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The mandate to form public councils under local police offices was re-assigned from the Ministry of Interior to the RF President (more precisely, it should be exercised following some yet unclear procedures established by the President of RF).

On 31 January, Mr. T. Bolloev, head of the public corporation Olympstroy, announced his resignation. Meanwhile, the Investigative Committee and the Police Department of Krasnodar krai opened six criminal cases on corruption in Olympstroy (though given the corporations budget, the alleged embezzlement of Rb. 23 mln. seems preposterous). With Mr. Bolloev in the driving seat, construction works at previously idle Olympic sites have been gaining momentum, while the government dropped some objects or cut back on the others. The Olympic construction program started appearing more realistic, albeit the city of Sochi still remains a zone of conflicts associated with the Olympic construction, as well as a very unfavorable terrain, as far as construction of Olympic facilities is concerned.

INFLATION AND CREDIT AND MONETARY POLICY INFLATION AND CREDIT AND MONETARY POLICY N.Luksha As a result of December 2010, the CPI in Russia amounted to 1.1 per cent, which is considerably higher than in the previous year (0.4 per cent). As a result, the growth rate of consumer prices in general for 2010 exceeded the official government forecast, having reached 8.8 per cent, and coincided with the index of 2009. In January 2011, inflation has accelerated markedly: from January 1 to 24, the CPI stood at 1.8 per cent, thus exceeding the monthly index of January 2010 (1.6 per cent). Over a month, from mid-December 2010 to mid January 2011 the volume of Russia foreign currency and gold reserves remained unchanged, amounting to 478 billion dollars as of January 14. In 2010, the national foreign currency and gold reserves have been increased by 8.8 per cent to 480 billion dollars. In December 2010, the real effective exchange rate rose by 3.7 per cent, and as of the year results - by 7.1 per cent. In January 2011, the value of the two-currency basket has continued to decrease: on January 25, it amounted to 34.67 rubles (-0.7 per cent as compared with late December).

On December 24, 2010, the Board of Directors of the Central Bank has announced the preservation of the refinancing rate at 7.75 per cent and other rates for the Bank of Russia operations to provide liquidity. At the same time, from December 27, 2010 the interest rates on deposit operations were raised by 0.25 percentage points.

In December 2010, inflation continued to accelerate: the consumer price index for the month was the highest for the past year (except January), amounting to 1.1 per cent (against 0.4 per cent in December 2009) (see Fig. 1). The main contribution to the acceleration of inflation, like a month earlier, was made by the food items, the rate of price growth for which has increased by 1.5 times to 2.1 per cent. The utmost growth once again was observed in fruit and vegetable products (+ 8.per cent), cereals and beans (+ 7.6 per cent) and sunflower oil (+ 6.6 per cent). Prices for meat and poultry have ceased to decline and rose by 0.8 per cent.

In the last month of 2010, the growth rate of prices for industrial goods has slowed down (by 0.per cent versus 0.7 per cent in November 2010). The largest price growth was observed in the same group of products that in November, but their increase was lower than before: petrol went up by 0.9 per cent, tobacco products - by 0.8 per cent, knitwear - by 0.7 per cent. Prices have fallen down for video-audio items (-0.1 per cent).

In December prices for commercial services continued their growth by 0.4 per cent. The utmost growth was noted in transport services, which have grown by 0.4 per cent. Services for heating have also increased in price (+0.7 per cent), as well as medical services (+ 0.6 per cent). At the same time, communications and international travel services have fallen down by 0.1 and 0.6 per cent, accordingly.

The basic CPI of consumer price index1 in December 2010 has made 0.7 per cent (versus 0.7 per cent in the relevant period of 2009).

The consumer price index in Russia in the past year amounted to 8.8 per cent, remaining at the same period as in the last year. Therefore, the increase in consumer prices exceeded the upper limit of the last estimates of the Ministry for Economic Development - 8.5 per cent. We would like to remind, that in the first six months of the year of inflation slowed down, owing to the effect of the base in 2009 and the effects of economic recession, accompanied by stagnation in consumer demand. However, since August, inflation began to gain speed, having reached its peak in December. In the second half of the year the determining factors of accelerating inflation were food shock as a result of summer drought and crop failure, increasing inflationary expectations, recovery in domestic demand and money supply growth. The largest price growth in the last year were observed in the food segment, which due to the negative supply increased by 12.9 per cent 1 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 RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES (two-fold as compared with 2009). In contrast, the rate of growth of prices for industrial goods (+per cent) and commercial services (8.1 per cent) in 2010 was 1.5-2 times lower than those of the last year.

In January 2011, inflation continued to accelerate: in the first 11 days of the month consumer price index reached 0.8 per cent, having exceeded by 0.1 percentage points the level of the same period of 2010. During the second and third weeks of the month inflation slowed down the pace of growth. Nevertheless, since the beginning of the year to January 24, the rate of growth of prices amounted to 1.8 per cent, exceeding the monthly inflation rate of the last year (1.6 per cent in January 2010). Leaders of growth in consumer prices were potatoes (+15 per cent), cabbage (+11.per cent) and buckwheat (+10 per cent). The largest tariff increase was recorded for cold and hot water (respectively, by 9.1 per cent and 7.6 per cent) and heating (+8.1 per cent).

At the beginning of the year, inflation has traditionally gathered pace. One of the main reasons for the burst of inflation has become a seasonal rise in prices for fruit and vegetables, supported by the continuing effect of the summer food shock, as well as the worldwide increase in food prices.

In addition, January is traditionally a month when rising adjustable rates for commercial services have also contributed to the jump in prices. Increased excise taxes on gasoline from January 1, have also made its contribution. According to the Ministry of Economic Development estimates, inflation in January 2011 will be 2.1-2.3 per cent1.

The official forecast of annual inflation for 2011 is 6-7 per cent. However, according to Alexander Ulyukayev, Central Bank First Deputy Chairman, keeping this ceiling of inflation growth rate will be difficult to achieve, especially of the projected in 2011 capital inflow. Inflation risks will remain high during the first half of 2011, we believe that the implementation of the official inflation forecast for 2011 is a hardly possible task.

In December, the monetary base in broad definition has grown for the first time since August, it has increased by 17.9 per cent to RUR 8,190.3 bn. On January 1, cash in circulation with regard to the fund balances in credit organizations has reached RUR 5.8 trillion (+12.5 per cent), correspondent accounts of credit organizations with the Bank of Russia made RUR 994.7 billion (+1.7 per cent), mandatory reserves made RUR 188.4 billion (growth by 4.3 per cent), deposits of the banks with the Bank of Russia made RUR 588.9 bn (decrease by 1.5-fold) In general, the monetary base in broad definition has grown by 26.6 per cent.

In December, the excessive reserves of commercial banks2 have significantly increased and reached by the end of the month RUR 2,216.8 bn, which is by 1.4-fold higher than the relevant indicator of November. This was due, first of all, to sharp increase of banks deposits with the Bank of Russia, as well by one and a half times 3,5% higher amount with the correspondent accounts of the Central Bank. Such 3,0% dynamics is explained by a seasonal 2,5% increase in budgetary expenditure in 2,0% the year.

1,5% According to preliminary estimates of G. Melikyan, First Deputy Chairman of 1,0% the Bank of Russia, in 2010 the credit 0,5% portfolio of banks in nominal terms has 0,0% increased by about 12-15 per cent. Retail -0,5% lending increased by over 15 per cent, while lending to non-financial sector - about 13 per cent. Therefore, the growth rate of banks loan portfolio remained Source: RF Statistical Service.

low, and with regard to inflation, the Fig. 1. The Growth Rate of the CPI in 2002 - 2010 (% per month) banks showed very little growth in their loan portfolio. In addition, the level of 1 RBC News (http://www.rbc.ru/fnews.frame/a//top///////20101020171955.shtml), 20.10.2010.

2 Under the excessive reserves of commercial banks in the Central Bank rating if understood the sum of correspondent accounts of commercial banks, their deposits with the CB and the CB bonds from commercial banks.

Jul Jul Jul Jul Jul Jul Jul Jul Jul Okt Apr Apr Apr Apr Apr Apr Apr Apr Apr Jan Jan Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Oct Oct INFLATION AND CREDIT AND MONETARY POLICY outstanding debt in banks, according 5650 to G. Melikyan, exceeded the pre-crisis 5350 level by 2-3 times. In December the growth of the volume of cash in circulation by 12.5 increase of mandatory reserves by 1.5 per cent urged the extension of monetary base in narrow definition (cash plus mandatory reserves)1 by 12.1 per cent to RUR 3750 5,973.6 bn (see Fig. 2). Herewith, from 3450 mid-December 2010 to mid-January 2011, the volume of foreign currency and gold reserves has not changed and amounted to 478 billion dollars as of January 14. In general, over the past Monetary Base (billion rubles) year, international reserves have grown Gold and Foreign Currency Reserves (billion dollars) by 8,8 per cent, from USD 441 billion to 480 billion.

Source: RF Central Bank.

As of 2010 results, the net outflow of Fig.2 Changes in the Monetary Base and in the Gold and Foreign capital from the country has reached Currency Reserves in 2007 - USD 38.3 bn, which exceeded all earlier estimates of the Central Bank2,.

According to preliminary estimates of the Central Bank, the major capital outflows occurred in the IV-th quarter, when the country lost 22.7 billion dollars. We would like to remind, that only in the II-nd quarter of the last year there was a net inflow of USD 2.8 billion. In quarters I and III there was also recorded a net outflow.

S. Ignatiev, the Head of the Central Bank Capital is concerned with the capital outflow from the country, who does not have complete information on the causes of such outflow. In addition to payments by companies on foreign debt, according to the Chairman of the Central Bank, a possible cause of leakage was the purchase of non-financial assets abroad. Some market participants also attributed the flight of capital from Russia with fears arising from investors after resigning of the Mayor of Moscow Yuri Luzhkov. We believe that a large capital outflow from Russia is due, above all, to the continuing significant economic and political risks of investing in Russia.

High oil prices contributed to the strengthening of the ruble in real terms in December, for the first time since August 2010. Accordingly, the index of real effective exchange rate for the month increased to 141.0663 (see Fig. 3). As a result of 2010, the ruble strengthening in real terms in the two-currency basket has reached 7.1 per cent, as compared with the weakening in 2009 by 3,9 per cent.

Throughout 2010 the dollar exchange rate against the ruble fluctuated in a corridor of RUR 2932 to the dollar. At the year-end, the exchange rate of ruble/dollar, despite the high volatility, has returned to that of the beginning of the year RUR 30.4/USD In January 2011, the dollar continued to weaken: within 25 days of the month it has lost 1.per cent. Since mid-January, the dollar rate has fallen down to RUR 30 to the dollar. The dollar becomes cheaper for the second consecutive month: since the beginning of December of the last year, after a month-and a half months growth, dollar was depreciated by 3 per cent. One of the main reasons for the ruble strengthening were the high world oil prices, which approached in December USD 100 per barrel.

Over the past year, the euro weakened against the ruble by 7.2 per cent. Herewith, for the first five months the Euro fell by almost 14 per cent to the ruble, then in the next five months, it has 1 We would 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 RF Central Bank.

2 RF Central Bank (http://cbr.ru/statistics/print.aspxfile=credit_statistics/capital.htm) 3 The level of January 2002 is accepted as 100 per cent billion rubles billion dollars 1-7.03.4-10.08.8-14.12.5-11.07.8-14.11.15-21.09.19-25.01.12-18.04.24-30.05.16-22.08.20-26.12.31-06.02.25-01.05.06-12.06.18-24.07.29-04.09.10-16.10.21-27.11.02-08.01.13-19.02.27-02.04.08-14.05.19-25.06.31-06.08.11-17.09.14.- ECONOMY: TRENDS AND PERSPECTIVES 50 virtually reconquered its lost position, but in the last two months of the year 45 again lost about 7 per cent.

In early January of the new year 40 the dynamics, typical of the European 35 currency in December 2010, was continued. The Euro exchange rate was 30 falling against the dollar, as well as to the ruble in FOREX market. Depreciation of 25 the Euro was caused by the same debt 20 problems of some European countries.

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