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As of November 1, 2008, cash in circulation with regard to the fund balances in credit organizations made RUR 4.4 trillion (2.5 per cent growth against October 1), correspondent accounts of credit organizations in the Bank of Russia made RUR 608.7 billion (-13.4 per cent), mandatory reserves made 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.

Jan Jan Jan Jan Jan Jan Jan Sep Sep Sep Sep Sep Sep Sep May May May May May May May RUR 34.2 billion (- 7.7 per cent), banks deposits in the Bank of Russia made RUR 223.4 billion (growth 1.5 times), the value of shares of the Bank of Russia with credit organizations made RUR 23.billion (-0.9 per cent). Therefore, in October reduction of excessive reserves of commercial banks has made RUR 25 bln5.

The reduction of monetary base was due primarily to the reduced mandatory reserves of commercial banks as a result of reduced rate of compulsory reserves. We can remind, that from October 15 the Bank of Russia has reduced the rates of contributions to the mandatory reserve fund (FOR) to 0.5 per cent for all types of credits, from the previous 4.5 per cent for credits in foreign currency, 1.5 per cent for ruble credits to physical persons, 2.0 per cent for other liabilities. The upgrading of the standard deductions to the mandatory reserve fund has also been amended.

Previously, it was assumed that from February 1, 2009 and March 1, the rates will be increased by p.p., now they will be raised on the same dates schedule by 1 p.p.

Currently the situation with bank liquidity remains rather tense as of October results due to massive purchases of foreign currency by commercial banks, what is explained, on the one hand, by expectations of further ruble devaluation, and on the other hand, by the need to settle the accounts with foreign counterparts for previous credits in foreign currency in the absence of the inflow of new capital from abroad. Large-scale purchases of foreign currency was continued, despite the fact that 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 - 3450 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Source: RF CB Fig. 2. Monetary base (in narrow definition) and gold and foreign currency reserves dynamics in the RF within 2007 The growth of the volume of cash in circulation in October by 77.5 has led to the cut-down of the monetary base in narrow definition (cash+ mandatory reserves) 6 by 0.2 per cent (see. Fig. 2).

Herewith, the volume of foreign currency reserves of the Central Bank of the Russian Federation has declined in October by 13 per cent and made on November 1 USD 484.6 bln. It should be noted, The excessive reserves of commercial banks with the RF CB refers is the amount of correspondent accounts of commercial banks, their deposits with the RF CB and the CB bonds of 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 1-7.03.3-9.05.4-10.08.6-12.10.8-14.12.9-15.02.5-11.07.6-12.09.8-14.11.25-31.08.15-21.09.17-23.11.19-25.01.22-28.03.12-18.04.24-30.05.14-20.06.16-22.08.18- from October 17 to 24 the peak decrease of the reserves has been noted, USD 31 billion. The basic reasons of such significant reduction of gold and foreign currency reserves was outflow of capital, revaluation of reserves as a result of USD strengthening against EURO and GBP, as well as allocation of assets at the deposits of the Bank for Development to support Russian companies in severe crisis situation.

In October, the outflow of foreign currency from the country was continued (within the month, the net outflow made USD 50 bln7) what resulted in considerable nominal RUR rate reduction. However, the real effective RUR rate has increased as of October results (like in the relevant period of preceding year); the real effective RUR rate index made 138.68 (See Fig. 3). As a result of RUR strengthening in real terms in the two-currency basket within January-October of the current year at 5.7 per cent as compared with 4.5 per cent within January-October 2007. In our estimates, this indicator will be reduced to 3 per cent as per annual results of 2008.

As of October results, the USD has significantly strengthened against EURO in the global currency market. As a result, the official USD rate against RUR has grown by RUR 1.17 and by late October the dollar rate was RUR 26.54, as compared with RUR 25.37 as of October 1. The EURO rate at the end of October has decreased to RUR R 34.04. Despite that fact, ruble has got downgraded against the two-currency basket9, which value has grown by 12 kopeks, from RUR 30.25 to RUR 30.37.

Indicators of Ruble`s Exchange Rate Dynamics 38 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 Fig. 3. Indicators of ruble exchange rate within January 2005 September On November 12, the Bank of Russia, in the framework of its measures aimed at reducing the outflow of capital from the country and curb inflation, decided to raise the refinancing rate and interest rates on credit and deposits of this bank. The refinancing rate was increased from 11 per cent to per cent per annum. Due to the fact that the refinancing rate is the basic interest rate for all credit operations of the Central Bank, its growth has caused a corresponding upgrading of all other interest rates of the RF the CB (see Table 1).

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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 Jul Jul Jul Jan Jan Jan Jan Sep Sep Sep Sep M ar M ar M ar M ar Nov Nov Nov M ay M ay M ay M ay Table 1.

Dynamics of the RF CB interest rates on credits Interest rate (% per annum) Credit type Before amendment Upon amendment Overnight 11 Credit, secured with assets, provided for 90 calendar days 9 8 to 90 calendar 8,5 to 90 calendar Borrowing against bill pledging, right of claim on credit days; days;

agreement organization or guarantee lending 9 from 91 to 180 9,25 from 91 to calendar days calendar days Moreover, the interest rate for cross-currency swap transactions for 1 day term (ruble part) has also been raised by 3 p.p 12 per cent, while interest rates on direct REPO transactions for 1 day and days term were increased to 9 per cent per annum.

To bind the increased monetary offer, the Central Bank has also increased interest rates on deposit operations under standard conditions: "tom-next", "spot-next" and "on demand" from 4.25 per cent to 5.75 per cent per annum, "1 week "and" spot-week" from 5.25 per cent to 6.25 per cent per annum.

Moreover, the Bank of Russia has increased the rate under operations with liquidity, arranged on auction basis:

under direct REPO operations for the term of 1 day from 7 per cent to 8 per cent per annum;

under direct REPO operations for the term of 7 days from 7.5 per cent to 8.5 per cent per annum;

under 14-days lombard credits for the term of 14 days - from 8 to 8.5 per cent per annum;

under direct REPO operations for the term of 90 days from 8.5 per cent to9.5 per cent per annum.

It is worth mentioning, that this is the fifth upgrading of the refinancing rate in the current year:

before the Central Bank was increasing the rate by 0.25 p.p on February 4 (that rates increase was the first in nearly 10 years), on April 29, June 10 and July 11. Therefore, the RF CB has taken measures to tighten monetary policy. It is noteworthy, that only recently interest rates on credits, issued by the Central Bank of Russia were expressly decreased for the purpose of stabilizing the situation in the Russian financial market. However, issued by the Bank of Russia loans were used by banks to buy foreign currency, leading to increased pressure on the ruble and maintained the lack of liquidity in the RF banking system. As a result, the RF CB has decided to combat the outflow of capital by increasing the yield of ruble assets and increase transaction costs of currency swap. At the same time, in a continuing decline in energy carriers prices, measures taken are unlikely to result in significant reduction of capital outflow and reduce pressure on the ruble.

Herewith, one shouldnt state, that by taking such steps, the Bank of Russia demonstrates inconsistency in its policies. It should be noted, that the decline in the rates of deductions to compulsory reserve fund was made in mid-October at the time, when the crisis has only started in Russia. At that point, it was necessary to ensure additional liquidity in the banking system. This measure was right to the point, and provided a positive psychological effect.

The subsequent upgrading of the refinancing rate should not be considered as a move inconsistent with the actions to provide liquidity to banks. The decision to raise the rates was taken almost a month after the mandatory reserves were reduced. During this period, the Central Bank began to struggle with another, more acute problem, i.e., heavy pressure on the ruble. The problem of the lack of liquidity has been addressed by others, more targeted measures.

To maintain the banking sector in the developing financial crisis, on November 19, the RF CB has entered into agreements with eight major Russian banks for compensation of their losses in the interbanking credit operations. On November 21, the first unsecured auction was held with the nineday credit (Russian banks have borrowed from the Central Bank RUR 227.5 billion). Earlier, nonsecured loans were provided to the Russian financial organizations for five weeks, for three and six months. Overall, on November 21 the unsecured debts of credit institutions to the Bank of Russia amounted to RUR 1,115 trillion.

Moreover, November 11 and 24, 2008, the Bank of Russia has expanded the admissible range of ruble value in the two-currency by 30 cents in both ways. This step was the RF CB reaction to a strong outflow of capital from Russia. In recent months, the RF CB has been supporting the RUR rate by selling gold and foreign currency reserves, which have been decreased from August 1 to November of the current year by 18.8 per cent (USD 112 billion).

It is clear, that in the background of continuing decline in prices of basic commodities of the Russian exports and capital outflow, further support of the two-currency basket value level would lead only to the complete exhaustion of gold and foreign currency reserves and subsequent sharp devaluation of the ruble. We believe that some weakening of the national currency would be more reasonable and less painful to the Russian economic agents.

Financial MarketsN. Burkova, E. Khudko In November the Russian financial market dynamics was determined by the negative situation in the global financial and commodity market. Increased global liquidity crisis, the slowdown in the world economic growth, negative macroeconomic statistics from the U.S., major financial problems in the U.S. automotive industry and one of the largest U.S. bank Citigroup, the continued decline of oil prices and further strengthening of the US dollar provoked the deterioration of the Russian stock market. Moreover, on November 10 Standard & Poor's Agency has downgraded the forecast for the Russian sovereign rating form stableto negative. However, a number of anti-crisis measures taken by the Government of Russia, have contributed to some improvement in investors expectations. These volatile trends were clearly evident particularly in the Russian stock market (where the quotations of "blue chips" have been upgraded to 30 per cent), as well as in the growth of the main Russian stock indices in MICEX and RTS (by 20 per cent as of the month results) as of month results, as well as in the investors lower activities in MICEX and RTS futures markets and volatile dynamics in the government securities.

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

Date Major developments October 27 RF Central Bank has obtained the right to take part in stock exchanges adoption of additional package of actions to prevent the banks bankruptcy with the help of targeted measures by the Deposit Insurance Agency (assigning functions of Provisional Authority) and the RF CB.

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