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Therefore, in February the expansion of money supply and growth of gold and foreign exchange reserves resumed. At the same time, it should be noted that by the end of the first two months of the year there is observed a decrease in the monetary base (in the broad definition) (- 5 per cent), while in the respective period of the preceding year it increased by about the same value.

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

1450 1420 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Figure According to the preliminary estimates presented by the RF Finance Ministry, in January through February of 2005 the payments pertaining to the RF foreign debt amounted to RUR 181.8 billion. The payments associated with the servicing of the foreign debt made RUR 42.66 billion, while the repayment of the principal debt amounted to RUR 139.13 billion. At the same time, there were registered no new borrowings.

According to the preliminary estimates presented by the RF Finance Ministry, over the last year the external debt of the Russian Federation declined by US $ 9.2 billion and made US $ 110.5 billion in It should be reminded that the narrowly defined monetary base is fully controlled by the RF Central Bank in contradistinction to the monetary base in the broad definition.

billion rubles billion dollars 1-7.09.3-9.11.6-12.04.8-14.06.5-11.01.9-15.03.16-22.03.18-24.05.20-26.07.10-16.08.22-28.09.13-19.10.24-30.11.15-21.12.16- beginning of 2005. This amount included the debt to the Paris Club member countries (over the year, this debt declined by US $ 4.6 billion and in the beginning of 2005 amounted to US $ 43.1 billion). The RF external debt in the form of Eurobonds decreased by US $ 0.3 billion and amounted to US $ 35.4 billion. The debt to the international financial organizations declined by US $ 2.4 billion and made US $ 9.7 billion.

Since March 15, 2005, the Bank of Russia has set forth the following structure of the two-currency basket in order to implement its exchange rate policy: 20 per cent of Euro and 80 per cent of US dollars. It should be reminded that starting on February 1, the Bank of Russia had been using as the operational benchmark of its exchange policy the currency basket, where the specific weight of the Euro made 10 per cent and US dollar 90 per cent. This measure was aimed to decrease the volatility of the Ruble exchange rate against the currencies of the major RF trade partners. It seems that the growth of the share of the Euro in the currency basket should facilitate the achievement of this objective, since the 10 per cent share of the Euro in the currency basket in fact meant that there were no serious changes in the exchange policies.

P. Trounin Demand for real cash balances in In 2004, the rates of growth in money supply were significantly below the respective values observed in 2003. In particular, the money supply M1 increased by 30.5 per cent over the year, while in 2003 the respective increment made 45.6 per cent. Money supply 2 increased by 35.8 per cent (50.per cent in 2003). Only in the 1st quarter there was observed a relatively rapid (in comparison with the figures registered in 2003) growth in broad money aggregates; however the rates of increase declined in the 2nd and 3rd quarters. In the 4th quarter, the rates of growth in money aggregates traditionally accelerated, however, these rates were more moderate than those observed in 2003.

Therefore, in 2004 the annual monetization of GDP only increased from 24.3 per cent to 26.0 per cent remaining at a low level. Thus, in Bulgaria the monetization of GDP (calculated on the IFS database) was at 47 per cent, in Estonia at 40 per cent, in Hungary at 48 per cent, in Latvia at 37 per cent, in Lithuania at 31 per cent, and in Slovakia at 64 per cent. As it has been noted before6, such a low level of monetization of GDP permits to maintain rather high rates of money supply not causing negative consequences, at least until there is reached the level of monetization at 35 to 40 per cent, i.e.

the growth in money supply is absorbed by the economy due to the increase in demand for real cash balances (in the case the current inflationary expectations and the trends of dynamics of demand for money persist).

At the same time, in 2004 banks continued to expand the crediting of the real sector of the economy, an evidence of which is the growth of the money multiplier to its maximal values observed over the whole period of monitoring (see Fig. 1). In August through September of 2004, the money multiplier practically was at 2.0 level (what exceeded the previous maximum reached in February of 1998);

however, later the value of this indicator declined to 1.8; these developments were caused by the expansion of the money supply at the end of the year, while broad money aggregates react to the seasonal fluctuations of demand for liquid assets to a lesser degree.

The major factor behind the expansion of money supply on the part of Russian banks in 2004 was the growth in claims to non-financial enterprises of the private sector, i.e. credits and investment in private bonds. As the data presented in Fig. 2 demonstrate, by the end of 2004 the share of claims to the private sector in the total amount of assets of the banking sector exceeded 60 per cent as it increased by about 5 p. p. over the year. At the same time, the share of claims to the enlarged government and foreign assets declined or remained practically unchanged. On the whole, by the end of the year the amount of assets of the RF banking system made 39.7 per cent of GDP, while the amount of claims to the non-financial private sector was at 24.55 per cent of GDP. It should be noted that in the beginning of the year the respective indicators were at 38.57 per cent of GDP and 21.0 per cent of GDP.

See: Russian economy in 2003. Trends and outlooks. Issue 25. M.: IET, 2004.

2,1,1,1,1,1,1,Fig. 1. Money multiplier (M2 / Reserve money) in 1998 through 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. 2. Total assets of the RF banking system S. M. Drobyshevsky Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Apr July July July July July July July 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 Financial marketsIn March, negative trends prevailed, on the whole, on the Russian financial market. Despite the growth of world oil prices and slight strengthening of national currency, rising of inflationary expectations in the USA made a negative impact on the entire world financial system, including also the Russian financial instruments markets. Investors expected raising of interest rates in the USA and tried to cut the number of long positions on all the developing markets. This determined the trends in the domestic financial markets. Some corporate events were of negative character, so, also did not stimulate restoration of quotations.

Government securities market During the month a slow worsening of business situation was observed on the Russian market of currency bonds. Early in the month, the market decline was observed following the fall in quotations of the U.S. treasury bonds. Later, a slight rise in quotations was observed following the basic assets, which positively reacted to the employment statement in the U.S. However, the above growth did not last long enough, and the quotations of both - basic assets, and then, Russian papers, continued to decline. The investors tried to short positions in Eurobonds on the eve of the U.S. FRS (Federal Reserve System) session, which made a considerable pressure on prices. As expected, the interest rate was raised by 0.25% (to 2.75%) at FRS session. In addition, it had been stated that further tightening of monetary policy will be carried out with restraint. But other commentaries spoke for increased attention of financial powers to inflationary processes, and, consequently, the possibility of changing polices in future. The world markets for debt The world debt markets reacted to this by reducing quotations, and Russia was not an exclusion.

As of March 23, the yield to maturity of Russian eurobonds RUS 30 reached 6.63% annualized, RUS-18 6.85% annualized. For the same date, the yield on Russian eurobonds made: the 7th tranche OVVZ 6.15%, %, the 6th tranche OVVZ 4.37%, the 5th tranche OVVZ 5.86%, RUS-07 4.98%.

Minfin bonds' yields to maturity in January 2004 - March 6.5% Tranche 5 Tranche 6 Tranche 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% Fig. 1.

7 In preparing the review were used analytical materials and reviews of the Bank ZENIT, IC ATON, MICEX, CB of Russia, official internet-sites of Russian issuing companies. to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in January - March 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% USD-2030 USD-2007 USD-Fig. 2.

Within a month, the ruble market for public debt was affected by such factors as dynamics of basic assets and Russian eurobonds, as well as dollar/ruble exchange rate.

For the period of 1 - 23 March, the total volume of the secondary GKO-OFZ market amounted approximately to Rb 164 bn in the average daily turnover of about Rb 10.26 bn (Rb 44 bn in the average daily turnover of about Rb 2.59 bn in February). Therefore, in comparison with February indicators, the activity on the market has grown several times. Within a month the two auctions had been held for placement of OFZ. Thus, on March 2, an auction took place for placement of OFZ-PD 25058, the volume of issuance amounted to Rb 6 bn. The volume of placement made Rb 3.97 bn in the average daily yield of 7.13% annualized. On March 16, the placement of OFZ-AD 46018 was made of volume of Rb 10 bn. The volume of placement reached around Rb 2 bn in the average daily yield of 8.69%.

As of March 23, the volume of GKO-OFZ market was Rb 604.42 bn at face value and Rb 583.65 bn at market price. Duration of GKO-OFZ market portfolio made 1696.51 days.

Market for corporate securities Stock market dynamics In March, on the whole, the fall of quotations had been observed. Early in the month the Russian stock market was affected by different factors. On the one hand, an extremely high level of the world oil and metal prices supported the quotation of shares and, primarily, the mineral sector companies. On the other hand, the information that Rosneft may be acquired by Gazprom without Yuganskneftegaz caused negative reaction of the market. After a tendency towards exceeding the level of 720 points by the end of the second week of the month RTS index began to decline. Lowering also continued in the course of next week of March. The market broke through a psycologically important level of 700 points by RTS index, following which rather a quick lowering of quotations took place. The trigger of falling were shares of RAO UES Russia, which was caused by the information that energy reform may be put off to 2006. The above caused a new burst of sales in the stock of energy holding, and then - in other blue chips.

Besides, the dynamics of the stock market in the second part of March was characterized by decrease in the number long positions prior to the U.S. FRS session, at which raising of interest rate was expected to 2.75% and commentaries on the following policies. The rate was raised, but this event had already been stored in quotations and did not cause considerable reduction of prices. In the second part last week of the month negative dynamics exchanged for positive correction, which partly was determined by favorable statements of the president of Russia on possible ways to improve relations of business and power.

90 800.The total volume of trading ($) 80 750.The RTS Index 70 700.60 650.50 600.40 550.30 500.20 450.10 400.350.Fig. 3.

On the whole, over the period of 1 to 24 March, RTS index reduced by 4.96%, witch in absolute terms made 35.4 points. For the same period, the volume of trading with the stock included in RTS index made up $314 million, with average daily turnover at a level of $18.5 mln ($385 mln with average daily turnover at a level of $21.4 mln in February). Thus, the investors activity in March remained practically at a level of February. The indicators of maximum and minimum volume in the trading system in February amounted to $31.37 mln. (March 16) and $3.34 mln (March 5) correspondingly, in comparison with $46.16 mln and $9.67 mln in March.

According to the results of the month (from February 25 to March 24) all blue chips were characterized by considerable falling of market price. The leaders of such fall proved to be Yukos papers, which became cheaper in March by 26%. Next go the stock of Mosenergo (20%), Sibneft (6.61%), GMK NorNickel (6.4%), Surgutneftegaz (6.29%). Over the period in question, quotations of the stock of Tatneft and RAO UES Russia went down by 5.76% and 4.59% accordingly, while the stock of Lukoil and Rostelecom by 2.33% and 1.85%. Minimum decline rates were demonstrated by Sberbank of Russia shares, which cost decreased only by 0.34%.

In February, the shares of RAO UES Russia (21.77%), Lukoil (20.65%), GMK NorNickel (6.78%) and Surgutneftegaz (5.4%) surpassed by turnover in RTS8 in March other participants in trading sessions. In addition, by the results of trading in the first two weeks of the month, Rostelecom shares held leading position by turnover in RTS.

According to March 23 data, five leaders in capitalization on the domestic stock market are as follows9: Lukoil $28.27 bn, Surgutneftegaz $26.31 bn, Sibneft $15.38 bn, GMK NorNickel $12.39 bn, RAO UES Russia - $11.91 bn.

According to RTS data.

For calculations there were used the indices of corporate bonds traded on MICEX, which are computated by the bank Zenit.

points mln US dollars s of the Russian Blue Chips from February 25 to March 24, 5% 0% -5% -10% -15% -20% -25% -30% Change in price (%) Fig. 4.

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