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As estimated by the Ministry of Finance, the volume of lost budget revenues in 2008, resulting from the switchover to the quarterly schedule of VAT payment, will amount to 260 billion roubles. According to Deputy RF Minister of Finance T. Golikova, these are going to be lumpsome losses, and the monies in question will be left at the disposal of Russian enterprises. Besides, she noted that in the nearest future the coordination of the main direction of tax policy for the years 2008 - 2010 will be completed, and this week they will be submitted, in their final version, to the RF Government.

Also in February, RF Minister of Finance A. S. Kudrin announced that the decision concerning the broadening of the foreign-currency structure of the RF Stabilization Fund can be made as early as next July. It is then that the results of the investment of the already accumulated funds will be drawn, and on their basis to understand if the broadening of the foreign-currency structure is indeed necessary. Presently, the resources of the RF Stabilization Fund are denominated in USD (45 %), euro (45 %) and UK pounds (10 %). Previously, it has been suggested that these monies might also be invested in the Swiss franc and the Japanese yen.

D. Polevoi Monetary policy The beginning of the year 2007 saw the traditional January upsurge of inflation, which, however, proved to be of a much smaller magnitude than the year before: the value of the consumer price index (CPI) in January amounted to only 1.7 % against 2.4 % in 2006. These data make it possible to conclude that the inflation rate in Russia, as demonstrated by the years results, will continue its slowdown. In January, money supply was shrinking: the narrow monetary base decreased by 2.8 %. Accordingly, the volume of gold and foreign currency reserves in January grew by only 0.1 %. Early this year, the RF Statistics Service, for the second time in its history, published the base structure of consumer prices applied for computing the CPI.

The consumer price index in January amounted to 1.7 % (as compared to 2.4 % in January 2006, see Fig.

1). The highest contribution to the growth in consumer prices early in the year was made, as usual, by the growing prices of commercial services to the population, which increased in January, on the average, by 4.%. The highest growth rates in January characterized the prices in the housing and utilities sector ( + 11.%), pre-school education services ( + 3.2 %) and spa and health resorts ( + 2.2 % ). No decreases in process were seen in any of the categories of services. It should be reminded that in January 2006 prices in the housing and utilities sector had demonstrated an even greater growth by 13.8 %, on the average.

The prices of foodstuffs were growing in January at a much slower rate, the countrys average rate being 0.9 % (+ 2 % in January 2005). Consequently, the growth rate of the prices of foodstuffs became much lower than last year. This resulted, first of all, from the much less prominent growth of the prices of fruit and vegetable products ( + 4.1 % against + 11.3 % in January 2006) and the decreased prices of granulated sugar ( 1.1 % against + 10.7% in January 2006).

The prices of non-food commodities in January were also rising, their prices, just as the year before, increasing by 0.4 %. The growth of prices of non-food commodities was the result, first of all, of the increased prices of tobacco products ( + 1.6 % ), knitwear ( + 0.6 % ), and construction materials (+ 0.6 % ). The prices of footwear went down in January by 0.1 %.

The growth in the base consumer price index2 in January 2007 was 0.6 % (having been 0.8 % in the same period of the preceding year). We believe that in the next few months, due to the considerable growth in money supply, the base inflation rate is not going to demonstrate any substantial decrease. It should be noted that, according to the IETs monthly bulletin of modeled short-term forecasts of socio-economic indices in the RF, the CPI in February 2007 was 1.3 %.

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% Figure 1. Growth rate of CPI in years 2002 2007 (monthly %).

Source: the RF Statistics Service.

During January 2007, the monetary base (in a broad sense3) was reduced by 383 billion roubles, to 3,738.billion roubles ( 9.3 % ). The broad monetary base as of 1 January 2007 was 4,121.6 billion roubles. Below we are going to discuss the changes in each of the components of the broad monetary base.

The cash-in-circulation volume, including the cash balances of credit institutions, as of 1 February 2007, was 2.82 trillion roubles ( 7.8 %, as compared to 1 January), the correspondent accounts of credit institutions with the Bank of Russia 425.9 billion roubles ( 33.3 % ), mandatory reserves 229.4 billion roubles (+ 3.8 %), banks deposits with the Bank of Russia 111.3 billion roubles ( + 13.5 % ), while the value of the Bank of Russias bonds held by credit institutions 147.3 billion roubles ( + 44.1 %).

The decrease, in January of the current year, of the cash-in-circulation volume ( 7.8 %), with a simultaneous increase in mandatory reserves (+ 3.8 %), resulted in the shrinkage of the narrow monetary base (cash The base consumer price index reflects the inflation level on the consumer market less the seasonal factor (prices of vegetable and fruit products) and the administrative factor (tariffs on regulated services, etc.); it is calculated by the RF Statistics Service.

The RFs monetary base in a broad sense, in addition to the cash-in-circulation issued by the Bank of Russia, and the residuals, on the accounts, of mandatory reserves of the funds in the national currency attracted by credit institutions and deposited with the Bank of Russia, includes the funds in corresponding accounts with credit institutions and bank deposits placed with the Bank of Russia.

Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr + mandatory reserves)4 by 2.8 % (see Fig. 2). At the same time, the gold and foreign currency reserves of the RF CB grew in January only slightly (+ 0.1 %), amounting, as of 1 February, to $ 303.9 billion. However, during the four weeks of February, they increased by 2.4 % and reached the amount of $ 311.2 billion. A considerable portion of the liquid funds flowing into the country was being accumulated in the RF Stabilization Fund, the volume of which, as of 1 February 2007, became 2,647.2 billion roubles (+ 300.3 billion roubles, as compared to 1 January 2006). Such a substantial growth of the Stabilization Funds volume can be explained by the fact that, in accordance with the RF Budget Code, beside the additional revenues received by the federal budget in December 2006 in the amount of 145.28 billion roubles, the residuals of the federal budget funds as of the beginning of 2007, in the amount of 155.05 billion roubles, were also transferred there.

It should be noted that, according to the IETs monthly bulletin of modeled short-term forecasts of socioeconomic indices in the RF, the accumulated gold and foreign currency reserves are to exceed the level of $ 339 billion by the end of March 2007.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2005 - 2006.

2100 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Figure 2. Changes in monetary base (in a narrow sense) and gold and foreign currency reserves of RF in years 2005 2007.

Source: RF CB.

According to the information published by the RF Federal Treasury, payments against the government external debt in January of this year amounted to $ 328.1 million. The costs of debt redemption proper amounted to $ 108.9 million, the costs of debt servicing - to $ 219.2 million.

In this connection, $ 49.4 million was earmarked for the redemption of Russias debt, $ 87.9 million for the redemption of the IBRRs and the EBRRs loans, and $ 190.7 million -for the redemption of bond loans.

From 8 February this year, the RF Central Bank changed the structure of the bi-currency basket, which is to be applied by the Bank of Russia as an operational benchmark for its exchange-rate policy, by increasing the euros share from 40 % to 45 %, and accordingly decreasing that of the USD from 60 % to 55 %. It should be noted that the CB previously had also changed the structure of the bi-currency basket in favor of the euro.

It should be remembered that the monetary base in a broad sense is not a money aggregate; it is a characteristic of the Bank of Russias liabilities denominated in the national currency. The monetary base in a narrow sense is a money aggregate (being one of the characteristics of the money supply volume), fully controlled by the RF Central Bank.

billion rubles billion dollars 3-9.02.1-7.09.3-9.11.7-13.04.9-15.06.6-12.01.22-28.12.13-19.01.17-23.03.19-25.05.21-27.07.11-17.08.22-28.09.13-19.10.24-30.11.16- Base structure of populations consumer expenditures, applied for computing IPC in 2006 and share, in % 2006 All commodities and commercial services 100 Foodstuffs 42.71 40.Meat products 10.71 10.Fish products 1.88 1.Butter and oils 1.6 1.Milk and dairy products 2.84 2.Cheese 0.99 0.Eggs 0.72 0.Confectionary 2.33 0.Tea, coffee 1.03 2.Sugar 1.14 0.Bread and bakery products 2.5 2.Pasta and grain products 1.12 0.Fruit and vegetable products, including potatoes 3.96 3.Alcoholic beverages 7.12 6.Public catering 2.28 2.Other foodstuffs 2.49 2.Nonfood commodities 33.74 35.Garments and underwear 5.19 5.Furs and fur products 0.56 0.Knitwear 1.29 1.Foot wear leather, textile, and mixed materials 2.52 2.Detergents and cleaning products 0.74 0.Perfumery and cosmetic products 1.36 1.Haberdashery 0.79 0.Tobacco products 0.83 0.Furniture 2.17 2.Electrical and other household equipment 2.18 2.Printed matter 0.5 0.Television and radio equipment 1.15 1.Personal computers 1.13 1.Communications equipment 0.87 0.Construction materials 1.83 2.Passenger motor cars 4.24 4.Petrol 1.91 Medical products 1.43 1.Other nonfood commodities 3.05 3.Commercial services 23.55 24.Domestic services 2.71 2.Passenger transport services 3.31 3.Communications services 2.66 3.Housing and utilities services 8.9 8.housing services 2.78 2.hotel services and other accommodation services 0.11 0.utilities services 6.01 5.Pre-school education services 0.28 0.Public education services 2.02 2.Services of cultural organizations 0.26 0.Spa and health resort services 0.54 0.Medical services 1.02 1.Other commercial services 1.85 1.Source: The RF Statistics Service.

From 12 February, the Russian rouble has been placed on the exchange lists of international currencies of Euroclear (International Central Securities Depositary). Besides, the broker company ICAP made the deci sion, on 14 February, that on-line trading in the Russian rouble on the EBS platform should be launched, which will make it possible to carry out rouble / USD operations with one-day transfer of payments. In our opinion, these events reflect a growing demand of the market participants for rouble-denominated operations, which will inevitably result in a growing liquidity of the rouble as a settlement currency.

In February, representatives of the Bank of Russia declared that the issue into circulation of bank notes with intermediate face values will take place only when the inflation rate per annum goes down below 5 %.

In early 2007, the RF Statistics Service, for the second time in its history, published the base structure of the populations consumer expenditures, which is applied for computing the IPC value. This is a major step toward ensuring the transparency of the methodology of its computation. Judging by these published data, in 2007 the share of foodstuffs will become somewhat reduced, due to the increased share of nonfood commodities and commercial services to the population. In our opinion, these changes represent quite an adequate reflection of the real structure of consumer expenditures, because it is a global trend that, as the populations incomes grow, an increasing share in its expenses is being overtaken by nonfood commodities and services, while the share of foodstuffs is shrinking.

P. Trunin Financial markets In February, the situation on the Russian financial markets remained relatively favorable. The market of foreign-currency-denominated sovereign debt was displaying a moderate upward trend, following the prices of US government bonds. Despite these developments, the rouble-denominated government and corporate debt market was displaying somewhat less positive dynamics, which was largely accounted for by the lowering liquidity within the banking system. As for the share market, the prices of Russian shares were on the rise, due to the stabilization of the oil market and growth of the stock markets in developed and developing countries, coupled with favorable domestic corporate news, which all was contributing to growth of the basic stock indices - up to new historic highs.

The government securities market During February, the yields to maturity of Russian foreign-currency-denominated bonds were decreasing on the indices registered at the end of January.

Early in the month, the prices of basic assets were growing, due to the publication of latest macroeconomic statistics, which had demonstrated stable rates of economic growth in the USA during Q III 2006, in face of inflations stability. Against this background, Russian eurobonds, in contrast to the majority of developing markets, were displaying moderate growth. It seems that, in a situation of the Russian economys stable growth and stable oil prices, investors view Russian bonds as assets with relatively low risks, which keeps their quotations at an appropriate level.

Russian bonds continued to display growth during the months second week, which can be explained by positive dynamics of basic assets. Thus, the prices of US treasury bonds increased after the speech addressed by the Director of the US Federal Reserve System (FRS) to the Congress, where it was noted that the economy was growing steadily, while the inflation rate was expected to go down. The optimistic expectations of the monetary authorities in respect of diminishing inflation pressure resulted from the data published the day before on the producers price index (PPI), which had gone down by 0.6 % on December 2006.

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