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D. Polevoy Monetary and Credit Policy As of results of November of the current year consumer prices have grown in the RF by 0.6 per cent in average terms within the country. Therefore, one can expect that the growth rate of inflation in Russia as of the year results will not exceed 10 per cent for the first time. The monetary base in narrow definition continued to grow by 1.1 per cent in November. The volume of gold and foreign currency reserves in December has reached the new peak of USD 295.8 bln. Starting from December 11, the interest rate on deposits in the Bank of Russia has been raised for the fourth time within the year.

Consumer price index in November made 0.6 per cent (versus 0.7 per cent in October 2005 ; see Fig.

1). Unlike the previous months, the highest growth rates were observed in regard to food products (+0.8 per cent), whereas the price for granulated sugar has decreased (by 5.9 per cent) and for grits and beans (by 0.per cent). Meanwhile, fruit and vegetable prices have grown (by 2.7 per cent), as well as milk and dairy products (by 1.4 per cent) and bread and bakery products (by 1.2 per cent).

Prices for non-food products have grown by 0.6 per cent in November, especially for footwear (by 1.1 per cent), knitwear (by 1.1 per cent), construction materials (by 1 per cent), as well as clothes and underwear (by 1 per cent). It should be noted that due to the seasonal factor there was observed some decrease in petrol prices (by 0.6 per cent).

As concerns chargeable public services, in November the utmost growth was noticed in consumer services (by 1.2 per cent), medical care (by 1 per cent) and cultural organizations (by 1 per cent). In November further reduction of prices was taking place in health-resort services (by 0.2 per cent). In general, chargeable public services prices have grown in November by 0.5 per cent.

The basic consumer price index4 in November 2006 made 0.6 per cent (versus the relevant period of preceding year 0.6 per cent). Therefore, the basic inflation rate was higher than in the relevant indicator of preceding month. We consider that in the nearest months, as a result of considerable growth of monetary offer within the first half-year, the basic inflation level will not get lower.

According to the bulletin of approximation short-term estimates of the RF socio-economic indicators, published by IET, the CPI in November made 0.7 per cent.

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 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 In November 2006 the monetary base (in broad definition5) has been increased by RUR 145.4 bln, to RUR 3506.4 bln (plus 4.3 per cent). The volume of the monetary base in broad definition made as of November 1, 2006 RUR 3361 billion. Let us consider the dynamics of the monetary base in broad definition by components.

As of December 1, cash in circulation with regard to the fund balances in credit organizations made RUR 2.62 trillion (plus 1.9 per cent versus November 1), correspondent accounts of credit organizations in the Bank of Russia made RUR 433.7 billion (plus 25.9 per cent), mandatory reserves made RUR 212.7 billion (plus 2.7 percent), bank deposits in the Bank of Russia made RUR 55.2 billion (minus 10 per cent), the value of shares of the Bank of Russia with credit organizations made RUR 180.8 billion (plus 4.4 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 1.9 per cent) and mandatory reserve funds (by 2.7 per cent) has led to the growth of monetary base in narrow definition (cash plus mandatory reserve funds)6 by 1.1 per cent (see Fig. 2). In this background gold and foreign exchange reserves of the RF Central Bank have grown by 6.1 per cent and made RUR 289 billion as of December 1. Within the first three weeks of December they have been further increased by 2.4 per cent and reached the new peak in the amount of USD 295.8 billion. The major part of incoming liquidity has been accumulated in the RF Stabilization Fund, the volume of which has reached as of December 1 of 2006 RUR 2,189.5 billion (plus 140.2 bln as compared with November 1, 2006).

It should be noticed, that according to the IET RF published model short-term socio-economic forecasts, the volume of the accumulated of gold and foreign exchange reserves by the end of the year of 2006 should overcome the level of USD 296 billion.

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.

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

Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Oct 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.

1950 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Source: RF Central Bank According to the information of the Federal Treasury, payments under external debt in November of the current year have made USD 1015.1 million. The amount of USD 589.4 million was addressed to repayment of the external debt and USD 425.7 million was paid for the services thereof. Herewith, USD 55.8 million was million was spent to cover the debt of Russia, 77.4 million for the World Bank and EBRD loans, USD 842.6 million for loans raised upon bonds and USD 39.3 million under intergovernmental agreements.

Since December 11 2006, the Bank of Russia has raised for the fourth time in 2006 the refund rate on deposit operations in national currency with credit organizations, made through Reuters Dealing and the electronic MICEX system under tom-next, spot-next,on demand standard terms to 2.25 per cent and on one week and spot-week to the level of 2.75 per cent..

This measure of credit and monetary policy is aimed at reduction of the volume of liquidity assets in the national financial system. It should be noted, that the Bank of Russia was persistently raising the above interest rates within 2006, using them as an instrument of the general monetary and credit policy.

P. Trunin Financial Markets In December the favorable situation in various sectors of the Russian financial market was sustained. The debt market has demonstrated some progress, reflecting the dynamics of the basic assets, yield to maturity securities of the USA Treasury. In general, the domestic market remained sustainable due to the growth of the yield to maturity in the banking sector and ruble strengthening versus USD. Even the considerable activity growth in the primary market could not provide a negative impact over the secondary debt market. As concerns the securities market, the December, like years ago, was rather successful in terms of investments in the Russian companies. The growth was caused by both, favorable external factors (including the growth of prices for oil and metal markets, the sustainable dynamics of stock markets) and a number of corporate news, monetary market stabilization, expectations of pre-New Year rush, which gave the incentives for the investors purchases.

P T 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.

billion rubles billion dollars 3-9.03.1-7.12.8-14.12.5-11.05.7-13.07.8-14.09.17-23.11.20-26.01.10-16.02.24-30.03.14-20.04.16-22.06.18-24.08.20-26.10.10- securities market As of December results, in the market of Russian securities in foreign currency no expressed growth was observed. Regardless the publication of the data on the growth of the US economy at the beginning of the month, the investors have revised their expectations in regard to the lowering of the yield to maturity, which has brought up the growth of refinancing rate of the US securities, whereas the Russian securities kept up the immunity to that factor. The Russian market could have also be supported by the intention of the investors to reach the maximum value of portfolios by the end of the year, which restricted the offer in the market even under conditions of the lowering US market. The beginning of the second part of the week of the month was designated with the rise of the US market due to the decision of US IRS to maintain the refinancing rate unchanged. At the same time, the comments mentioned some slow-down of the economic growth, which might result in a decrease of refinancing rate in the nearest future. In that background the Russian market has also grown up, as the international debt markets, including our domestic one, are pretty sensitive to the USA debt market situation. The beginning of the second part of the month was characterized by a slow-down of the market activities. Despite the gradual decrease of the US market, the Russian securities remained stable, whereas the prices of some issues have shown even some growth.

As of December 22, the Russian Eurobonds RUS 30 yield to maturity made 5.5 per cent per annum, RUS-18 5.64 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 5.57 per cent, seventh tranche bonds 5.41 per cent, fifth tranche bonds 5.47 per cent, RUS-07 5.04 per cent.

FIG. 1.

Minfin bonds' yields to maturity in October-December 6.0% Tranche 5 Tranche 8 Tranche 5.5% 5.0% 4.5% 4.0% 2.

Yields to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in October - December 6.3% USD-2030 USD-2007 USD-6.0% 5.8% 5.5% 5.3% 5.0% The situation in the government debt market remained quite favorable. The basic factors of strengthening were a noticeable improvement of the situation with the RUR liquidity in the banking sector, stability of quotations in the external market and expressed strengthening of RUR against USD, encouraging to the investors.

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 slowdown of activities was observed in the market of government securities in November.

In December several auctions were held on additional OFZ placements. Thus, on December 1 there was arranged an auction for placement of OFZ-PD series 25060 with the issue volume RUR 5.32 bln. The actual volume of placement made RUR 5.05 bln with an average yield to maturity of 6.15 per cent per annum. On December 13 an auction on placement of OFZ-PD series 46018 was held; the issue volume made RUR bln, actual amount of placement - RUR bln, average yield to maturity 6.54 per cent per annum. Moreover, on December 15 an additional auction on the same issue was arranged; the issue volume was RUR 1.7 bln, actual placement volume RUR 1.36 bln, average yield to maturity 6.54 per cent per annum.

As of December 25, the market volume of GKO-OFZ made RUR 875.6 bln in nominal terms and RUR 874.85 bln in the market value. The duration of GKO-OFZ portfolio was 1992.47 days.

Equity Market Stock market situation.

Within the major part of December situation in the Russian stock market was rather favorable, which allowed the basic stock indicators to gain their historical peak. The beginning of December was marked by a stable growth of RTS index. The oil prices were kept up at a very high level, a number of corporate news (a discussion of an amendment to the Charter of RAO UES Russia to restrict dividends repayment under privileged shares; approvals of the Ministry of Finance and Ministry of Economy of additional emission of Sberbank of Russia shares) has also made for the market growth. Moreover, a psychological factor of pre-New Year rush is working, when purchasing activity, including that in regard to shares, is very high.

The beginning of the second week of the month was characterized by a lower tendency, what was natural after a long period of the market growth, though the lowering had only technical character. However, partially the decrease could be explained by the OPEC decision to reduce official quotas only from February 2007. Nevertheless, this has not seriously affected the market and in the middle of the week the securities started to grow. In the background of restored oil prices and increased metal prices, the shares of oil and metallurgy companies have also raised, namely LUKOIL, Norilsk Nickel. An additional supporting became an information from the Italian Enel company about its intention to purchase a share in the Russian energy corporation. However, further the rates of growth have noticeably slowed down, which can be explained by a worse situation in the western markets. At the same time, basic factors remained quite favorable. Thus, economies of industrialized countries are sustainable, inflation is within reasonable limits (though there is a risk of its growth), oil price is rather high. All the above factors together with a considerable improvement of the situation in the domestic monetary market have supported the Russian security rating and their gradual growth.

FIG. 3.

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