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Therefore, according to the Russian official statistics, in February of this year there was observed a decline in the rates of growth in consumer prices. It should be noted that while in January the most significant increase was observed with respect to prices of food products, in February paid services rendered to households accounted for the largest increment in prices, what may explain the fact that this group demonstrated the highest rates of growth since the beginning of the year.

However, it should be noted that the official statistics for February of this year without any explanation present only changes in prices of certain housing and public utilities not allowing to assess the changes across the whole group of paid services. Therefore, in February of 2004 the RF Goskomstat in fact failed to present information concerning the dynamics of prices of housing and public utilities services at large.

According to preliminary estimates, in March inflation rates were at or below 0.8 per cent to 1.0 per cent.

As on March 12, 2004, the amount of gold and foreign exchange reserves of the Bank of Russia made US $ 84.6 billion (see Figure 2) and did not change over the week. As a result, the current amount of gold and foreign exchange reserves is practically still at the level registered in early February. In the last month, the amount of gold and foreign exchange reserves decreased by US $ 3.4 billion (from US $ 88 billion to US $ 84.6 billion). This significant decrease may be explained both by the considerable payments related to the external debt, and support of the Ruble exchange rate on the domestic market on the part of the RF Central Bank. According to the estimates, only on March 3 the Bank of Russia sold more than US $ 1 billion to commercial banks in order to prevent a significant appreciation of the UIS Dollar exchange rate.

The Growth Rate of the CPI in 2002 - 2004 (% per month).

3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% Figure 1.

Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2003 - 2004.

1410 1370 1270 1090 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Figure 2.

Jul Jul Jan Jun Jan Jun Jan Feb Sep Feb Sep Feb Oct Oct Apr Aug Dec Apr Aug Dec Mar Mar Nov Nov May May billion rubles billion dollars 3-9.2.1-7.09.2-8.03.9-15.06.7-13.07.4-10.08.9-15.12.6-12.01.23-29.06.21-27.07.18-24.08.15-21.09.13-19.10.11-17.11.23-29.12.20-26.01.17-23.02.16-22.03.29.09-5.10.27.10-3.11.25.11-1.12.In February of 2004, the monetary base of the Russian Federation in the broad definition6 increased by 1.85 per cent and made RUR 2008.1 billion as on March 1, 2004. At the same time, the amount of cash in circulation (as adjusted for cash balances of crediting organizations) made RUR 1233.5 billion, or was by 3.per cent above the level registered at the end of January of 2004. The amount of accounts of crediting organizations with the Central Bank of Russia diminished by 13 per cent (to RUR 232.6 billion) in February, the mandatory reserves reached RUR 280.7 billion (increasing by 1.15 per cent in comparison with the figures registered in January of 2004), while the amount of banks deposits in the Bank of Russia increased by 3.4 per cent up to RUR 189.8 billion. As on March 1, the amount of the CBR liabilities concerning repurchase of securities was at RUR 71.6 billion, what was by 46.4 per cent above the level observed on February 1 of 2004.

In March, Russia paid about US $ 2521.1 million as disbursement of its public foreign debt, including US $ 198.4 million transferred as debt repayment and US $ 148.6 million as interest payments to the official creditor countries. The payments to international financial institutions made US $ 253.7 million: 233.1 million as debt repayment and US $ 20.6 million as interest payments respectively. Besides, in March, US $ 2069 million were transferred as the payment relating to RF Eurobonds, including US $ 1273.6 million of debt repayment and US $ 795.4 million of interest payments respectively.

In February and March, there were observed indications that the Bank of Russia seriously considers to undertake preventive measures if the US $ depreciation against the Euro would significantly affect the Russian domestic forex market. In particular, the bank may discontinue to quote the Ruble against any single foreign currency and switch to basket mechanisms. At the official level, the priority of the RF Central Bank is at the moment is to control the real effective Ruble exchange rate. It is calculated in accordance with the methods made public last October. However, the Bank of Russia reviews the possibility to amend its exchange policies aiming to determine the Ruble exchange rate basing on the basket including both US Dollar and Euro. At the same time, the necessity to mitigate the volatility of the Ruble / Euro exchange rate on the domestic market may be primarily explained by the fact that the importance of the member countries of the Euro zone in the Russian foreign trade is constantly increasing.

P. Trounin Financial Markets In March, positive situation was observed on the Russian financial market. The overall dynamics of the sovereign bond market reflected the situation on the US market of government bonds. A certain intensification of activity was observed also on the market of Ruble denominated debt, especially after the reelection of V. Putin for his second Presidential term. Moreover, the favorable external and domestic market situation facilitated an increase in the attractiveness of Russian securities: in March the RTS index reached its next historical high of 72.81 points. As concerns the forex market, there was observed a significant appreciation of the Ruble against the Euro, while the Ruble / US $ exchange rate remained rather stable.

The Market for Government Securities In February, there was observed a rather stable situation on the market of government forex denominated bonds characterized by a certain decline in yields. However, it should be noted that in the beginning of the month, the appointment of M. Fradkov positively affected the market dynamics. Later, the quotations somewhat declined and remained at practically the same level reacting only to the dynamics of prices of base assets the US Treasury bills. It is interesting to note that the results of the Presidential elections in Russia had practically no impact on the market, since they were expected and already reflected by quotations. Towards the end of the month, only one event significantly affected the yields of securities. In the beginning of the third week of March, there was observed a considerable rise in prices of Russian sovereign bonds caused by the information that the Fitch agency may increase its ranking of Russia to the investment level. However, the growth turned out to be short lived: towards the end of the week there was observed a decline in quotations in the Russian segment against the background of decreasing prices of the base assets, as predicted by certain experts.

The Monetary Base in broad definition includes cash in circulation, the funds in mandatory reserves, and funds in commercial banks' correspondent accounts with the Bank of Russia.

As on March 24, the yield to maturity of Russian Eurobonds RUS-30 was 6.78 per cent p.a. (end of February: 7.08 per cent); RUS-18: 6.52 per cent p.a. (end of January: 6.82 per cent). Besides, on the same date the yield to maturity of the Russian Eurobonds was: Minfin bonds, 7th tranche: 5.90 per cent; Minfin bonds, 6th tranche: 3.61 per cent; Minfin bonds, 5th tranche: 4.98 per cent; RUS-07: 3.89 per cent. Therefore, over February the levels of yields of all Russian Eurobonds have somewhat increased in comparison with the figures registered at end-January of 2004.

FIGURE 1.

Minfin bonds' yields to maturity in December 2003 through March 8.0% Tranche 5 Tranche 6 Tranche 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% FIGURE 2.

Yields to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in December 2003 through March 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% 2.5% USD-2030 USD-2007 USD-Over the month, the situation on the market of Ruble denominated public debt was also rather tranquil. In spite of the fact that in the beginning of the month the rise in prices was constrained by the appreciation of the US $ exchange rate on the currency market, the latter appreciation of the Ruble had positively affected 01.12.04.12.09.12.15.12.18.12.23.12.06.01.12.01.15.01.21.01.26.01.29.01.03.02.06.02.11.02.17.02.20.02.26.02.02.03.05.03.11.03.16.03.19.03.24.03.01.12.04.12.09.12.15.12.18.12.23.12.06.01.12.01.15.01.21.01.26.01.29.01.03.02.06.02.11.02.17.02.20.02.26.02.02.03.05.03.11.03.16.03.19.03.24.03.the dynamics of prices. Besides, the market was supported by the impact of other factors as well, among which the most important still were the high level of liquidity in the banking sector and high oil prices on the world market. At the same time, the reelection of V. Putin for his second Presidential term entailed an additional demand for Ruble denominated assets on the part of non-residents, who raised the limits on investment in Ruble denominated instruments. At the same time, a certain growth in quotations was observed even at the background of increasing supply on the primary market.

Over the period from March 1 to 24, the aggregate turnover of the secondary GKO OFZ market made about RUR 58.6 billion, while the average daily turnover was at RUR 3.45 billion (in February, the average daily turnover was registered at RUR 4.5 billion). In the same period, there took place several auctions for the placement of OFZ AD. For instance, on March 3 there were held auctions for placement of OFZ AD 46001 and OFZ-AD 46002, the nominal value of which made RUR 4 and 7 billion respectively. The amount of the placements made RUR 3.99 and 1.42 billion, while the weighed average yields of the placements were at 7.08 per cent and 7.91 per cent per annum. On March 17, there were held auctions for the placement of OFZ FD 27025 and OFZ-AD 46003, the par value of the placements made RUR 5 billion each. The amount of the placement made RUR 1.02 and 2.26 billion, while the weighed average yields of the placements were at 6.51 per cent and 7.46 per cent per annum respectively.

As on March 26, the amount of the GKO OFZ market made RUR 453 billion at par and RUR 437.billion at the market value. The duration of the GKO-OFZ market portfolio was 1670.1 days.

The Market for Corporate Securities Situation on the stock market.

In March of 2004, on the Russian stock market there was observed a steady increase in quotations. For instance, in the period from March 1 till 26 the RTS index grew by 46.41 points (by 6.93 per cent) and at closure on March 25 it was registered at 706.71 points. At the same time, it should be noted that on March the index reached its historical maximum of 721.81 points. The major factors behind the positive dynamics of quotations were as before high oil prices, stabilization of the Ruble exchange rate, and rather high level of liquidity in the banking sector. At the same time, it should be noted that political factors had practically no impact on the prices of stocks: the market rather calmly reacted both to the news about the reshuffling of the Government and to the results of the Presidential elections. However, both factors facilitated optimism of investors, what resulted in the growth of the market in the second half of the month.

FIGURE 3.

90 670.The total volume of trading ($) 80 620.The RTS Index 70 570.60 520.50 470.40 420.30 370.20 320.10 270.220. points mln US dollars s 03.02.25.02.19.03.09.04.30.04.26.05.18.06.08.07.29.07.19.08.09.09.30.09.21.10.12.11.03.12.25.12.20.01.10.02.03.03.25.03.In the period from March 1 till 26, the turnover in the RTS trading amounted to US $ 534.74 million, while the average daily turnover at the RTS made about US $ 28.14 million (US $ 22.7 million in February).

The highest volume of trade at the RTS (US $ 57.5 million) was observed on March 3. The lowest trade volume (US $ 13.4 million) was observed on March 17.

Over the last month (from February 25 till March 26), all blue chips demonstrated a growth in prices.

Thus, shares in the RF Sberbank became leaders in terms of growth in prices (a rise by 21.95 per cent). Sberbank stocks were followed by securities of Surgutneftegaz, which gained 21.35 per cent. YUKOS shares grew in price by 8.68 per cent, LUKoil by 8.2 per cent, Norilsk Nickel by 6.34 per cent. The most insignificant rates of growth among all blue chips demonstrated Mosenergo stocks, which were up by only 2.per cent.

FIGURE 4.

Dynamics of the Russian Blue Chips from February 25 to March 26, 25% 20% 15% 10% 5% 0% Change in price (%) In February, the MMC Norilsk Nickel shares took the top position by the volume of turnover in the RTS7:

the share of respective transactions amounted to about 29.81 per cent of the total turnover. The amount of transactions with the shares in the RAO UES of Russia was somewhat lower (26.41 per cent). The shares of LUKoil and YUKOS followed: the volume of transactions with these companies shares made 21.94 percent and 12.42 per cent of the total turnover respectively.

As on March 26, the top five leaders of the national stock market by capitalization looked as follows8:

YUKOS: US $ 36.17 billion; Surgutneftegaz: US $ 26.08 billion; LUKoil: US $ 25.07 billion; Sibneft: US $ 16.45 billion; MMC Norilsk Nickel: US $ 15.67 billion.

The market for fixed term contracts. In March, the activity of investors on the RTS market for fixed term contracts (FORTS) increased in comparison with the preceding month. Thus, in the period from March 1 till March 26 the volume of trade in futures and options at the RTS amounted to about RUR 24.5 billion (110.thousand transactions; 3.02 million contracts), what was by far above the respective indicators registered in the preceding month (RUR 18.98 billion, 93.25 thousand transactions; 2.5 million contracts).

As usual, futures contracts account for the greatest percentage of transactions: the volume of trade in these contracts reached RUR 22.97 billion (2.84 million contracts, 107.6 thousand transactions) over the period under observation. As before, options were in a much lower demand: the respective amount of trading made On the classical stock market.

According to the RTS.

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