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10 Monetary base in a narrow definition is a monetary instrument (an indicator of monetary supply volume), which is fully controlled by the RF Central Bank. The Monetary base in narrow definition includes the cash in circulation, issued by the Bank of Russia (and the balance on the accounts of credit organizations), balances on the accounts of mandatory reserves of the funds in the national currency attracted by credit institutions in national currency, deposited with the Bank of Russia.

The level of 2002 is accepted as 100 per cent.

Bi-currency market is an operational index, used by the RF Central Bank in foreign currency policy. Currently, the share of EURO makes 45 %, USD share is 55 % in the basket.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2006 - 2007.

3860 3780 2740 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Fig. 2.

Source: RF Central Bank Indicators of Ruble`s Exchange Rate Dynamics 38 135.130.125.120.115.110.105.100.20 95.Official USD/RUR exchange rate (end pf period) Official EUR/RUR exchange rate (end of period) Value of the two-currency basket Real effective exchange rate index (right scale) Fig. 3. Indicators of RUR Exchange Rate Dynamics in January 2002 - November 2007 .

Source: RF Central Bank, authors estimates.

billion rubles billion dollars 1-7.12.3-9.02.1-7.09.3-9.11.7-13.04.9-15.06.20-26.10.10-16.11.23-29.12.13-19.01.17-23.03.19-25.05.21-27.07.11-17.08.22-28.09.13-19.10.24-30.11.15-21.12.24.02-2.03.28.04-4.05.30.06-6.07.RUR Jul Jul Jul Jan Jan Jan Sep Sep Sep Mar Mar Mar Nov Nov Nov May May May According to the information of the Federal Treasury, payments under external debt in November of the current year have made USD 1248 million. The amount of USD 1060.1 million was addressed to repayment of the external debt and USD 187.9 million was paid for the services thereof. Herewith, USD 632.4 million was million was spent to cover the debt of Russia, 90.2 million for the World Bank and EBRD loans, USD 451.3 million for loans raised upon bonds and USD 74.1 million under intergovernmental agreements.

To reduce tension in the banking system, the Central Bank of Russia has taken a series of measures, aimed at increasing liquidity resources in November-December, governed by the Russian credit organizations.

First, from November 28, the Central Bank of Russia has started to make lombard loans for the term of one day at a fixed rate of 8 per cent per annum. Moreover, in addition to the existing direct REPO auctions, the banks have got an opportunity to take credits from the Central Bank under securities for one day at a fixed rate of 8 per cent and for one week at a fixed rate of 7 per cent. This measure has allowed to limit the rates in the interbank market to eight per cent, as the excess of this value makes it more profitable to commercial banks to take credits from other credit institutions, rather than the Central Bank of Russia.

Secondly, on the fifth of December, the Bank of Russia has published a list of 24 issues of Eurobonds, under the security of which the banks can be able to attract credits of the Central Bank of Russia. In December, the information was disclosed, that the Bank of Russia intends to enter the stock exchange market to provide funds to the banks under stock bonds.

Third, from December 27, the Central Bank of Russia started to provide credits to the banks under the loans and promissory notes of reliability categories I and II. However, those guarantees will be accepted only from the companies, engaged in mineral resource extraction, manufacturing, production and distribution of electricity, gas and water, construction, transportation and communications, have a business record over three years and a share in the bank capital at least by 20 per cent (or the bank shares in the company).

Those measures will make for extension of the amount of funds, available to commercial banks in the event of deterioration of the situation in financial market. At the same time, after allocation of the funds, dedicated by the government to development institutions, the Bank of Russia has placed the bonds worth about RUR 60 billion to reduce excessive liquidity funds.

Financial MarketsN. Burkova In December, a number of measures, taken by the United States have inspired positive expectations of the investors worldwide, as compared with November situation, including the Russian stock market, where the growth of the stock market quotations was observed. MICEX and the RTS indices have also increased. The steady growth in the activity of investors was noted in the market of financial derivatives, in particular in the RTS.

Government securities market Despite the increase in liquidity, the situation in the Russian market of government securities in December was characterized by persistent dynamics of investment activity and smooth decrease of secondary markets growth.

As of December 21, the Russian Eurobonds RUS 30 yield to maturity made 5.54 per cent per annum, RUS-18 5.60 per cent per annum. As of the same date, the yield to redemption of the Russian Eurobonds made: for the seventh tranche of external currency debt bonds 5.45 per cent, the fifth tranche of external currency debt bonds 5.31 per cent (See Figs 1 and 2).

PTIn 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.

FIG. 1.

Minfin bonds' yields to maturity in October-December Tranche 5 Tranche 7,0% 6,5% 6,0% 5,5% 5,0% 4,5% 4,0% 3,5% 3,0% 2,5% 2,0% 1,5% FIG. 2.

Yields to maturity of the Russian eurobonds with maturity in 2010, 2018, and 2030 in October-December RUS-2030 RUS-2010 RUS-2018 RUS-6,5% 6,0% 5,5% 5,0% 4,5% 4,0% 3,5% 3,0% 2,5% 2,0% A smooth decline in yields to redemption was observed within the month in the ruble debt market as well.

However, the activity in the debt market has been increased by several times, what is largely based on the measures taken by the RF Central Bank on attraction of additional funds to cover the deficit of liquidity, including daily measures.

Within the period from November 24 to December 21 the total turnover of GKO- OFZ secondary market amounted to approximately RUR 99.81 billion with an average daily turnover of RUR 4.99 billion. (About RUR 33.84 billion with an average daily turnover of RUR 1.69 billion in November). Two auctions on addi 01.10.04.10.09.10.12.10.17.10.22.10.25.10.30.10.02.11.08.11.13.11.16.11.21.11.26.11.29.11.04.12.07.12.12.12.17.12.20.12.01.10.04.10.09.10.12.10.17.10.22.10.25.10.30.10.02.11.08.11.13.11.16.11.21.11.26.11.29.11.04.12.07.12.12.12.17.12.20.12.tional OFZ placement were arranged in December. Thus, the auction on placement of OFZ series 46018 was held on December 12 for the amount of RUR 4 billion, actual placement made RUR 3.8 billion with an average weighted yield of RUR 6.49 per cent per annum. Another auction on placement of OFZ series was held on December 18 for the amount of RUR 0.3 billion, with an average weighted yield of RUR 6.per cent per annum.

As of December 24, the GKO-OFZ market amounted to RUR 1047.4 bln at face value and to RUR 1053.bln at market value. The duration of the GKO-OFZ market portfolio was 2104.28 days, having decreased by 13.34 days as apposed to the preceding month, when that value made 2117.62 days (as of October 26).

Equity Market Stock market situation Reduction of the key interest rate by a quarter of the percentage point by the USA Federal Reserve System has affected positive expectations of the Russian stock market participants. Throughout December, there was observed a strong and continuous price growth in the Russian stock market.

However, positive impact on the overall dynamics of the market was provided by growing activity in the oil and gas sector in view of the decision of the Central Bank to support the ruble liquidity, as well as a number of positive corporate news. As a result, the MICEX index has reached a new its historical peak of 1969.91 points, having grown as of December 12 by 16.42 per cent since the beginning of 2007. Earlier peak of MICEX index was recorded on December 11, 2007 at the level of 1951.38 points. The MICEX index growth in December has reflected the general trend of the growth of the Russian companies quotations (See Fig. 3).

FIG. Dynamics of MICEX Index and trading volume 113 2 000,The total volume of trading (roubles, 1 900,billion) MICEX Index 1 800,1 700,1 600,75 1 500,1 400,60 1 300,1 200,45 1 100,38 1 000,900,23 800,15 700,8 600,0 500,In general, within the period from November 24 through December 24, the MICEX index has decreased by 7.6 per cent, i.e., by 136 points in absolute terms. Within the same period, the turnover of trades on shares, included in the MICEX index, made about RUR 1338 bln at an average daily turnover at the level of RUR 63.71 bln (as compared with about RUR 1301.41 bln at an average daily turnover at the level of RUR 65.07 bln within October 26-November 23). Therefore, the investors activity in the stock market in December has implicitly downgraded as compared with the preceding month. The indicators of maximum and minimum turnover in the market trades in December made RUR 95.2 bln (as of December 10) and RUR 36.5 bln (as of December 24), accordingly.

As of monthly results (from November 24 through December 24), practically all blue chips have shown a steady growth in their market values, except for Nornickel and Tatneft, whose shares have been downgraded in December by 7.4 per cent and 1.09 per cent accordingly. The leaders in terms of growth rates were Gasprom Neft, whose shares have grown by 24.72 per cent, Rostelecom (16.10 per cent), Gasprom (13.83 per cent), RAO UES of Russia (by 9.55 per cent). Some lower rates of growth were recorded in the points roubles, billion 02.10.20.10.10.11.30.11.20.12.17.01.06.02.27.02.21.03.10.04.28.04.22.05.09.06.02.07.20.07.10.08.30.08.19.09.09.10.29.10.19.11.07.12.shares of Rosneft (by 8.43 per cent), Surgutneftegas (by 8.25 per cent), Sberbank of Russia (by 4.per cent), Mosenergo (by 1.23 per cent), LUKOIL (by 0.66 per cent) (See Fig. 4).

FIG. 4.

Dynamics of the Russian Blue Chips from November 24 to December 24, 25,00% 22,50% 20,00% 17,50% 15,00% 12,50% 10,00% 7,50% 5,00% 2,50% 0,00% -2,50% -5,00% -7,50% Change in price (%) In December the MICEX turnover leaders14 were: Gazprom(37.4 per cent), Nornickel (14.2 per cent), LUKOIL (9.3 per cent), ), Sberbank of Russia (8.2 per cent) and RAO UES of Russia 97.2 per cent).

The total share of transactions with the above companies shares made 87 per cent of the gross turnover in the traditional MICEX stock market.

In terms of capitalization, as of December 24, the top five leaders of the domestic stock market were15:

Gazprom (RUR 7448 bln), Sberbank of Russia Russia (RUR 2161 bln), Rosneft (2067 bln), LUKOIL (RUR 1883 bln), GMK Norilsk Nickel(RUR 1362 bln).

Futures and options market In December the investors activity in the MICES futures and options market has expressly decreased as compared with the preceding month. Thus, in that period the total turnover in the MICEX futures and options market amounted to approximately RUR 132.5 bln (322 transactions, 5.28 mln of contracts) against about RUR 132.5 bln (335 transactions, 5.84 mln of contracts) in November.

An adverse situation was observed in the RTS futures and options market, where the investors activity in December has expressly increased as compared with the preceding month. Thus, in the period from November 24 through December 24 the total turnover in the RTS futures and options market amounted to approximately RUR 1399.3 bln (1.704 thousand of transactions, 21 mln of contracts) against about RUR 1155.bln (1519 thousand of transactions, 16.74 mln of contracts) in November.

The greatest demand, as before, was for futures: the volume of trading in futures in the period under review was RUR 1099.3 bln (1659 thousand of transactions, 16.6 mln of contracts). Options enjoyed a far lower demand, with the volume of trading at about RUR 300 bln (45 thousand of transactions and 4.41 mln of contracts). The highest level of trading in the futures market was RUR 126.8 bln (as of December 13), the lowest was RUR 17.9 bln (as of December 28).

Corporate bond market As of December results, an explicit growth was observed in the total volume of trading in corporate bonds (about 30 per cent) as compared with the preceding month.

From November 24 through December 24 the price index of corporate bonds traded on MICEX16 has grown by 0.06 points (- 0.05 per cent), as well as the index of the ten most liquid corporate bonds, which At the classical stock market.

According to RTS data.

LUKoil Tatneft Rosneft Gazprom Russia Mosenergo Rostelecom Sberbank of Gazprom neft GMK NotNikel Surgutneftegas RAO UES Russia have grown by 0.48 points (- 0.41 per cent) (See Fig. 5). In December, a significant growth was recorded in the market of corporate bonds (over 30 per cent) as compared with preceding month.

Within that period the total turnover in MICEX corporate bond sector amounted to nearly RUR 58.6 bln with an average daily turnover of RUR 2.79 bln (about RUR 44.35 bln with an average daily turnover of RUR 2.22 bln in the relevant period of September). Therefore, the investors activity has noticeably increased within the month.

FIG. Dynamics of corporate bond indices 122,ZETBI-Corp ZETBI-Corp120,118,116,114,112,110,108,Table 1.

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