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The rating agency's experts believe that these changes in the ownership structure may affect the corporate governance process in MTS. When the agency assigned the CGR for the first time (7.4, the highest rating in Russia), its experts noted that the high quality of governance and control was ensured by a parity in influence by the two largest strategic shareholders. This parity implied a rigid system of internal control, equal representation and active participation by both parties in the Board's activities. Any changes in the ownership structure may disturb the achieved balance of influence by two largest shareholders and affect the standards of corporate governance in MTS negatively.

Table Dynamics of the World's Stock Indices Change During the Change Since the As of 24 March, 2003 Value Month (%) Beginning of the Year 363 -5.28% 1.09% RTS (Russia) 8214.68 4.10% -1.52% Dow Jones Industrial Average (USA) 1369.78 2.41% 2.57% NASDAQ Composite (USA) 864.23 2.74% -1.77% S&P 500 (USA) 3743.3 2.40% -5.00% FTSE 100 (UK) 2548.37 0.05% -11.90% DAX-30 (Germany) 2726.85 -0.99% -11.00% CAC-40 (France) 4230.7 1.99% -8.64% Swiss Market (Switzerland) 8435.07 0.86% -1.68% Nikkei-225 (Japan) 11053 7.51% -1.91% Bovespa (Brazil) 5924.34 -0.05% -3.31% IPC (Mexico) 1012.22 -0.27% IPSA (Chile) 1299.56 2.02% -3.09% Strait Times (Singapore) 569.85 -0.97% -9.19% Seoul Composite (Korea) 8892.65 -23.17% -14.25% ISE National-100 (Turkey) Foreign Exchange Market.

High oil prices and government bond auctions brought about additional offer of foreign currency in the internal market. It should be noted that the increased reserves of the Bank of Russia allow it to have total control over the currency market.

On the whole, from 28 February till 2 March the RUR / US$ rate decreased 19.18 kopecks (0.61 percent), from RUR / US$ 31.5829 at 28 February, 2003, to RUR / US$ 31.3811 on 21 March, 2003. From 3 till March the rate hovered around the RUR / US$ 31.58 mark, and the daily amounts of trade were cca. US$ million, with the exception of Tuesday, 4 March, when the trade volume almost tripled in comparison with the previous auction. The additional offer of currency resulted from the necessity to create Rouble provisions before the Wednesday auctions, in which large Rouble government bonds were to be placed. The Bank of Russia bought currency at the rate of RUR / US$ 31.58, which prevented the market from great falls. As a result, from 11 till 13 March the Dollar rate sank 18.01 kopecks, reaching RUR / US$ 31.3818. Buying the currency at RUR / US$ 31.38, the Bank of Russia stopped further decrease. Thus, in the period under review, the Dollar rate fell to the level of last July. According to preliminary estimates, the volume of trade in the US currency in the SELT will amount to cca. US$ 2.68 billion.

Just like in the previous month, the Rouble liquidity remained at a rather high level: balances in corresponding accounts stayed in the range of RUR 80 - 100 billion. The overnight rates grew from 1 to percent in the first half of the month to 4.5 to 5 percent in the period from 19 till 25 March.

The US Dollar - Euro rate in the FOREX market decreased 1.24 cents (1.15 percent) in the period from February till 25 March, reaching the level of US$ / Eur 1.0635. It should be noted that, amid negative news about the US economy, the Dollar rate grew to US$ / Eur 1.1 level, in the period from 28 February till March. The rate remained at this high level until 13 March; however, after the military campaign in Iraq began, it dropped sharply to the levels of US$ / Eur 1.7 - 1.6.

The changes of RUR / Euro rate followed the world's leading floors. The highest mark reached in March was RUR / Eur 34.7741 (the historic maximum) on 07 March 2003, the lowest mark was RUR / Eur 33.on 21 March, 2003. On the whole, in March the rate fell 69.02 kopecks, or 2.03 percent; the trade volume was cca. 82.42 Euros.

Dynamics of the Official RUR / US$ and RUR / Euro Exchange Rate 35,34,33,32,31,30,29,Official RUR / US$ Exchange Rate 28,Official RUR / Euro Exchange Rate 27,26,Fig. Euro / US Dollar Rate Dynamics in the World's Currency Markets 1,1,1,1,0,0,0,Fig. RU US Dollar / Euro Table Financial Market Indicators November December January February March Month 1.6% 1.5% 2.4% 1.6% 1.2% Monthly inflation rate 20.98% 19.56% 32.92% 20.98% 15.39% Inflation rate annualised on the basis of this month's trend 21% 21% 21% 18% 18% CB RF refinancing rate 14.02% 13.41% 12.31% 9.66% 9.0% Annualised yield to maturity on OFZ issues 11.15 15.11 11.88 34.53 32.Volume of trading in the secondary GKO-OFZ market for the month (RUR billion) Yield to maturity on Minfin bonds at the end of the month (% p.a.) 4.83% 4.55% 3.70% 3.28% 3.5% 4th tranche 7.83% 7.66% 7.01% 6.31% 6.6% 5th tranche 6.78% 6.66% 5.74% 5.19% 5.3% 6th tranche 8.50% 8.08% 7.19% 6.43% 6.7% 7th tranche 6.81% 6.61% 5.82% 5.32% 5.4% 8th tranche 4.68% 10.11% 3.74% 2.16% 3% INSTAR-MIACR rate (% p.a.) on interbank loans at the end of the month:

31.8424 31.7844 31.8222 31.5762 31.Overnight 31.6736 33.1098 34.4443 34.0549 33.Official RUR / US$ exchange rate at the end of the month 0.32% -0.18% 0.12% -0.77% -0.62% Official RUR / Euro exchange rate at the end of the month 1.59% 4.53% 4.03% -1.13% -1.38% Average annualised growth in RUR / US$ exchange rate 260.20 219.92 217.31 276.19 Average annualised growth in RUR / Euro exchange rate 361.15 359.07 347.63 383.23 Volume of trading at the stock market in the RTS for the month (US$ million) 0.70% -0.58% -3.19% 10.24% -5.3% Value of RTS Index at the end of the month Change in value of RTS Index during the month (%) * Estimate D. Skripkin Banks on the market of Ruble denominated state securities The banking sector remains the main holder of the Ruble denominated bond public debt. However, in 2002 the process of concentration of federal debt instruments (FDI) denominated in Rubles in the banking sector somewhat slowed down (see Fig. 1). While in 2001 its share increased from 61.5 % to 75.6 % in months, in 2002, after a peak registered in February and March, when the share of the banking sector made 78.2 %, no clear trend might be traced further, and by the beginning of 2003 it made 76.7 %. The deceleration of growth in the share of the banking sector in the total amount of internal bond debt is usually associated with the launch of the accumulating element of the pension system and investment of collected insurance fees in GKO-OFZ in 2002. However, an analysis of the dynamics of the share of the banking system in the total amount of debt does not justify this unequivocal conclusion. As Fig. 1 demonstrates, the growth in its share ceased yet in the autumn of 2001, a few months before the first fees to the accumulating component of the pension system were collected, while the start of investment of fees in April of resulted in a decrease in the share of the banking sector only in the next month, although not to the levels below those registered in the end of 2001.

% 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 2001 Source: CBR Fig. 1. The share of the banking sector in the aggregate GKO-OFZ portfolio in 2001 through According to information about the holders of public bond debt published by the Central Bank of Russia, the data on the portfolio of commercial banks is combined with the data on securities owned by the Central Bank, and therefore do not allow to evaluate the share of commercial banks in the aggregate GKO OFZ portfolio. The data on the participation of commercial banks per se in the aggregate GKO OFZ portfolio may be obtained only basing on their balance sheets.

In the beginning of 2002, less than 500 banks out of more than 1300 operating banks6 had Ruble denominated federal debt instruments in their portfolios. By the end of the year, the number of banks holding Ruble denominated FDI decreased to 440. However, the aggregate GKO OFZ portfolio of commercial banks increased by 41 % (from Rub. 114.1 to Rub. 161 billion in current prices) over 12 months of 2002. At the same time, the rate of increase in the Sberbank portfolio was below the respective indicator of other banks (34 % as compared with 72.4 %), what resulted in a certain decline of its share in the aggregate GKO OFZ portfolio of commercial banks (from 81 % in the beginning of the year to 77.3 % in the end of the year). In 2001, the growth in the total portfolio of Ruble denominated FDI was much less pronounced (10.8 %) and was generated primarily by Sberbank, the portfolio of which increased from Rub. 63.4 to Rub. 92.9 billion (by 46.5 %), while the rest of operating banks demonstrated the opposite trend their aggregate GKO OFZ portfolio decreased from Rub. 39.5 billion to Rub. 21.2 billion (i.e. by 46.4 %) over the same period.

The share of GKO OFZ in the Sberbank assets somewhat decreased over 2002 (form 12 % to 11.5 %). It was observed that for the rest of the sample this share increased from 1.0 % to 1.3 %.

The number of banks engaged in GKO OFZ operations considerably fluctuated over the year while in December of 2001 the turnover7 of these instruments was reported by 378 banks, in November the number of banks engaged in FDI operations in Rubles decreased to 285. In absolute terms, the aggregate turnover of all operating Russian banks demonstrated the following dynamics: while in December of 2001 the turnover made Rub. 51.4 billion, in September of 2002 this value declined to Rub. 31.2 billion. However, in November the turnover increased again and made Rub. 54 billion, reflecting, as it seems, the general recovery of the secondary market observed in the last quarter of 2002. At the same time, Sberbank operations in this market segment were rather stable.

The trade activity of the operators on the GKO OFZ market remains low. It would suffice to note that the turnovers on respective accounts calculated as the sum of purchases and sales over the month remain below the balances on accounts, while in the pre-crisis period the monthly turnover exceeded the balances on accounts used by banks to reflect GKO OFZ operations 2 to 3 times. In November of 2001, the ratio between turnovers and balances on accounts made 54.8 % (91 % without Sberbank), however, by December of this indicator declined making 34 % (87 % without Sberbank). For comparison purposes, the ratio between turnovers and balances on accounts relating to forex denominated FDI made 153 % in November of (283 % without Sberbank).

Here and below without banks under ARCO management.

Here and below the turnover is calculated as the sum of purchases and sales.

Eight trading organizations (MICEX is the leader) are engaged in GKO OFZ operations. Banks make more than 90 % of dealers on MICEX. A more thorough analysis of the operations conducted by Russian banks playing the leading role on the GKO OFZ market in the respective MICEX section is carried out below. In order to form the sample there were used the lists compiled by MICEX, which include the dealers on the GKO OFZ market demonstrating largest trade turnovers in the course of secondary bidding over the period under observation. According to the data collected in November of 2001 and 2002, the list included 22 banks. For the further analysis Sberbank was excluded from the sample, since its indicators have a strong distorting impact on the averages.

The aggregate turnover of bank being the leaders of the MICEX section of Ruble denominated state securities (without Sberbank) made 52.3 % of the aggregate GKO OFZ turnover of all operating Russian banks without Sberbank in November of 2002 and increased 1.5 times in comparison with the respective indicator registered in November of 2001 (35.6 %).

The share of Ruble denominated FDI in the assets of banks being the leaders of the MICEX GKO OFZ market remained above the share of the average Russian bank (1.9 % as compared with 1.0 % in the beginning of December of 2001 and 1.8 % as compared with 1.3 % in the beginning of December of 2002).

In the end of November of 2002, the average size of assets of banks most active on the MICEX GKO OFZ market exceeded the value demonstrated by the average Russian bank more than 17 times (Rub. 34.4 billion as compared with Rub. 2 billion).

Although since recently the low activity on the Russian GKO OFZ market has been associated with low profitability of investment in Ruble denominated FDI, the comparison of profitability indicators of the banks actively operating on this market with the average indicators of the banking system at large does not confirm such a relationship. In any case, the banks actively operating at the MICEX section of Ruble denominated state securities in 2002 proved to be much more profitable than the average banks (the average ratio between profits and assets made 3.5 % and 2.5 % respectively).

L. V. Mikhailov, L.I. Sycheva, E. V. Timofeev, E. V. Marushkina Investment in fixed assets The specifics of the investment situation in January through February of 2003 were that the traditional for the beginning of the year investment pause was overcome. In February of 2003, the monthly rates of growth in investment were highest since last January. In January through February of 2003, the amount of investment in fixed assets increased by 9.5 % in comparison with the figures registered in the respective period of the preceding year and made Rub. 204.1 billion.

The major factors positively affecting investment activity were increasing rates of growth in production of goods and services of the base economic sectors; increasing household investment resources (due to growing real disposable cash incomes); expanding investment potential of the export oriented industries (because of improving external business situation). At the same time, the lack of own financial resources of enterprises, insignificant amounts of financing of state investment, and relatively high rates constrained investment activity.

The dynamics of investment operations were rather significantly affected by trends formed in through 2001. In 2002, the amount of investment in fixed assets made Rub. 1758.7 billion increasing by 2.% in comparison with the figures registered in the preceding year. In 2002, consumer demand outpaced investment demand in terms of growth rates. As a result, the trend towards outpacing rates of growth in GDP in comparison with dynamics of investment in fixed assets was restored.

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