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In the 1st quarter 2004, the quotations of the whole range of Eurobonds in circulation was ris ing gradually, which can be explained by a series of factors, such as the dynamics of the ba sic assets (the US T bills). The latter was determined by statements of the FRS representa tives. They argued that it was not the time yet to raise interest rates in the economy 05.01.21.01.04.02.19.02.05.03.22.03.06.04.22.04.13.05.27.05.15.06.29.06.14.07.28.07.11.08.25.08.10.09.24.09.08.10.25.10.09.11.24.11.09.12.RUSSIAN ECONOMY in trends and outlooks and the interest rate should remain unchanged, at least, within the next months. The noted increase of Russias credit rating in forex equivalent by S&Ps from BB up to BB+ can also be regarded as a positive factor, but it failed to secure a long lasting effect on quotations. Rather, it it caused just a short term price rise. A favorable macroeconomic situation in the country and the rise in world prices for oil encouraged foreign investors in the market for the Russian Eurobonds. Finally, the political environment also influenced the markets: for instance, while Mr. Putins re election for the second term had lowered un certainty about the RF Governments course for the next 4 years, the Cabinet reshuffle caused just a transient and reserved reaction of the markets.

9.5% 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% 2.5% USD-2030 USD-2007 USD-Source: Investment Agency Finmarket Fig.19. The 2004 Yields to Maturity of the Russian Eurobonds with the Maturity Dates in 2030, 2018, and April 2004 saw the change of the upward dynamics of the quotations and the start of a downfall in quotations which lasted through late May. A substantial deterioration of the situation on the market for Eurobonds was fueled by the negative dynamics of the basic assets. In addition, April saw a greater capital outflow from Russia, which could be the for eign investors reaction to the deterioration of the investment climate in the country against the background of the YUKOS case. The situation with liquidity was also deteriorating sometimes to the extent there were no transactions on some kinds of bonds. The vectors of prices of the Russian Eurobonds were being opposite until August: while the state of af fairs on the markets for minerals had a favorable impact both on the dynamics of the quo tations and Russias budget, there were several factors that were exercising at once a negative pressure on the prices. The prices primarily reacted to a greater volatility of basic assets. Thus, over a single month the yields rates of the US government bonds would reach a two year peak and consequently fell nonetheless. The prices of the Russian forex denominated bonds were also affected by the issuance by Germany of credit notes tied to 05.01.21.01.04.02.19.02.05.03.22.03.06.04.22.04.11.05.25.05.09.06.25.06.12.07.26.07.09.08.23.08.08.09.22.09.06.10.21.10.04.11.22.11.07.12.22.12.Section 2.

Monetary and budgetary spheres Russias debt repayment to Germany. While the notes formally are the German govern ment papers, Investors viewed that as an increase of the offer of Russian papers. Finally, the court marshals decision to sell the core YUKOSs oil producing asset, Yuganskneftegas, obviously did not contribute to a rise in the quotations.

However, the trend to a rise in quotations of the Russian Eurobonds was prevailing over the next three months. More specifically, in August, the rise in quotations was trig gered by the information of Russias intention to start consultations with the Paris Club on a repayment or exchange of its USD 4.7 bln. worth debt to the club, and investors appreci ated Russias eagerness to reduce the volume of its foreign debt. The price rise for basic assets also contributed to the one for Russias forex denominated bonds. In September, the quotations of the latter somewhat grew against a fall in the yields rates of the US bonds. Once the information appeared that the Moodys investors Service had decided to revise Russia;s sovereign rating up to positive due to the improvement of the macroeco nomic situation in the country, it also generated the consequent price rise in October.

However, the price rise on the market for the Russian Eurobonds discontinued in No vember. That in part can be explained by soaring yields rates of the US bonds due to A.

Greenspans statement of a possibility for foreign investors to loose their interest in the US papers. It was only thanks to Fitchs raising of Russias sovereign rating up to the invest ment level in mid November that Russias Eurobonds ceased to fall In December, they bounced back and forth, because of a simultaneous influence of opposite factors. On the one hand, the dynamics of prices of the US T bills were favorable for the price rise for Rus sian bonds. Another favorable news became Moodys raising Gasproms rating up the in vestment level. On the other hand, back tax claimes to Megaphon and Vympelkom trig gered a downfall in prices, while the results of the auction on Yugansknetegas did not appear particularly encouraging either.

Overall, the 2004 dynamics of the market for the Russian Eurobonds were fairly moderate and mirrored the presence of political risks investors might face in the country.

However, against the background of the raising of the US basic interest rate the yields rates of the basic assets, the US bonds, remained practically unchanged, which also af fected the dynamics of the Russian segment of the respective market. Given the current general economic trends in the US economy, one can expect a further increase of the rates. This should undoubtedly have an effect on the yields rates of the US T bills and, ac cordingly, other segments of the world market for Eurobonds, including Russias. The fac tor capable of neutralization of this particular effect could be just a lowering of political risks in Russia, as well as S&Ps raising its credit rating up to the investment level. Fur thermore, the RF Governments eagerness to ensure an early debt repayment to the Paris Club and the IMF should help the Russian Eurobonds in 2004, providing the negotiations are a success.

2.4.2. The market for subfederal and municipal debt Dynamics of market development Following the results of 2004, the regional consolidated budget was executed with surplus amounted to Rb 31.9 bn, i.e. 1,1% of its expenditure side or 0,19% of GDP. The budgets of the Federations subjects were executed with a surplus of almost Rb 28.7 bn (1,6% of the expenditure side), the budgets of the municipal formations with surplus Rb 2.2 bn (0,2% of the expenditure side).

RUSSIAN ECONOMY in trends and outlooks In the preceding two years the regional consolidated budget was executed with defi cit. In such a way, in 2003, deficit of the Federations subjects budget amounted 2,3% of its expenditure side (3,0% in 2002). Earlier, the municipalities budgets were also executed with deficit 3,2% in 2003, and 2,8% in 2002 (Table 15).

Table The territorial budgets surplus (deficit) to budget expenditures (%) ratio Regional consolidated budget Regional budgets Municipal budgets 2004 1.1 1.6 0.2003 2.6 2.3 3.2002 2.7 3.0 2.Source: IET calculations based on the data of the Ministry of Finance of the RF.

As of January 1, 2005, the consolidated budget in 43 Russian federations subjects was executed with surplus. An aggregate volume of the budget surplus reached in those regions Rb 82.7 bn or 6,08% of the value of revenue side of their budgets. The median value of the budget surplus made 1,79% of the expenditure side of the budget.

The highest surplus to consolidated budget revenues level ratio had been achieved in the Evenk Autonomous District (AD) 47,7%, Tyumen Region 27,6%, Nenets AD 17,4%, Lipetsk Region 13,8%, Khanty Mansijsk AD 13,6%, Chukotka AD 12,8%, and in Vologda Region 12,2%. Almost half 48,8% of aggregate surplus of the regional budget was provided by the two Federations subjects: Khanty Mansijsk AD 29,5% or Rb 24.4 bn, and Tyumen Region 18,8% or Rb 15.6 bn. According to estimates, the major cause of such considerable surplus of the Federations subjects, following the results of 2004, became Yukos unplanned tax revenues, paid by the company in accordance with the legal actions won by the government on the revealed tax arrears of the previous years.

In 2004, in 46 subjects of the RF the consolidated budget, an aggregate volume of which totaled Rb 50.8 bn or 3,45% of the revenue side of their budgets, had been exe cuted with deficit.

The median level of the budget deficit made 2,3% of the relevant budget revenues.

The highest deficit to budget revenues ratio observed in Khabarovsk Territory (12,6%) and Novosibirsk Region (10,1%).

About 68% of the aggregate deficit fell on 6 Federations subjects Moscow (27,2% or Rb 13.76 bn), the Moscow Region (10,7% or Rb 5.42 bn), Khabarovsk Territory (8,5% or Rb 4.28 bn), the Republic of Tatarstan (7,6% or Rb 3.85 bn), Republic of Sakha (Ya kutia) (7,2% or Rb 3.65 bn), Novosibirsk Region (6,9% or Rb 3.5 bn) (Table 16).

Section 2.

Monetary and budgetary spheres TableExecution of consolidated budgets of the Russian Federations subjects in 2004 (%) Central federal district Belgorod Region 20 295.38 1 541.28 7.59 2.38 1.41 0.76 8.93 18.Bryansk Region 14 236.23 468.09 3.29 8.71 3.65 0.69 1.07 110.Vladimir Region 18 234.29 51.07 0.28 0.78 0.02 0.06 4.22 6.Voronezh Region 23 850.79 155.72 0.65 14.49 0.95 1.33 1.74 146.Ivanovo Region 14 473.23 33.76 0.23 2.56 0.59 0.18 2.79 253.Kaluga Region 14 905.97 510.24 3.42 4.08 3.20 0.08 2.88 93.Kostroma Region 9 613.40 369.48 3.84 13.12 3.14 1.23 1.67 81.Kursk Region 14 068.87 88.51 0.63 3.74 0.96 0.40 0.61 153.Lipetsk Region 24 908.78 3 438.32 13.80 0.02 0.02 0.00 20.04 0.Moscow Region 115 863.94 5 417.58 4.68 28.59 8.00 2.67 7.49 171.Oryol Region 9 980.82 28.75 0.29 0.80 0.27 0.00 3.28 95.Ryazan Region 13 994.32 107.56 0.77 2.29 0.07 0.28 3.09 9.Smolensk Region 12 421.39 8 460.00 0.07 3.55 0.10 0.38 1.29 148.Tambov Region 13 853.19 276.95 2.00 2.31 1.54 0.04 0.65 76.Tver Region 18 431.36 78.46 0.43 3.08 0.53 1.28 3.20 125,Tula Region 21 482.54 177.33 0.83 14.15 0.47 1.31 1.16 56.Yaroslav Region 21 675.18 1 958.65 9.04 24.34 6.95 1.71 1.25 76.Moscow 394 450.57 13 760.93 3.49 12.38 5.06 1.89 11.15 145.Total 776 740.23 17 991.41 2.32 12.89 4.16 1.59 8.24 179.North Western federal district Republic of Karelia 13 843.52 593.54 4.29 12.48 1.34 1.05 0.98 31.Komi Republic 30 071.04 23.42 0.08 4.77 0.00 1.08 3.80 6.Arkhangelsk Region 24 659.77 120.02 0.49 5.13 0.74 0.44 2.38 152.Vologda Region 29 515.33 3 604.28 12.21 1.63 0.52 0.27 15.47 4.Kaliningrad Region 13 957.72 268.10 1.93 7.22 1.89 0.34 2.43 97.Leningrad Region 27 310.98 1 020.72 3.74 9.94 3.44 0.87 4.99 92.Murmansk Region 20 012.30 447.62 2.24 5.70 1.05 0.55 3.64 46.Novgorod Region 8 796.88 11.23 0.13 3.47 0.12 0.14 1.95 95,Pskov Region 9 463.55 288.42 3.05 8.51 3.91 0.46 2.37 128.St.

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