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Food Industry Iron and Steel Light Industry Industry in tota Wood Industry, Paper and Pulp Fuel Industry Machine Industr Petrochemical Industry Building Materials Industry Nonferro Industry us Chemical Industry Power Energy Industry RUSSIAN ECONOMY in trends and outlooks 1370 Monetary base ( RUR billion ) Gold and Foreign Exchange Reserves ( USD billion Fig.3. Movements in Monetary Base and Gold and Foreign Exchange Reserves in By the end of the quarter 1 of 2004, the broad monetary base1 accounted for RUR1936,6 billion thus increasing by 1.2% since the beginning of the year. It should be noted that the broad monetary base grew at faster rates (4.2%) in the quarter 1 of 2003. At the same time, the volume of cash in hand decreased by 1.9% over the period under re view in 2003 against the growth by 0.8% in 2004. Hence, for the first time over the last few years we could see increasing volume of cash in hand in composition of the monetary base in the quarter 1. Growth rates of compulsory reserves in the quarter 1 decreased slightly from 8.9% in 2003 to 7.9% in 2004. The narrow monetary base grew from 1392,1 up to RUR1458,5 billion (+4,8%) over the quarter 1. Incremental growth in the narrow monetary base over the corresponding period in 2003 accounted for 1.1% against 17.4% in the quarter 4 of 2003. Growth rates of the monetary base was caused mainly by slow downed growth rates of the gold and foreign exchange reserves of the Bank of Russia. According to the results of the quarter, the gold and foreign exchange reserves grew from $77,8 bil lion up to $83,7 billion (+7.6%), which was related mainly to the Bank of Russias transac tions aimed at flattening fluctuations of the USD exchange rate in the Moscow Interbank Currency Exchange (MICEX) and external debt payments.

In the quarter 2, the broad monetary base decreased by 0.9% to account for RUR1,92 trillion as of July 1, 2004. The volume of monetary base increased by 0.3% as compared to the corresponding figure as of January 1, 2004. It should be noted that the volume of monetary base decreased by 3.5% over the period between April and May, and grew by 2.7% only in June. It will be recalled that the monetary base increased by 19.4% in the quarter 2 of 2003. As of July 1, the volume of cash in hand accounted for RUR1.35 tril lion (which exceeds by 9.5% the figures as of April 1, 2004) including cash balances of The RF broad monetary base includes money on correspondent accounts of credit organizations and bank deposits with the Bank of Russia, besides the outstanding cash issued by the Bank of Russia and compulsory reserve balances in national currency of the funds borrowed by credit organizations and deposited with the Bank of Russia.

RUR billion USD billion 2-8.03.1-7.12.4-10.05.6-12.07.8-14.09.20-26.01.10-16.02.23-29.03.13-19.04.25-31.05.15-21.06.17-23.08.20-26.10.10-16.11.22-28.12.27.07-2.08.29.09-5.10.30.12.03-5.01.Section 2.

Monetary and budgetary spheres credit organizations. The volume of accounts of credit organizations with the Bank of Rus sia shrank by 3.9% down to RUR223,1 billion over the quarter 2. Compulsory reserves shrank by 12.7% down to RUR251,2 billion in the period between April and June. Banks deposits with the Bank of Russia decreased down to RUR38,4 billion (65%) over the quarter 1. As of July 1, the amount of obligations of the Bank of Russia on repurchase of securities decreased by 22.9% as compared to April 1 and accounted for RUR56 billion.

Hence the structure of monetary base was effected by the crisis in the banking sector of the Russian Federation that took place in the period between May and June of 2004: sharp reduction in liquidity of the interbank credit market resulted in shrinkage of banks deposits and accounts with the RF Central Bank, compulsory reserves were reduced as a result of depositors outflow, and the RF Central Banks attempts to increase liquidity of the inter bank credit market led to reduction of its obligations to banks on repurchase of securities.

Substantial growth in volume of cash in hand (+9.5%) in the quarter 2, including de posits outflow from the banking sector and reduction of compulsory reserves, led to in crease in the narrow monetary base (cash + compulsory reserves) by 5.9%.

The broad monetary base reduced by 4.8% in the quarter 3 and accounted for RUR1,83 trillion as of October 1, 2004. The monetary base was reduced by 4.5% as com pared to the corresponding figure as of January 1, 2004. It should be noted that an insig nificant growth of the monetary base was recorded only in September (+0.1%), while it was shrinking in the period between July and August. It will be recalled that the monetary base was reduced by 3.2% over the quarter 3 of the previous year. As of October 1, cash in hand plus balances of credit organizations accounted for RUR1,37 trillion (which exceeds by 1.6% the corresponding figure of July 1 of the current year). In the quarter 3, the volume of credit organizations accounts with the Bank of Russia remained practically the same and accounted for RUR223,4 billion at the end of the quarter. Compulsory reserves were sharply reduced down to RUR116,1 billion (53.8%) in the period between July and Sep tember. At the same time, banks deposits with the Bank of Russia increased up to RUR45,4 billion (+18.2%) over the quarter 3. As of October 1, the value of obligations of the Bank of Russia for repurchase of securities increased by 21.4% as compared to July and accounted for RUR68 billion. Hence the downward movement of the monetary base in the quarter 3 was caused mainly by the shrinkage of the compulsory reserves fund due to substantial reduction in corresponding regulations of the RF Central Bank (since July 8, 2004). At the same time, stabilization in the banking sector led to a growth of banks de posits with the Bank of Russia and its obligations on repurchase of securities.

Changes in the narrow monetary base (cash + compulsory reserves) in the quarter were also governed by a sharp reduction of the compulsory reserves fund at the back ground of insignificant growth in cash: as a result, this aggregation was reduced by 4.8% over the period between July and September. In spite of a substantial growth in the gold and foreign exchange reserves in the quarter 3 (+7.8%), the monetary base couldnt show growth due to large withdrawals of liquidity to the budgetary system (incremental growth of deposits of state administration agencies with the RF Central Bank exceeded RUR125 bil lion in the period between July and August alone).

Over the quarter 4, the broad monetary base increased by 30.6% and accounted for RUR2,39 trillion as of January 1, 2005. The volume of monetary base increased by 24.7% as compared to the corresponding figure as of January 1, 2004. It should be noted that the volume of monetary base increased throughout the entire quarter 4, the fastest growth was recorded in December (+14.5%). It will be recalled that over the quarter 4 of 2003, the monetary base increased by 29% with total growth accounting for 55.3% over 2003. The volume of cash in hand plus balances of credit organizations accounted for RUR1,67 tril RUSSIAN ECONOMY in trends and outlooks lion as of January 1 (which exceed by 21.6% the corresponding figure of October 1, 2004).

Volume of accounts of credit organizations with the Bank of Russia increased by 2,2 times, up to RUR486,4 billion over the quarter 4. Compulsory reserves grew by 4.8% up to RUR121,7 billion in the period between October and December. The volume of banks de posits with the Bank of Russia grew up to RUR91,4 billion (double increase) in the quarter 4. As of January 1, the value of obligations of the Bank of Russia on repurchase of securi ties reduced by 96% and accounted for RUR2,5 billion as compared to October 1.

Hence, the monetary base of the Russian Federation was notably widened in the quarter at the background of a substantial growth in the gold and foreign exchange reserves.

Expansive growth in both cash in hand (+21.6%) and compulsory reserves (+4.8%) in the quarter 4 led to a 20.3% increase in the narrow monetary base (Fig. 3). Such growth was caused by purchase of large volumes foreign currency by the RF Central Bank. The gold and foreign exchange reserves of the Bank of Russia grew by 31% and reached $124,5 billion in total over the period between October and December.

Hence, according to the results of 2004, the monetary base grew more moderately that in 2003. However, it grew at faster rates in the quarter 4 than in the previous year. It should be noted that the gold and foreign exchange reserves grew slower until September as compared to 2003. On the other hand, reserves of commercial banks shrank substan tially after reduction of the compulsory reserve regulations in summer, but such shrinkage ceased to exist in fall. Thus, according to the results of the year, incremental growth in the narrow monetary base accounted for 24.8% (48.7% in 2003) and reserves for 24.4% (54.1% in 2003). The volume of 0 cash increased by 33.8% against 50.3% in 2003. Con sequently, money supply in 2004 was not that heavy as in 2003. The federal budget, spe cifically the Stabilization Fund, played the key role in sterilizing money issuance of the RF Central Bank. In 2004 incremental growth of deposits of the general government with the RF Central Bank accounted for nearly RUR600 billion, more than a half of the entire issu ance of the Bank of Russia was withdrawn from the economy through the budget system of the Russian Federation in 2004. Final incremental growth of reserve money (broad money) was no more than RUR476 billion.

2.1.3. Money Demand According to the results in 2004, broad money grew at slower rates than the corre sponding values in 2003. In particular, 1 grew by 30.5% over the year against 45.6% in 2003. 2 grew by 35.8% (50.5% in 2003). A relative fast growth in broad monetary aggre gates was recorded only in the quarter 1 (as compared to 2003), however it slowed down in the quarter 2 and 3. Traditionally, monetary aggregates grew up at faster rates in the quarter 4. Such growth, however, was more moderate than in 2003.

Hence, according to the results of 2004, monetization of GDP increased merely from 24.3% of GDP up to 26.0%, but it still remained low. (in 2003, for example, monetization of GDP (calculated by using the IFS data base) was 47% in Bulgaria, 40% in Estonia, 48% in Hungary, 37% in Latvia, 31% in Lithuania, and 64% in Slovakia). As was noted in the previ ous economic review2, such situation maintains high enough growth rates of money sup ply, which has no adverse effects at least until monetization of GDP reaches 35 to 40%, since money supply growth will be absorbed by the economy due to growing demand for real monetary reserves (provided that currently prevailing inflationary expectations and trends in money demand remain the same).

Russian Economy in 2003. Trends and Outlooks. Issue 25. .: IET, 2004.

Section 2.

Monetary and budgetary spheres At the same time, banks continued financing the real economic sector in 2004, as evidenced by the fact that money multiplier grew up to its maximum over the entire period of record (Fig. 4). In the period between August and September 2004, the multiplier even reached 2,0 (which is beyond the previous high recorded in February 1998), but it dropped then down to 1,8 due to broadening monetary base at the end of the year, while broad money aggregates are less sensitive to seasonal fluctuations in demand for liquid funds.

2,1,1,1,1,1,1,Fig. 4. Money multiplier (2 : Reserve Money Ratio) in the Period Between 1998 and More money supply from the Russian banks in 2004 was caused mainly by increased requirements to non financing private enterprises, i.e. credits and investments in private bonds. As indicated in Fig. 5, by the end of 2004, a share of requirements to the private sector in total assets of the banking system exceeded 60%, thus growing nearly by 5 per centage points during the year. At the same time, a share of requirements to general gov ernment and foreign assets either reduced or remained the same. In total, the volume of assets of the banking system of the Russian Federation reached 39.7% of GDP and the volume of requirements to the non financing private sector accounted for 24.55% of GDP by the end of the year, while the corresponding figures accounted for 38.57% of GDP and 21.0% of GDP at the beginning of the year.

Jan Oct Oct Oct April Jan April April Jan Jan July Oct Jan Oct Oct Oct April July Jan July July Jan April April Jan April July July RUSSIAN ECONOMY in trends and outlooks 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Reserves Foreign assets Claims to enlarged government Claims to public non- financial enterprises Claims to private sector Fig.5. Total Assets of the Banking System of the Russian Federation 2.1.4. RUR Exchange Rate Movement The official nominal RUR exchange rate to the leading foreign currencies changed gradually enough throughout 2004 (Fig. 6). The RUR/USD exchange rate remained virtu ally unchanged until the end of the year (from the beginning of the second half of October), when there was an upward trend in the nominal RUR/USD exchange rate. In total, the RUR exchange rate increased from RUR29,45 to 27,75 per $1 USD, or by 5.79%.

The RUR/EURO exchange rate was less uniform. The RUR grew against the EURO during the first four months until the end of the year, when the EURO exchange rate grew up. The range of fluctuations in the RUR/EURO exchange rate was wider than that of the RUR/USD exchange rate. According to the results of 2004, the official RUR exchange rate declined by 2.68% against EURO, from RUR36,82 up to RUR37,81 per EURO.

Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Apr July Section 2.

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