency debt bonds 45.22 per cent, seventh tranche bonds 5.46 per cent, fifth tranche bonds 5.63per cent, RUS-07 5.32 per cent.

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.

Fig 1.

Minfin bonds' yields to maturity in September-November 6.5% Tranche 5 Tranche 8 Tranche 6.0% 5.5% 5.0% 4.5% 4.0% Fig. 2.

Yields to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in September - November 6.8% USD-2030 USD-2007 USD-6.5% 6.3% 6.0% 5.8% 5.5% 5.3% 5.0% The situation in the government debt market remained quite neutral. On the one hand, negative tendencies in the debt bonds market could not make one think of a high attraction of the RUR securities to the investors; on the other hand, some strengthening of the RUR rate and a more favorable position in liquidity were the supporting factors. The lack of an expressed interest was observed in the primary as well, where offers exceeded the demand. Further liquidity downgrading was encouraging the growth of offering, which resulted in price reduction. By the middle of the month the slow-down of the market was continued in the background of expressed liquidity problems and reduced market of the Russian Eurobonds.

In the period of November 1-24 the total turnover in the secondary market of GKO-OFZ made about RUR 38.54 bln, with an average daily turnover at the level of RUR 2.27 bln.(as compared with RUR 38.01 bln. with an average daily turnover at the level of RUR 2.7 bln. In October). Therefore, in November a slow-down of activities was observed in the market of government securities in November.

In November several auctions were held on additional OFZ placements. On November 1 and 8 there were arranged auctions for placements of OFZ-PD series 25060 with the issue volume RUR 9 bln and 4 bln respectively. The issue volume was RUR 11 bln, the demand for the bonds at a market value amounted to RUR 50.067 bln.

On October 18 an auction for the placement of OFZ-AD series 25059 was held. The issue volume was RUR 1.80 bln. and RUR 2.96 bln. with an average weighted yield of 6.26 per cent per annum. On November 15 auctions were held on placements of OFZ-AD, series 46017 and OFZ-AD, series 46020.

The issue volumes were RUR 11 bln and 8 bln accordingly, placement volume made RUR 9.37 bln. 6.46 bln. with an average weighted yield of 6.68 and 6.9 per cent per annum. On November 24 auctions were arranged for additional placements of the same issues. The issue volumes were RUR 1.bln. and RUR 1.76 bln., placement volumes were RUR 1.14 bln. and RUR 1.15 bln. with an average weighted yield of 6.57 and 6.84 per cent per annum.

As of November 28, the GKO-OFZ market amounted to RUR 862.37 bln at face value and to RUR 859.78 bln at market value. The duration of the GKO-OFZ market portfolio was 1999.12 days.

Equity Market Stock market situation.

Within November the situation in the Russian stock market was rather favorable. The first week of the month was marked by a satisfactory stable growth of the market, regardless the absence of an explicit positive growth in the stock markets of industrialized countries and in the oil market. Nevertheless, by the end of the week the US positive macroeconomic statistics has supported the American securities market and the members of the black gold market have friendly accepted the comments of OPEC representatives about the reduction of official supply volume. Therefore, there was observed a rather stable situation in the market. Among domestic factors, one should note extremely positive results on IPO TMK and OGK-5, the demand for which during the auctions highly exceeded the offered volume, as well as a relatively higher demand for the securities of RAO UES of Russia metallurgy corporation. The growth of those securities was caused by the expected results of an on-going discussion in the Presidents Administration in regard to the power sector reform. One cannot dismiss a seasonal factor as well (pre-New Year rush), when the Russian securities are noticeably growing, as a rule. The most negative market factor in November became the lack of liquidity in the banking sector.

The investors optimism was prevailing within the second week of the month. In the background of a moderate growth of American indices and the world oil prices, the recovery of the Russian stock market was continued after the autumn fall. At the same time, some decrease was observed in the metal market, where relatively downgraded positions of IPO issuers (Severstal first of all), as well as the postponed meeting on the issues of power sector became the factors that pointed out to a high probability of market sustainability at the same level and no noticeable signs of considerable growth in the nearest future.

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