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Foreign assets held by the regulators of the national monetary base decreased by USD 7.6 bln. For the private banks the increase was by USD 23.4 bln.

Assets taken out of country in 2005 by non financial sector and households were estimated at USD 38.6 bln, with a 15.6 per cent decrease versus the preced ing year. At the background of growth in direct and portfolio investments (USD bln), as well as in trade credits and advance payments (USD 0.9 bln), a significant decline was observed in the amount of cash held in foreign currency (USD 10.bln). In other words, in the continued strengthening of RUR in nominal terms in 2006, both, physical persons and non financial sector actively disposed foreign currency. Value of export earnings not received timely, imported goods paid for under import contracts but not delivered and asset transfers under non existing contracts has decreased since 2005 to the level of USD 17.7 bln.

Therefore, in out opinion, the major trend in dynamics of the balance of pay ments indicators in 2006 was a considerable inflow of net capital in non financial sector in the amount of USD 40.9 bln (as opposed to outflow of capital from non financial sector in 2004 at the level of USD 8.5 bln and inflow in 2005 in the amount of USD 3 bln) (See Fig.7).

Section Monetary and budgetary spheres Source: RF Central Bank, IET assessments Fig. 7. Net Capital Outflow Dynamics within 2002It has to be noted that as per results of the 1st quarter, there was observed an outflow of capital in the amount of USD 5.3 bln. Total capital inflow within the year was ensured during the II IV quarters, when the net inflow of capital to non financial sector made USD 46.1 bln and determined the outcome of the year. These capital inflows resulted mainly from national companies and banks active involvement in attraction of foreign credits, as well as foreigners enthusiasm in lending money to Russian companies in the face of the country sound macroeconomic dynamics.

Wed like to mention once again, that the bulk of the assets, attracted by non financial organizations, were made in the form of direct investments, rather than loans and credits, made a year earlier.

Moreover, in 2006 there was observed a restructuring in the trend of non official capital outflow (capital flight) (See Fig. 8), which made as per the year re sults, according to our estimates14,USD 21.2 bln, i.e., USD 25.1 bln less than in 2005. A relevant decrease was observed in regard to capital flight in external trade (from 12.6 per cent in 2005 to 4.6 per cent in 2006).

Capital flight is assessed in accordance with IMF methodology as a grand total of trade credits and advance payments, export earnings not received timely, imported goods paid for under import con tracts but not delivered, and net errors and omissions.

RUSSIAN ECONOMY IN trends and outlooks Source: RF Central Bank, IET assessments Fig. 8. Capital Flight Dynamics within 2002Among other specifics of balance of payments of 2006, one should note high, as before, and still growing share of income from energy sources and export sales, once again demonstrating high level of dependence of Russian economy on natural resources export and market prices. On the other hand, there are high expecta tions for stabilization of prices in 2007, what can decrease the share of energy sources in the total export sales. Therefore, as was expected in the preceding year, in the background of further growth of net capital inflow to the RF and reduced capital outflow, the stability of balance of payments will be maintained both, by the surplus balance of current account (which might be reduced under conditions of lower prices for energy resources and growing imports), and by the account of op erations with capital and non financial instruments (accompanied by accumulation of gold and foreign currency resources).

2.1.4. Basic Measures to be Implemented in the Sphere of Monetary and Credit Policy In January 2006 Rosstat has published basic structure of consumer expendi ture weights of population, used for assessment of consumer price index for 2006.

We should mention, that that structure was published for the first time, which was a serious move towards higher transparency in the IET estimation methodology.

Within 2006 the RF Central Bank has been raising four times the interest rates on financial instruments on deposit operations in national currency for credit or Section Monetary and budgetary spheres ganizations, made under Tom next, spot next, on demand standard terms to 2.25 per cent per annum; on the operations made under one week and spot week terms to the level of 2.75 per cent per annum. The interest rate increase was effected for the purpose of excessive money supply sterilization and came into effect due to some changes in national and external economic conditions, namely to the refund rate policy, pursued by Federal Reserve System of the USA and Euro pean Central Bank. It should be noted, that the raised refund rates on the RF Cen tral Bank deposits have, in fact, increased their attraction. As per results of the year, credit organizations' deposits with the Bank of Russian have grown practically 13 fold. With the help of this measure the Bank of Russia was pursuing the policy of raising the significance of the interest rate as an instrument of the general mone tary and credit policy.

In 2006 the RF Central Bank has decreased the refund rate twice, on June it was reduced from 12 per cent to 11.5 per cent, and since October 23 it was es tablished at the rate of 11 per cent. It should be noted, that the decrease of the re fund rate was implemented at the background of growing interest rates on deposits of credit organizations with the RF Central Bank. The decline of refund rates was aimed at raising the significance of interest rates in monetary and credit policy. As a mater of fact, the effective refund rate is much higher than the standard rate of a bank credit, and therefore, changes in refund rate provide minimum effect in terms of monetary and credit policy. However, the raised rates on deposits has led to their increased attractiveness to the banks and made a positive impact over liquid ity sterilization in the Bank of Russia.

Due to abolishment of restrictions in foreign currency operations as of Janu ary 1 2007, to achieve the aim of unrestricted convertibility of the Russian rouble, the Bank of Russia has reduced twice the reserve limit of funds for foreign currency operations and cut down to zero the quota for mandatory sale of foreign currency receipts. Soon after that, on May 29, the RF Central Bank issued a resolution on abolishment of requirements on reservation of funds on certain transactions with foreign currency. Moreover, on July 1, 2006 a demand to open special accounts for certain types of operations with foreign currency was also dismissed (i.e., special bank accounts, special deposit accounts, accounts of non residents in the register of securities holders).Those measures were aimed at annihilation of restrictions in regard to operations with capital and at free rouble convertibility.

In May the RF State Duma has adopted in final reading the law on the RUR graphic symbol, with relevant amendments to the Law On the RF Central Bank (Bank of Russia). According to the new law, Russian rouble will have an appropri ate visual symbol, which is subject for approval by the Bank of Russia in compliance with appropriate legislative procedure.

In June the Paris Club of Creditors has accepted the prescheduled recovery of the long term Russian debt, which exceeded the amount of USD 20 bln. It was planned to repay 51.4 per cent of that amount at face value, whereas the balance of total debt should be recovered with an interest of about USD 1 bln. It should be re minded, that in 2005 Russia has made early repayment of its debt to IMF (in the RUSSIAN ECONOMY IN trends and outlooks amount of USD 3.3 bln) and partially recovered the debt to Paris Club (in the amount of USD 15 bln). In our opinion, prescheduled recovery of external debts is a positive way of accumulated national funds expenditure, as on the one side, that measure does not bring inflation pressure in the national economy, and on the other side, reduces the liabilities to external creditors.

In August the bank of Russia has submitted to the RF State Duma a document on "Major Trends of Consolidated Monetary and Credit Policy in 2007", where, for the first time in recent years, the Bank of Russia has outlined its primary task for the year of 2007, namely combating of inflation and bringing it to the level of 6.5 8 per cent as of the year results. As concerns the index of inflation targeting for the rouble rate in real terms, it should be held within the range of 0 per cent to 10 per cent. In our point of view, those measures will help the Bank of Russia to pursue effective monetary and credit policy, avoiding attempts to achieve several conflicting targets.

Moreover, according to the Central Bank estimates, the surplus of monetary base in narrow definition will make 1422 per cent in 2007. Gold and foreign currency re serves by the end of 2007 should reach about USD 316 bln USD 390 bln. We con sider that both estimates are somewhat lower than they should be. According to the model of approximation of short term estimates of the RF socio economic indica tors, in the first half year of 2007 the growth rate of the monetary base should reach 18.1 per cent, and gold and foreign currency reserves will exceed USD 384 bln.

Since October 1 of the preceding year, the Bank of Russia has increased the rate of deductions to Mandatory Reserve Fund and under the debts of Russian banks to external credit organizations from 2 per cent to 3.5 per cent. By this means, Cen tral Bank was making an attempt to reduce the attraction of foreign credits to the Russian banks and to protect national currency from excessive pressure. However, that measure has not bring any problems with liquidity to the banks, as the Bank, hav ing increased the rate of deductions to Mandatory Reserve Fund, has also raised the average index from 0.2 to 0.3. Therefore, now the banks are able to withdraw at the beginning of the month and repay at the end of month up to 30 per cent of their de ductions to Mandatory Reserve Fund. As a whole, those two counteracting meas ures, taken by the Central Bank, lead to a neutral result, but their introduction might point to the beginning of a tougher monetary and credit policy.

2.2. The state budget 2.2.1.A general overview of the budgetary system When analyzing the main parameters characteristic of the RF budgetary sys tem in 2006, it should be noted that last years level of revenue and expenditure by comparison with that of 2005 changed only slightly (see Table 1): in the federal budget, the share of tax revenues in GDP decreased by 0.1 p. p. and amounted to 22.2 % of GDP, while in the budgets of RF subjects the amount of tax revenue as a percentage of GDP was the same as in the previous year (10.3 % of GDP). As a re sult, the share of taxes and payments in the revenues of the RF consolidated budget in 2006 amounted to 32.5 % of GDP, against 32.6 % of GDP in 2006.

Section Monetary and budgetary spheres According to the data on the actual execution of the RF federal budget in 2006, its revenue was 23.6 % of GDP, which is by 0.1 p. p. lower than the corre sponding index of 2005. The revenue of the RF consolidated budget in amounted to 35.5 % of GDP, which is by 0.3 p. p. higher than the pervious years index. As for the expenditure indices of the RF budgetary system in 2006, they demonstrated a certain decline against the sum of expenditure in the 2005 federal budget (16.1 % against 16.3 % of GDP), but did not change in terms of the RF con solidated budget and amounted to 27.5 % of GDP.

The revenue of the RF territorial budgets in 2006 constituted 14.3 % of GDP against 13.9 % of GDP one year earlier. The expenditure of the budgets of RF subjects also demonstrated a slight growth on the year 2005 (13.6 % of GDP) and amounted to 13.7 % GDP. Due to the decreased revenue and expenditure in the federal budget, and the increased revenue and unchanged expenditure in the RF territorial budgets, the surplus in the consolidated budget, as shown by the re sults of the year 2006, rose on the previous year and amounted to 8.0 % of GDP (against 7.7 % of GDP in 2005), having reached its historic high of the whole post Soviet period.

The single social tax (SST), a part of which is transferred to the federal budget, deserves a separate comment. Thus, throughout the period of 2002 2004, the revenues generated by this tax were declining at a stable rate, having demonstrated a noticeable fall in 2005 to the level of 1.24 % of GDP against 2.6 % of GDP in 2004. By the results of 2006, the share of revenues from this tax in GDP decreased even further to approximately 1,19 % of GDP. The main cause of this sharp decline is the lowering of the rate of SST in 2005 from 35.6 % to 26 %. It should be noted that, for example, in 2001, assuming the tax base was 100,roubles, the proportional shares of the SST rate divided between the budget and off budget funds would be as follows: 28 % to the federal budget, 4.0 % to the Social Insurance Fund, 0.2 % to the Federal Compulsory Medical Insurance Fund, and 3.4 % to the territorial funds. In 2005 the law was amended, whereby the proportional distribution of the SST rate, at a tax base of up to 280,000 roubles, became as follows: 20 % to the federal budget, 3.2 % to the Social Insurance Fund, 0.8 % to the Federal Compulsory Medical Insurance Fund, and 2.0 % to the territorial compulsory medical insurance funds. Thus, the diminished share of transfers to the federal budget in 2005 was the direct consequence of the sharply decreased standard deduction rate established for the aggregate revenue from this tax.

The budget of the RF general government, by the results of 2006, was exe cuted in respect of revenue at the level of 40 % of GDP against 39.7 % of GDP in 2005. Expenditure amounted to 31.5 % of GDP against 31.6 % of GDP in 2005. The growing revenue of the general governments budget alongside the reduction in its expenditure as a share of GDP was conducive to an increased budget surplus from 8.1 % of GDP in 2005 to 8.5 % of GDP in 2006.

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