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In November prices for public services have also grown by 0.7 per cent. The utmost growth was observed in pre-school education and public services (by 1.5 per cent in each area). Due to seasonal upgrading of railway tariffs, prices for train tickets have incresed (by 1.2 per cent). At the same time the costs of health and recreational services have declined (-0.4 per cent).

Prices for non-food items have increased in November by 0.5 per cent. The highest growth rates were noted in medical supplies (+2.2 per cent), detergents and cleaning agents (+1.7 per cent), knitwear (+1.5 per cent), clothes and underwear (1.4 per cent ) due to the decline in prices for energy sources on the national and global level.

The reason for a further reduction in gasoline prices (-5.9 per cent) was the discrepancy between the world price for oil and petroleum products and export duties on energy sources. Thus, during the month of November due to the so-called Kudrins scissors2, oil companies were loosing on each ton of exported oil nearly USD 70 on average. As a result, there was an excessive supply oil products in the domestic market, which has led to a sharp decline in prices in the wholesale market and their (much lower) adjustment in the retail market. However, the decline in retail prices of gasoline in our country is not likely to reach the level of the US and Europe, where gasoline prices have fallen down by tens of percent, as the Russian companies are trying to compensate for the low profits from exports by the high profitability in the domestic market. It should be noted, that this situation takes place only due to the high monopolization of retail sales in the Russian market of petroleum products.

The Growth Rate of the CPI in 2002 - 2008 (% per month).

3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% Source: Rosstat Therefore, despite the fact that as of November results, the CPI was slightly lower than the indicator of preceding month, its difference in annual terms from the growth rate of prices in the same period of Before the crisis, the export duty on crude oil and petroleum products were estimated basing on the monitoring of oil prices within previous two months, and were in effect during the next two months. As a result, under growing oil prices, the oil companies had a big advantage, because changes in export duties were lagging behind the dynamics of oil prices. However, when the oil prices are falling down, export duties decline slower than oil prices. This phenomenon was called Kudrins scissors.

Jul Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Apr Okt 2007 remains rather high (12.5 per cent versus 10.6 per cent). Growth rate of monetary supply M2 in November has also decreased (-2.2 per cent). There are reasons to expect further reduction in the rate of inflation in early 2009.

Firstly, the are expectations for restriction in tariffs growth for natural monopolies supplies and services (gas, railway transportation and electricity for the population). Secondly, the downfall of commodity prices and the reduction of consumer demand will result in the decline of producer prices.

Thirdly, the reducing monetary supply in recent months also restrains the growth of prices. However, the reduction of inflationary pressures will be restrained by ruble devaluation, which urges growth of imported goods prices.

Like in preceding year, the basic consumer price index3 in November 2008 made 1.31 per cent. According to our estimates, the CPI in December made about 0.7 per cent.

In November 2008 the monetary base (in broad definition4) has been decreased by RUR 80.3 bln, to RUR 5201.8 bln (- 1.5 per cent). The volume of the monetary base in broad definition made as of November 1, 2008 made RUR 5282.1 billion. Let us consider the dynamics of the monetary base in broad definition by components.

As of December 1, 2008, cash in circulation with regard to the fund balances in credit organizations made RUR 4.2 trillion (4.2 per cent reduction against November 1), correspondent accounts of credit organizations in the Bank of Russia made RUR 643.3 billion (+5.7 per cent), mandatory reserves made RUR 30.1 billion (- 12 per cent), banks deposits in the Bank of Russia made RUR 296.8 billion (+ 32.9 per cent), the value of shares of the Bank of Russia with credit organizations made RUR 23.billion (+ 1.3 per cent).

As of November results, growth of excessive reserves of commercial banks has made RUR 108.bln5, whereas with the highest growth rates were noted in the deposits of banks in the RF CB, what is partly attributable to higher interest rates, established in mid-November. Moreover, due to significant infusion of public funds in the RF banking system, a number of credit organizations obtained excessive liquidity resources, which they prefer either to allocate at the RF CB deposits or foreign currency purchase, rather than to crediting the national economy due to the high credit and currency risks.

Therefore, in November the situation with liquidity has somewhat improved due to allocation of public funds into the banking system. At the same time, it is too early to speak about any long-term positive trend, as:

1) the rates in the interbanking credit market remain rather high (in November MIBOR rate on oneday credits were in the range of 10,6 per cent, and 9.4 per cent in December);

2) the demand for unsecured credits has not decreased (from October 21 to November 19, their volume has doubled, and a month later it has increased 2.2-fold);

3) the large volume of REPO transactions between commercial banks and the Central Bank of Russia is sustained;

4) capital outflow is continued.

It should be noted, that while devaluation expectations of economic agents are supported by gradual reduction of ruble nominal exchange rate, followed by the Central Bank of Russia, significant share of funds, allocated to the banking system will be further addressed in the foreign currency market and exchanged in dollars, provoking capital outflow.

The reduction of the volume of cash in circulation by 4.2 per cent and mandatory reserves by 12 per cent have led to the cut-down of the monetary base in narrow definition (cash+ mandatory reserves)by 4.3 per cent (see. Fig. 2). In the last month, for the first time since February 2008, the amount of 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.

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.

cash in circulation has reduced due to the replacement of rubles by foreign currency in the assets portfolio of economic agents, urged by ruble devaluation.

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 Herewith, the volume of foreign currency reserves of the Central Bank of the Russian Federation has decreased in November by 6 per cent and made on December 1 USD 455.4 bln. The basic reasons of such significant reduction of gold and foreign currency reserves were currency interventions, effected y the RF Central Bank.

As of November results, the real effective exchange rate has grown (in the same period of preceding year, it remained unchanged): index of real effective rate made 141.4 7 (see Fig. 3). As a result of ruble strengthening in real terms in the two-currency basket has reached in January-November of the current year 8 per cent as compared with 4,4 per cent in January-November of 2007.

As of November results, the USD has practically not changed against EURO in the global currency market. Herewith, the official USD rate against RUR has grown by RUR 0.5 and by late November the dollar rate was RUR 27.6, as compared with RUR 21.7 as of November 1. The EURO rate in late November has grown to RUR R 35.7. As a result, in the last month ruble has been downgraded against the two-currency basket8, which value has grown by 88 kopeks, from RUR 30.37 to RUR 31.25.

Therefore, over the past months at the background of weakening ruble in nominal terms to the twocurrency basket, a significant strengthening of ruble effective exchange rate in real terms was noted. In other words, the reduction of ruble nominal exchange rate against major international currencies has been insufficient to compensate for the difference in the rate of domestic and international inflation.

Wed like to remind, that as a result of the ruble strengthening in real terms, domestic products become less competitive as compared with foreign products, provoking additional difficulties for domestic companies in crisis situations.

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.

billion rubles billion dollars 1 -7.0 3.0 1 -7.1 1.0 4 -1 0.0 8.0 8 -1 4.0 9.0 5 -1 1.0 4.0 6 -1 2.1 2.0 1 3 -1 9.1 0.0 1 7 -2 3.1 1.0 2 2 -2 8.1 2.0 1 0 -1 6.0 5.0 1 4 -2 0.0 6.0 1 9 -2 5.0 7.0 2 3 -2 9.0 8.0 2 6.0 1 -1.0 2.0 2 7.0 9 -3.1 0.0 Indicators of Ruble`s Exchange Rate Dynamics 40 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 On December 1, 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 again to per cent per annum. The bank has incresed the refinancing rate for the sixth time in this year. Last time the refinancing rate was increased on November 12 by 1 per cent. 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 CB (see Table 1). Moreover, since December 1, the Central Bank has increased the interest rates on credit and deposits of this bank.

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 CB (see Table 1).

able Credit type Interest rate (% per annum) Before amendment Upon amendment Overnight 12 Credit, secured with assets, provided for 90 calendar days 10 11 to 90 calendar 8,5 to 90 days;

Borrowing against bill pledging, right of claim on credit calendar days;;

agreement organization or guarantee lending 9,25 from 91 to 12 from 91 to 180 calendar days calendar days Moreover, the interest rate for cross-currency swap transactions for 1 day term (ruble share) has also been raised by 1 p.p, to 13 per cent, while interest rates on direct REPO transactions for 1 day and 7 days term were increased to 10 per cent per annum. The RF. Central Bank has also increased interest rates on deposit operations under standard conditions: "tom-next", "spot-next" and "on demand" from to 6.75 per cent per annum, "1 week "and" spot-week" from to 7.25 per cent per annum.

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

- under direct REPO operations for the term of 1 day from 8 per cent to 9 per cent per annum;

- under direct REPO operations for the term of 7 days from 8.5 per cent to 9.5 per cent per annum;

- under 14-days lombard credits for the term of 14 days - from 8.5 to 9.5 per cent per annum;

RUR Jul Jul Jul Jul Jan Jan Jan Jan Oct Oct Oct Okt Apr Apr Apr Apr - under direct REPO operations for the term of 90 days from 9.5 per cent to 10.5 per cent per annum.

Therefore, the RF CB has taken further measures to tighten monetary policy. It is noteworthy, that only recently the interest rates on credits, issued by the Central Bank of Russia were being expressly decreased for the purpose of stabilizing the situation in the Russian financial market. However, credits, provided by the Bank of Russia were used by banks to buy foreign currency, what results in an increased pressure on the ruble and the lack of liquidity in the RF banking system. As a result, the RF CB has decided to resist the outflow of capital by increasing the yield of ruble assets and increase the value of currency swap transactions. At the same time, in the situation of continuing decline in energy sources prices, such measures can hardly result in significant reduction of capital outflow and pressure on the ruble.

From November 11 to December 24, the Bank of Russia 10 times has extended the value of the two-currency basket: three times in November (on November 11, 24 and 28) and seven times in December (on December 5, 11, 15, 17, 18, 22 and 24 ). Initially, the extension was made approximately once in ten days for 30 kopeks each way. However, within December 11 and 24, the weakening of the ruble has accelerated, and the value of the two-currency basket has been upgraded six times within that period, whereas after December 17 the Bank of Russia upgraded the rate to a greater extent than before, by 40-50 cents, according to different estimates. It should be noted, that the RUR weakening takes place basically due to EURO strengthening, while the exchange rate of the ruble against dollar is varying within the range of RUR 27.5-28.

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