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Monetary and budgetary spheres 38,37,37,36,36,35,35,34,34,33,33,32,Official RUR/USD exchange rate 32,31,31,Official RUR/EURO exchange rate 30,30,29,29,28,28,27,Fig.6. Official Nominal RUR/USD Exchange Rate and RUR/EURO Exchange Rate in 0,0,Changes in USD/EURO exchange rate 0,Changes in RUR/EURO 0,02 exchange rate 0,% Dec.03 Jan.04 Feb 04 Mar.04 April.04 May.04 June.04 July.04 Aug.04 Sep.04 Okt.04 Nov.04 Dec.-0,-0,-0,-0,Fig. 7. Monthly Changes in EURO/USD Exchange Rate and EURO/RUR Exchange Rate in As indicated in Fig. 7, the RUR/EURO exchange rate varied in the same manner as the EURO/USD exchange rate. In other words, one can argue that RF Central Bank relied, at least till October 2004, exclusively on the RUR/USD exchange rates, while the real RUR/EURO exchange rate relied on exchange rates of currencies in the world market. Un RUR ECONOMY in trends and outlooks der such circumstances, the real RUR exchange rate could decline against the EURO in the world market, though it grew against the USD.

Close relationship between the exchange rates was broken in the final quarter, which could mean that at the background of growing RUR and EURO exchange rates against the USD the Bank of Russia refused to interfere with the growth of the real RUR/EURO ex change rate under, maybe, the circumstances of accelerated inflation.

According to the results of the year, the real RUR/USD exchange rate as calculated on the basis of nominal exchange rate and CPI rates in Russia and the United States grew by total of 15.5%, while that of RUR/EURO by 6.5% (Fig. 8). It should be noted that while the real RUR/USD exchange rate reached its maximum over the post crisis period, the RUR is currently weaker against the EURO than, for example, in 2001. The real effective RUR exchange rate as calculated on the basis of the foreign trade pattern of the Russian Federation grew by 5.4% in the period between January and October 2004. Analysis of the real effective RUR exchange rate reveals that the current exchange rate corresponds to that in the quarter 4 of 1996, i.e. it is by nearly 10% lower than the maximum figures re corded in the middle of 1998. Hence, the pre crisis level of real RUR exchange rate will be reached in the nearest two years provided that the RUR exchange continue to grow at the current rates and the USD exchange rate against the leading world currencies remain within a range of $1,25 to 1,35 per 1EURO and 105 to 110 yen per 1USD.

Real RUR/USD exchange rate Real RUR/EURO exchange rate Real effective RUR exchange rate ( IFS ) Fig.8. Real RUR Exchange Rate Movement in the Period Between 1998 and 2.1.5. Banking Crisis in Several developments that took place in the period between May and July became most important events in the RF financial sector in 2004. For instance, in May the RF Cen tral Bank revoked the license from and introduced a temporal management at Sodbiznes jun sep sep sep sep sep sep sep dec jun dec dec dec jun dec jun dec jun dec mar mar jun mar mar mar mar Section 2.

Monetary and budgetary spheres bank. The bank was ranked 109 by size of assets3 according to the results of the quarter of 2004. Under the circumstances, other market participants discontinued their relation ship with Kredittrast Bank (which was ranked 67 by size of assets as of April 1, 2004) in fear of further actions of the RF Central Bank, as it was owned by Sodbiznesbank shareholders.

Its license was revoked in June 24, 2004. It is noteworthy that the majority of market par ticipants suspected Sodbiznesbank and Kredittrast in money laundry and restricted busi ness relations with them long before the license revocation. As a result, the actions of the Bank of Russia, though retarded, were considered by the banking community and deposi tors as a normal cleaning which could not lead to panic and banking crisis.

Late in May, however, managers of the Bank of Russia and the RF Financial Moni toring Committee alleged that they had a black list of banks suspected in money laun dry, which were expected to suffer corresponding measures in the nearest future. In our opinion, it was the actions of the RF Central Bank and the RF Financial Monitoring Com mittee that caused a problem of non confidence in the RF interbank market and led to reduction of limits determined by major Russian banks, including state owned banks, for crediting other banks, primarily medium size Moscow banks. Correspondingly, the ma jor borrowers in Interbank Loans Market (for example, Guta Bank, Paveletskiy, Dialog optim, etc.) began to face problems in servicing their current liabilities to other bansk.

Such information resulted in mass withdrawals of bank deposits by retail customers, es pecially from the aforementioned banks and then from those considered as non confident (for example, those included in the list of problem banks published in press and Internet). Among such banks were Guta Bank, Alfa Bank, Impeksbank, Masterbank, Bin Bank, MDM, etc. The peak of withdrawals fell into the first half of July. However, al most all banks (except for Guta Bank) managed to stay in business and maintain their positions in the private deposit market in the period between June and July 2004. A total of 9 Moscow banks lost their licenses in the period between June and September (figures in brackets refer to banks rating in terms of size of assets as of April 1, 2004), namely Kredittrast (67), Promeksimbank (361), Commercial Savings Bank (351), Mosz hilstroibank (1217), RIKOM (975), Dialog optim (58), Paveletskiy (169), Meritbank (210) and Finanstorgbank (513), as well as Savings and Development Bank (663) in corporated in the Komi Republic.

Hence, we believe that the developments that took place in summer 2004 should not be considered as banking crisis; rather it is an indicator of local instability of the Russian system related to its structural and institutional specific features: great number of small and medium size banks, generally passive treatment by the RF Central Bank of the banks dealing with shadow and semi legal transactions (which is not a secret for many market participants), low capitalization of the RF banking system, discrepancy in terms of assets and liabilities at many banks, heavy reliance of small and medium size banks on the Inter bank Loans Market, etc. It could be noted on the basis of aggregated data that assets of the banking system and private deposits (both call deposits and fixed deposits) grew in general (including in real terms) in the period between May and July 2004. According to the results of the quarter 3 of 2004, only 9 out of 50 major Russian banks reported reduc tion in assets (it should be noted that Guta Bank demonstrated a 20% asset growth over the quarter). In addition, we believe that public support of the banking sector was insignifi cant: in fact, the RF Central Bank made only one move in this direction as part of its general policy: it reduced the regulation of compulsory contributions due to the Compulsory Re serve Fund from 7 to 3.5% since July 8, 2004. However, taking into account the concentra The figures herein that represent the size of assets of banks rely on the data obtained from Interfax Agency.

RUSSIAN ECONOMY in trends and outlooks tion ratio of private bank deposits, one can say that most of the deposits were reopened with RF Sberbank and several major banks which could have resolved their problems in hand without such update. We also believe that the decision made by the RF State Duma on providing deposit guarantees at all commercial banks regardless of their participation in the private deposit insurance system could have adverse effects, since it encourages un necessarily risky behavior of banks, especially those which realize that they have no chance to pass the control of the RF Central Bank to lawfully join the private deposit insur ance system.

Guta Bank (ranked 17 in terms of size of assets as of July 1, 2004) was the major bank suffering losses during the crisis. Nevertheless, it turned no bankrupt, since its ac quisition by RF Vneshtorgbank was announced immediately after the bank started to face problems (it should be noted, however, that negotiations on purchasing its share by RF Vneshtorgbank or extending a major loan to Guta Bank started long before the events that look place in the period between May and June 2004). Furthermore, we believe that a sta bilization loan extended by the RF Central Bank to RF Vneshtorgbank in the amount of $700 billion should not be considered a measure aimed at supporting the banking system (such loan increased substantially the total value of liabilities due by the banking sector to the monetary regulation bodies), since, firstly, the bank itself faced no problems during that period, secondly, the amount paid to purchase Guta Bank (RUR 1 billion) was far less than the value of the loan. We also believe that expenses incurred by the owners of private banks (for example, Alfa Bank) in order to maintain stability and liquidity under a high rate of private deposit withdrawals can not be classified as expenses on saving the banking system, since such measures were caused by low actual capitalization of banks and mis takes in managing temporal structure of assets and liabilities.

2.1.6. The state of the balance of payments In 2004, the stability of the RF balance of payments was maintained at the expense of record high volumes of commodity exports, primarily products of the fuel and energy complex (FEC). At the background of extremely high prices of energy resources, export of goods increased by more than one third. Accordingly, the accumulation of gold and for eign currency reserves of the RF Central Bank continued. However, in 2004 there was in terrupted the trend towards a decline in the net capital outflow observed in 2000 through 2003.

According to the preliminary estimates of the RF balance of payments in 2004 pub lished by the Bank of Russia, the surplus on current account made US $ 58.2 billion, thus increasing by 64.4 per cent in comparison with the figures registered in 2003 (see Table 1). Over the year, the active balance of trade grew by 45.7 per cent (from US $ 59.9 billion to US $ 87.2 billion), as commodity exports increased by 33.9 per cent (from US $ 135.billion to US $ 182 billion) and imports grew by 24.6 per cent (from US $ 76.1 billion to US $ 94.8 billion). The share of export of oil, oil products, and natural gas made about 55 per cent in the total amount of exports (as compared with 54.2 per cent observed in 2003) (see Fig. 1). Therefore, similarly to the situation observed in the preceding years, the major fac tor determining the amount of current account surplus was the active balance of trade, which, in turn, tremendously depended on the changes in prices of energy resources and other staple Russian exports on world markets. The data presented in Fig. 2 demonstrate that the relationship between world oil prices and Russian balance of trade, which was no ticeable in 2001 through 2003, also manifested itself throughout 2004.

Section 2.

Monetary and budgetary spheres 200 100 0 1999 2000 2001 2002 2003 Exports Share of oil, refinery products and natural gas in exports Source: RF Central Bank.

Fig. 9. Dynamics of exports and the share of the Fuel and Energy Complex products in 1999 through In 2004, the deficit of the balance of services increased by US $ 14 billion in compari son with the figures registered in 2003 (+ 28.5 per cent). Export of services made US $ 20.3 billion, thus increasing by US $ 4.1 billion in comparison with the figures observed in the preceding year (+ 25 per cent). In 2004, import of services grew by 27 per cent and made US $ 34.3 billion.

In 2004, the balance of compensation of employees continued to diminish and made US $ 0.8 billion (as compared with US $ 0.1 billion registered in 2003).

In 2004, as compared with the figures observed in 2003, the deficit of the balance of investment incomes practically did not change and made US $ 13 billion. At the same time, in absolute terms the amounts of both receivable incomes and payable incomes dimin ished. Receivable investment incomes diminished from US $ 10.2 billion to US $ 4.5 billion, what was determined by a significant decline in the indicator pertaining to nonfinancial en terprises (from US $ 6.6 billion to US $ 0.3 billion). A similar decline in payable incomes of nonfinancial enterprises from US $ 16.8 billion to US $ 10.8 billion has determined that the total amount of payable incomes decreased from US $ 23.3 billion to US $ 17.6 billion.

As compared with the figures registered in 2003, in 2004 the balance of current transfers increased 2.9 times and made US $ 1.1 billion.

In 2004, the deficit of the capital and financial account (without changes in foreign exchange reserves) increased 6.6 times in comparison with the figures registered in (from US $ 0.8 billion to US $ 5.4 billion).

The balance of capital transfers was formed by negative figures and amounted to US $ 1.2 billion.

% US $ billion RUSSIAN ECONOMY in trends and outlooks The increase in the foreign liabilities of the economy made US $ 27.3 billion, what was by 2.1 per cent below the value of the indicator registered in the preceding year (US $ 27.9 billion).

Table Major items of the balance of payments in 2002 through 2004 (US $ billion) 2002 2003 Balance item Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q Current account 6,4 7,7 7,2 7,8 11,4 8,1 7,3 8,6 12,6 13,4 14,7 17,Capital and financial 4,8 0,5 1,8 4,1 2,4 1,5 6,7 6,7 2,5 8 4,8 account Changes in foreign 0,5 6,1 3,2 1,6 7,6 8,1 2,6 13,3 6,8 5 6,5 26,exchange reserves Net errors and 1,1 1 2,1 2,2 1,5 1,6 3,2 1,9 3,4 0,4 3,3 0,omissions Source: RF Central Bank.

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