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The problem is in untimely decisions on financing some projects, as well as delays in development of design documentation for eighty objects of targeted federal investment program. An important factor was the entry into force of the new City Planning Code. A series of regulatory documents should have been worked out for its implementation, which appeared only in April.

The data on financing of federal budget expenditures in January-October 2007, provided by the RF Ministry of Finance, can be seen below Table 1.

Amount of Revenues to the RF Federal Budget in 2005-(% in GDP) January- January2005 November 06 November Federal issues 2,58% 2,31% 2,19% 2,67% Including expenditures associated with the servicing of federal and municipal 1,06% 0,70% 0,65% 0,50% debt National defense 2,71% 2,68% 2,57% 2,79% National security and law enforcement 2,05% 2,20% 2,08% 2,23% National Economy 1,17% 1,25% 1,31% 2,17% Housing and public utilities 0,04% 0,19% 0,20% 1,00% Environmental protection 0,02% 0,03% 0,03% 0,03% Education 0,73% 0,82% 0,78% 0,96% Culture, cinematography and mass 0,22% 0,20% 0,21% 0,23% media Health care and sports 0,42% 0,58% 0,56% 0,67% Social policy 0,88% 0,86% 0,81% 0,78% Interbudgetary transfers 5,77% 5,92% 5,68% 6,48% Total expenditures 16,58% 17,05% 16,40% 20,01% Source: RF Ministry of Finance, IET estimates.

Expenditures of the federal budget have accounted to RUR 618.2 bln in October and RUR 984.5 bln in November 2007. Thus, the monthly growth has approached 60 %.

There were no significant changes in the revenue portion of the federal budget within the past month. The structure of tax revenues of the federal budget for the period under review as broken by individual federal administrative bodies is presented in Table3.

Table 3.

Amount of Revenues to the RF Federal Budget in 2005-(per cent of GDP in terms of cash basis execution) 2005 January- 2006 JanuaryNovember 2006 November Taxes and other payments administered by the 12,33% 11,17% 11,27% 11,67% Federal Tax Service Taxes and other payments administered by the 9,73% 10,58% 10,76% 9,96% Federal Customs Service Receipts administered by the Federal Agency 0,27% 0,26% 0,26% 0,27% for Management of Federal Property Revenues of the federal budget administered by 1,35% 1,11% 1,25% 1,77% other federal structures Total revenues 23,67% 23,12% 23,54% 23,67% Reference: an average price for Urals oil for the 50,20 61,12 60,89 67,period (USD per barrel)Source: RF Ministry of Finance, IET estimates 15% 10% 5% 0% .06 .06 .06 .06 .07 .07 .07 .-5% -10% Fig. 2. Oil and gas revenue and other than oil-and-gas deficit of the federal budget in 2006-2007.

(in % of GDP) Within January-November 2007, there is observed some access in the revenue, raised by all federal administrative bodies as compared with the relevant indicators of preceding year, accept for the Federal Tax Service (the reduction in revenues of this administrative body made 0,62 % of GDP). The decline is largely based on the reduction of export customs duties by 1.53 per cent of GDP versus the level of preceding year.

Monthly dynamics of oil and gas revenues and the federal budget deficit thereof are presented in Fig. 2.

.Other than oil deficit is one of the key indicators for external economic risks estimation in terms of national reserve stability. As can be seen from the graphs below, the re is a trend to reduction of the share of oil and These prices are calculated as a simple average monthly price used for tax purposes % gas revenues in the federal budget and GDP. This is a sign of some decrease in the budget dependence on the commodity sector in the Russian economy. At the same time, the share of oil and gas revenues, despite a slight decline, remains rather high. The average non-oil deficit of the federal budget for the period under review remained within 2-6 per cent of GDP. This reflects the sustained risks to the stability of public finance and requires prevention from excessive mitigation of fiscal policy on the part of the government.

As of December 1, 2007 the cumulative volume of the RF Stabilization Fund in the Russian ruble equivalent amounted to RUR 3517.05 billion, or 11.1 per cent of GDP (in annual terms). Fig. 3 presents monthly dynamics of the Stabilization Fund (in per cent of GDP). It is worth noting, that Stabilization Fund share in GDP in the current year has substantially exceeded the indicators, observed in preceding year.

14% 12% % in GDP 8% 6% 4% 2% 0% January March May July September November Fig. 3. The RF Stabilization Fund in 2006-2007 (in % of GDP) Note: Data for April and May is not available.

Proceeds from the placement of the Stabilization Fund assets of the Russian Federation in 2007 amounted to RUR 151.89 billion. Those revenues include the ruble equivalent of USD 6.20 billion, transferred by the Bank of Russia in the form of interest for the usage of the Stabilization Fund assets in foreign currency, placed in the accounts with the Bank of Russia as of December 15, 2007. The estimated return on the Stabilization Fund placement for the period from December 15, 2006 to December 15, 2007, has amounted to 10.94 per cent per annum (in USD). The exchange rate differences from the revaluation of balances in the account of the Stabilization Fund in foreign currency for the period under review has amounted to RUR 58.59 billion.

Inflation, Monetary and Credit Policy P.Trunin In November the inflation continued in the Russian Federation, having made 1.3 per cent as compared with 0.6 per cent in the relevant period of the preceding year. Herewith, foreign currency assets were being accumulated in the country, having exceeded USD 467 bln. Significant reduction of commercial banks reserves with the RF Central Bank was noted in October due to unfavorable situation in the interbanking credit market. In November - December, the situation in the Russian interbanking market has been stabilized both, due to the funds, allocated by the government of Russia to finance development institutions, and as a result of the measures of the Bank of Russia to increase the liquidity reserves, available to the Russian banks.

The consumer price index in November made 1.2 per cent (against 0.6 per cent in November 2006 (see Fig. 1.). Such high rates of consumer prices growth in November were observed for the last time only in 2002, when monthly CPI has exceeded 1.6 per cent. The utmost contribution to the prices growth, like in preceding month, was caused by foodstuffs (+ 1.9 per cent). It is worth noting, that in November the upsurge of those products reached 1.5 per cent, regardless fruit and vegetables. The utmost growth was observed in fruit and vegetables (+6.2 per cent), milk and dairy products ( (+3.7 per cent), pasta (+3.3 per cent), cereals and beans (+ 2.9 per cent), oil (+2.3per cent). Sugar was downgraded by 1.6 per cent in November.

In November, high rates of growth were observed in regard to non-food items, which average nation-wide prices have increased during the month by 0,9per cent (versus + 0,6per cent in November 2006). The highest growth rates were noted in November for petrol (+2.3 per cent), footwear (+ 1.2 per cent), knitwear (+ 1.per cent), clothes and underwear (+ 1.2 per cent), detergents and cleaning agents (+ 1 per cent) and medical supplies (+ 1.1per cent). Downgrading was not observed in any type of non-food items.

Commercial public services have grown in price in November by 0.6 per cent (+ 0.5 per cent in November 2006). The utmost growth was observed in regard to preschool and school education (+ 1.4 per cent), culture organizations (+ 1.5 per cent), housing utilities (+ 1.2 per cent), public transportation (1.2 per cent), healthcare services (+ 1.1 per cent). Downgrading was noted in November were observed for health-care and resort services ( 0.2 per cent).

Thus, in November the growth rates of consumer prices fell down in comparison with October, but still remained significantly higher than in the year of 2006. On 13 December, the RF Ministry of Economic Development ha submitted a plan to reduce the rate of consumer prices for 2007-2008. First of all, it is worth noting that most of the activities set forth in the Plan, are medium and long-term measures. In other words, the plan, submitted by the RF Ministry of Economic Development, will not reduce the inflation rate in the short term. Apparently, in the first half of next year, the inflation rate in Russia will remain rather high. The proposals, outlined in the Plan, are aimed at the development of trade infrastructure, improvement of prices for the products of mineral resourse monopolies, encouragement of competition. Undoubtedly, such proposals are sound and able to provide a positive impact over inflation rate in the country. However, it remains unclear to what extent the proposed measures will be implemented, taking into account the slow progress on these trends in structural reforms within the recent years.

The Growth Rate of the CPI in 2002 - 2007 (% per month).

3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% Fig. 1. Source: RF Statistical Service Finally, it was not clear, what steps should be taken in fiscal policy, which are also mentioned in the Plan, to reduce the inflation in the short term. Apparently, the reduction of public spending is problematic on the eve of the presidential elections, and high oil prices and a possible inflow of capital create the circumstances for the further expansion of monetary supply and support inflation. In such a situation, according to our estimates, the CPI will reach 4.5-5per cent as a result of the first quarter of 2008.

Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Consumer price index8 in November made 1.1per cent ( 0.6 per cent against the relevant period of preceding year). In our view, this fact is quite natural result of expressed extension of monetary offer in the current year, as well as the growth of foodstuffs prices in autumn.

Within November 2007 the volume of monetary base (in broad definition9) has been increased by RUR 245.3 bln to the amount of RUR 4650.4 bln (- 5.6 per cent). The volume of monetary base in broad definition as of November 1, 2007 was RUR 4405.1 bln. Let as 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 December 1, 2007 was RUR 3,64 trillion (+ 3.7 per cent as compared with November 1), the correspondent accounts of credit institutions with the Bank of Russia made RUR 677,4 bln (+ 32,7 per cent), mandatory reserves RUR 222.8 bln (-14.5 per cent), credit organizations deposits with the Bank of Russia RUR 87.5 bln (-14.5 per cent), the value of the Bank of Russias bonds held by credit institutions RUR 20.5 bln (+ 6.2 per cent). Therefore, further growth of commercial banks reserves with the RF Central Bank took place in October, based on reduction of liquidity problem. At the same time, before the assets, allocated by the government to the development institutions, were available at the market, credit organizations were using the Central Bank credits under securities: at the end of November, the volume of direct daily REPO transactions reached RUR 300 billion, what is higher than the peak value of the August of this year. Herewith, the volume of those transactions remained at a rather high level throughout November, indicating preservation of tension in the Russian financial market. At the same time, by mid-December, the volume of REPO transactions has decreased, and the rates at the interbank market have come back to the range of 3 per cent per annum. Sustainability in the interbank market in the next year will be largely determined by the dynamics of the budget expenditures, as well as income of private capital and export duties to the country.

The growth of cash in circulation in November of the current year (by 3.7 per cent) at the background of increased mandatory reserves (by 14.5 per cent) has resulted in extension of the monetary base in narrow definition (cash + mandatory reserves)10 by 1.4 per cent (see Fig.2). At the same time, the gold and foreign currency reserves of the RF Central Bank also grew by 3.7 per cent and amounted, as of November 1, to USD 463.5 bln. Within the first two weeks of December they have increased by 0.8 per cent more and reached the level of USD 467.4 bln. A greater portion of the national liquidity inflow was accumulated in the RF Stabilization Fund, which volume as of December 1, 2007 amounted to RUR 3517.1 bln, or 11.1 per cent of GDP (- RUR 132.2 bln against November 1of 2006). The volume of the RF Stabilization Fund has grown by RUR 140.2 bln within the relevant period of preceding year. The reduction of the RF Stabilization Fund was caused by the transfer of some part of the assets to the Bank of Development, the Government Nanotechnology Corporation and the RF Investment Fund.

Therefore, in November-December, the inflow of currency into the country has renewed as a result of sustained oil price growth, as well as due to resumed capital inflow from private sector. As a result, the real effective exchange rate of the ruble started to grow again: while in August-September it practically stayed at the same level of 129.4 129.6 11, in November it has grown to 130.6 (see Fig. 3).

In November there was noted further USD downgrading in the world currency market, causing its further weakening in the RF: by the end of the month the dollar rate RUR 24.35. Despite the significant strengthening of the ruble against USD, the Bank of Russia has maintained the value of bi-currency basket12 As a result, the EURO has grown to RUR 36.04 by the end of November.

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..

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