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Another problem faced by the budget unrelated to oil and gas prices is the potential reduction in the tax load imposed on the economy. Thus, according to A. S. Kudrin, the discussion of this issue has been adjourned until next spring. By that time, the Ministry of Finance intends to complete the analysis of all possible scenarios, and in particular, the lowering of the rate of VAT to 10 %, or its replacement by the sales tax.

The Minister expressed his very negative attitude to such declarations. He said that the decision-making concerning any changes in the size of the tax load would depend on other decisions that would have to be made, in particular the reforming of taxation in the gas sector. It should be borne in mind that presently the possibility of raising the rate of the excise on gas is being discussed, and the corresponding decision can be adopted within 1 1.5 months. Besides, such decisions should be made with due regard for the needs of the pension system. According to available estimates, by 2015 the Pension Funds deficit will amount to 2 % of GDP, and by 2020 to more than 3 % of GDP. Therefore, appropriate methods for dealing with such disbalances should also be determined.

On 22 March the government discussed the main parameters of the budget for 2008 2010. According to the information released by the RF Ministry of Finance, federal budget revenue in 2008 will amount to 6.trillion roubles (or 19.1 % of GDP), budget expenditure to 6.5 trillion roubles (or 18.6 % of GDP), including the revenues established as a fixed percentage of GDP in the amount of 188.5 billion roubles (or 0.5 % of GDP) and the revenues not established as such in the amount of 6,311.8 trillion roubles (or 18.1 % of GDP). The budget surplus in 2008 will amount to 173 billion roubles (or to 0.5 % of GDP). Federal budget revenue in 2009 will be 7.421 trillion roubles (or 18.8 % of GDP), budget expenditure 7.361 trillion roubles (or 18.6 % of GDP), including the revenues established as a fixed percentage of GDP in the amount of 213 billion roubles (or 0.5 % of GDP) and the revenues not established as such in the amount of 6.964 trillion roubles (or 17.6 % of GDP). The budget surplus in 2009 will be approximately 0.2 % of GDP. It was noted that in 2009, for the first time, the federal budget would contain arbitrarily approved expenditures, amounting to 0.5 % of GDP and to 2.5 % of the total expenditure of 2009. The amount of these arbitrarily approved expenditures will be 184 billion roubles. According to the RF Minister of Finance, neither the government nor the State Duma will be able to distribute these funds, because they are earmarked for covering the potential rise in salaries, social obligations and the implementation of other programs. As noted by the Minister, the federal budget revenue in 2010 will amount to 8.035 trillion roubles (or to 18.1 % of GDP), budget expenditure to 7.998 trillion roubles (or to 18 % of GDP), including the revenues established as a fixed percentage of GDP in the amount of 247 billion roubles and the revenues not established as such in the amount of 7.351 trillion roubles. The arbitrarily approved expenditures in 2010 will amount to 399 billion roubles, or to 5 % of the total revenue of 2010. The budget surplus will be 36.5 billion roubles (or 0.1 % of GDP). Thus, it has been planned that by 2010 an adequate balance of revenue and expenditure will be achieved, that is, the budget will be drawn without surplus.

D. Polevoi Monetary policy In February 2007, the inflation rate in Russia (+ 1.1 %) decreased both as compared to January (+ 1.7 %) and to the corresponding period of last year (+ 1.7 %). In February March the growth of gold and foreign currency reserves continued, their volume becoming equal to $ 321.7 billion, as did that of money supply (+ 1.9 %). In late February the RF Central Bank for the first time published a report on the structure and results of the management of gold and foreign currency reserves in the first half of last year.

The consumer price index in February amounted to 1.1 % (as compared to 1.7 % in February 2006, see Fig. 1). The highest contribution to the growth in consumer prices early in the year was made, as usual, by the growing prices of commercial services to the population, which increased in February, on the average, by 2.6 % ( + 1 % in February 2006). The highest growth rates in February were demonstrated by the prices of communication services ( + 10.3 %), passenger transport services ( + 4.2 %), services in the sector of physical culture and sport ( + 1.4 %), and housing and utilities services ( + 1.3 % ). No decreases in prices were seen in any of the categories of services in February.

The prices of foodstuffs were growing in February at a much slower rate than those of commercial services, the countrys average growth rate being 0.8 % (+ 3 % in February 2006). Besides, the growth rate of the prices of foodstuffs became much lower than last year. This resulted, first of all, from the much less prominent growth of the prices of fruit and vegetable products ( + 3.6 % against + 12.6 % in February 2006) and the decreased prices of granulated sugar (1.7 % against + 30.3 % in February 2006).

The prices of non-food commodities in February were also rising, their prices increasing on the average by 0.3 % ( + 0.5 % in February 2006). The growth of prices of non-food commodities was the result, first of all, of the increased prices of tobacco products ( + 0.9 % ) and construction materials (+ 0.7 %). It is noteworthy that the fall in the prices of motor petrol in February amounted to 0.6 %.

The growth in the base consumer price index4 in February 2007 was 0.5 % (having been 1.2% in the same period of the preceding year). It should be noted that, according to the IETs monthly bulletin of modeled short-term forecasts of socio-economic indices in the RF, the CPI in March 2007 was 0.5 %.

The base consumer price index reflects the inflation level on the consumer market less the seasonal factor (prices of vegetable and fruit products) and the administrative factor (tariffs on regulated services, etc.); it is calculated by the RF Statistics Service.

The Growth Rate of the CPI in 2002 - 2006 (% per month).

3,5% 3,0% 2,5% 2,0% 1,5% 1,0% 0,5% 0,0% -0,5% Figure 1. Growth rate of CPI in years 2002 2007 (monthly %).

Source: the RF Statistics Service.

During February 2007, the monetary base (in a broad sense5) was reduced by 24.2 billion roubles, to 3,714.4 billion roubles ( 0.6 % ). The broad monetary base as of 1 February 2007 was 3,738.6 billion roubles. Below we are going to discuss the changes in each of the components of the broad monetary base.

The cash-in-circulation volume, including the cash balances of credit institutions, as of 1 March 2007, was 2.88 trillion roubles (+ 2 %, as compared to 1 February), the correspondent accounts of credit institutions with the Bank of Russia 400.1 billion roubles ( 6.1 % ), mandatory reserves 210.5 billion roubles ( 8.%), banks deposits with the Bank of Russia 57.6 billion roubles ( 48.2 % ), while the value of the Bank of Russias bonds held by credit institutions 164.1 billion roubles ( + 11.4 %) The decrease, in February of the current year, of the cash-in-circulation volume (+ 2 %), with a simultaneous decrease in mandatory reserves ( 8.2 %), resulted in the expansion of the narrow monetary base (cash + mandatory reserves)6 by 1.9 % (see Fig. 2). At the same time, the gold and foreign currency reserves of the RF CB grew in February by 3.5 % and amounted as of 1 March to $ 314.5 billion. During the first three weeks of March they increased by another 2.3 % and reached the level of $ 321.7 billion. A considerable portion of the liquid funds flowing into the country was being accumulated in the RF Stabilization Fund, the volume of which, as of 1 March 2007, became 2,708.9 billion roubles (+ 61.7 billion roubles, as compared to 1 February 2006). During the corresponding period of the previous year the volume of the Stabilization Funds volume increased by 103.6 billion roubles. The lower growth rate of the Funds reserves can be explained by the deteriorating foreign economic situation early this year, and primarily by the declining oil prices.

It should be noted that, according to the IETs monthly bulletin of modeled short-term forecasts of socioeconomic indices in the RF, the accumulated gold and foreign currency reserves are to exceed the level of $ 327 billion by the end of April 2007.

The RFs monetary base in a broad sense, in addition to the cash-in-circulation issued by the Bank of Russia, and the residuals, on the accounts, of mandatory reserves of the funds in the national currency attracted by credit institutions and deposited with the Bank of Russia, includes the funds in corresponding accounts with credit institutions and bank deposits placed with the Bank of Russia.

It should be remembered that the monetary base in a broad sense is not a money aggregate; it is a characteristic of the Bank of Russias liabilities denominated in the national currency. The monetary base in a narrow sense is a money aggregate (being one of the characteristics of the money supply volume), fully controlled by the RF Central Bank.

Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2005 - 2006.

2260 2180 2100 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Figure 2. Changes in monetary base (in a narrow sense) and gold and foreign currency reserves of RF in years 2006 2007.

Source: RF CB.

According to the information published by the RF Federal Treasury, payments against the government external debt in February of this year amounted to $ 552 million. The costs of debt redemption proper amounted to $ 522.2 million, the costs of debt servicing - to $ 29.8 million. In this connection, $ 29 million was earmarked for the redemption of Russias debt, $ 40.8 million for the redemption of the IBRRs and the EBRRs loans, $ 0.2 million - for the redemption of bond loans, and $ 482 million for the redemption of the debt to the Paris Club.

In late February the RF Central Bank for the first time published a report on the structure and results of the management of gold and foreign currency reserves in the first half of 2006. In our opinion, the most interesting part of the report is the information concerning the results of the management of this countrys gold and foreign currency reserves. According to the report, in the first half-year 2006 the Bank of Russias assets denominated in reserve currencies increased by $ 68.9 billion, including those generated by received interest and revaluation of securities in the sum of $ 3.4 billion (5 % of the total growth). Thus, in the present situation of a substantial inflow of foreign currencies into this country, the interest payments represent an insignificant factor of changes in the amount of gold and foreign currency reserves. However, in an event of a worsening foreign economic situation and declining capital inflow, the role of the reserves management will, no doubt, become much more important.

In the report it is suggested that, for purposes of estimating the results of the RF CBs activity, the socalled normative portfolios should be applied, which, in fact, represent the indices of those markets where the investments are being made. It should be noted that the application of normative portfolios in order to compare their yields with the actual yields is on the whole quite consistent with the best international practices of estimating the portfolio management efficiency.

Within the assets of the Bank of Russia denominated in foreign currencies the operational and investment portfolios are separated. It is evident that the purpose of the operational portfolio is to maintain a high liquidity level of the reserve assets, which is necessary for the RF CB to perform the functions relating to its monetary and foreign-currency policy. The investment portfolio, as follows from its name, has been created for purposes of investing the funds contained therein in less liquid but more risky assets. So, it appears to be rather strange that the yields on the operational portfolios denominated in USD, euro and pound sterling were lower than the yields on the investment portfolios denominated in the same currencies. In the report this is explained by the growth of interest rates in the first half-year 2006, resulting from which the funds of billion rubles billion dollars 2-8.06.3-9.03.4-10.08.6-12.10.8-15.12.17-23.02.10-16.03.21-27.04.12-18.05.23-29.06.14-20.07.25-31.08.15-21.09.17-23.11.20-26.01.10-16.02.27.01-2.02.31.03-6.04.27.10-2.11.30.12.06-5.01.the investment portfolio invested in long-term securities demonstrated lower yields. However, in our opinion, this situation still testifies to a certain mismanagement of assets.

On the whole, the publication of the report can be regarded as a positive event, because regular disclosure of the information concerning the results of the management of gold and foreign currency reserves is conducive to greater confidence of economic agents in the policies being pursued by the RF CB. At the same time, the report does not contain any figures relating to the yields received on all the instruments applied in investing by each individual currency. This information could make it possible to estimate more fully the results of managing the reserve assets.

P. Trunin Financial markets Throughout March, the situation on the Russian financial markets was characterized by rather negative trends, which only toward the months end became somewhat better, and so the resulting main indices demonstrated a rise on the previous months level. The quotations of eurobonds were changing in different directions, with weak responses to the behavior of US bonds, which represented a benchmark for the whole international debt market. The activity on the market of rouble-denominated bonds during the greater part of the month was relatively low due to significant lack of liquidity in the banking sector. The levels of demand were to a certain degree restored at the months end. As for the share market, for nearly the whole month the prices of shares were decreasing in response to the decline on the international markets. Only in late March, due to the growing international oil prices, as well as the growth at the world trading floors, the share market began to demonstrate substantial growth, thus producing overall positive results of the month.

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