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According to the Deputy Chairman of the Bank of Russia A. Ulyukayev, the volume of liquidity, provided to the banking sector will be further declined through the limits and rates. The monetary emissions will be gradually replaced with fiscal emissions. Under the estimated budget deficit of 8 per cent of GDP, the budget funds recipients will get on their 1 Basic index of consumer prices is an indicator of the inflation level without regard to seasonal price reduction (fruit and vegetable products) and to administrative measures (tariffs for government-regulated services, etc.). It is estimated by the RF Statistics Service.

2 The RF monetary base in broad terms with no regard to the cash issued by the Bank of Russia and the balance of Compulsory Reserve Accounts on credit organizations in national currency, deposited in the Bank of Russia, taking into account the assets of correspondent accounts and bank deposits, allocated in the Bank of Russia.

3 The excessive reserves of commercial banks with the RF CB refers is the amount of correspondent accounts of commercial banks, their deposits with the RF CB and the CB bonds of commercial banks.

Jul Jul Jul Jul Jul Jul Jul Okt Apr Apr Apr Apr Apr Apr Apr Jan Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct - - RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES bank account RUR 200 billion more as compared 4250 with the preceding year.

Moreover, the Central 4050 Bank has abandoned its plan to allocate credit to 415 the banking system RUR 385 3-4 trillion in 2009.

3450 The reduction of the volume of cash in circulation in February by 1 per cent and mandatory reserves growth by 5.8 per cent has Monetary base in narrow terms (as Rb. Bn) led to the decline of the Foreign reserves (as USD m) monetary base in narrow Source: RF Central Bank definition (cash+ mandatory reserves)1 by 1 per Fig. 2. Changes in the monetary base and in the Gold and foreign currency reserves in 2007 cent (see Fig. 2). Herewith, the volume of the Central Bank foreign currency reserves has decreased by 0.7 per cent and made USD 384.1 bln by March 1, 2009.

In February, due to the stabilization of prices for energy sources, as well as the low level of ruble liquidity, the net outflow of capital from the country has significantly decreased, having reached USD 4.5 billion against RUR 29 billion in January 20092. Nevertheless, one can not expect the net capital inflow into the country yet, as the external debt of the private sector in 2008 has reached nearly USD 500 billion, while a significant redemption under which (USD 136 billion) is due in 2009. The outflow of capital in February, has affected the reduction of the real effective exchange rate by 5.5 per cent. 119,33 (. . 3). , , , 3,84 per cent, 1,72,0 per cent. ( 2009 2008 ) 15,215,5 per cent, 11,411,6 per cent.

In February, the rates of USD and Euro growth against RUR have significantly declined, accounting for, respectively, to 0.9 per cent versus 20.4 per cent and to 0.7 per cent versus 10.3 per cent in January. The USD rate has grown by 31 kopeks, form RUR 35.4 rubles to 35.7. As opposed to that, the rate of Euro against RUR has downgraded to RUR 45.4 in the late February. As a result, RUR has declined within the month in regard to the two-currency basket4 by 3 kopeks, the cost of which has grown to RUR 40.1. In February, for the first time since August 2008, the Bank of Russia has implemented net purchase of USD 861.million and Euro 98.97 million in the framework of foreign currency interventions. This was a consequence of the sharp decline in demand for foreign currency for the non-specula1 We would like to remind, that the monetary base in the broad definition is not a monetary instrument, it reflects the obligations of the Bank of Russia in national currency. The monetary base in narrow defi nition is a monetary instrument (one of indicators of the volume of monetary offer), which is under total control of the CBR.

2 As per estimates of Alexey Ulyukayev, First Deputy Chairman of the bank of Russia.

3 The level of January 2002 is accepted as 100 per cent.

4 Two-currency basket is the RF Central Bank operational indicator in its foreign currency policy.

Currently the share of EURO in the currency basket makes 45 per cent, USD 55 per cent.

Rb. b Rb. bn n USD bn USD bn 1-7.03.1-7.11.4-10.08.8-14.09.5-11.04.6-12.12.13-19.10.17-23.11.22-28.12.10-16.05.14-20.06.19-25.07.23-29.08.10-16.01.14- AND MONETARY AND CREDIT POLICY INFLATION 50 tive purpose; as mentioned above, the outflow of capital from the country has significantly decreased, while the trade balance 35 remained positive. Moreover, the demand for foreign currency1 on the part of population has signifi- cantly decreased as a re- 20 sult of the reduced volume of savings, which could Official USD/RUR exchange rate (end of period) Official EUR/RUR exchange rate (end of period) have been converted into Value of the two-currency basket Real effective exchange rate index (right scale) UD and Euro, as well as Source: RF Central Bank, authors estimates due to the stabilization of the RUR rate. Herewith, Fig. 3. Indicators of RUR Exchange Rate Dynamics the demand of the banking in January 2005-February sector for foreign currency for speculative purposes was balanced by the tightening of credit policy by the Bank of Russia which has made the RUR liquidity more expensive.

Therefore, in February, the Central Bank of Russia was pursuing a consistent policy, as a result of which it has succeeded to reduce the devaluating expectations of economic agents and to stabilize the situation in the Russian financial market. In February, the Central Bank has significantly cut down the volume of ruble liquidity, provided to the banking sector, and expressed an intention to continue such decline. Moreover, in March it was officially stated, that the Regulator does not intend to support the basket at the level of RUR 39-40, and in the presence of appropriate macro-economic conditions, the RUR strengthening can be sustained. Such statements have further reduced the speculative expectations for the devaluation. Nevertheless, it is worth noting, that the sustained inflationary pressure on the ruble and the expectations for devaluation, which were still strong enough in the first half of the month, prevented the Bank of Russia to pursue the policy of interest rates downgrading in February, initiated a month earlier. Consideration of this matter was deferred by the Central bank at least until April 2009.

1 In January the total demand of population for the foreign currency will decrease by 21 per cent against December 2008. A similar trend is expected in February 2009.

Rb Rb. bn Jul Jul Jul Jul Jan Sep Jan Sep Jan Sep Jan Sep Jan Mar Mar Mar Mar Nov Nov Nov Nov May May May May - - RUSSIAN ECONOMY: TRENDS AND PERSPECTIVES FINANCIAL MARKETN.Burkova, E.Khudko In1 March the Russian financial market dynamics was determined by the situation in the global and domestic financial markets new background. Positive financial results of a number of international companies, as well as positive reaction of international investors for the U.S. plans for early redemption of the long-term U.S. government bonds, a significant downgrading in the USD quotation, the trend in world oil prices growth, the approval of the RF Government of the anti-crisis program draft for 2009 in the volume of RUR 1.5 trillion to support the national economic recovery have contributes to the Russian stock market upgrading.

Herewith, the information on the net loss of American automotive producer General Motors Corp., of AIG Insurance company and the British bank Royal Bank of Scotland, negative macroeconomic data from the United States, as well as plans to reduce staff (in particular, AVTOVAZ) were restraining the growth of the Russian financial market.

March was a period of relative stability for the corporate bond market. Continued growth in the number and the secondary bond market was observed what has demonstrated the growing interest of the investors to this sector of the stock market. This has contributed to the growth of corporate bonds indices, and thus to the reduction the effective yield of securities. The volume of primary placements of bonds has reached the maximum value since July last year. The adverse effects were the reduced issues of the registered bonds and sustained large number of defaults.

Government Securities Market Within March, the RUR rate stabilization, improved situation with liquidity, as well as the absence of the RF government bonds in placement at the primary debt market have contributed to the significant investors activity growth at the secondary debt market at the background of the overall decline of Eurobonds and Minfin bonds yields. Rubledenominated government bond market in March was also marked by a moderately positive dynamics against the background of optimistic expectations of the investors.

As of March 23, the Russian Eurobonds RUS-30 yield to maturity has decreased as compared with the level of February 23 from 9.66 to 9.82 per cent per annum (by 9.83 per cent), RUS-28 from 9.82 per cent to 9.83 per cent per annum (by 3.87 per cent), RUS18 from 7.66 to 7.25 per cent per annum (by 5.35 per cent), whereas RUS-10, on the contrary, has grown from 3.24 per cent to 5.21 per cent per annum (by 60.80 per cent).As of the same date, the upgrading trend was also observed in the yields of external currency debt bonds.Thus, the yield to redemption of the seventh tranche of external currency debt bonds has grown from 4.78 to 4.93 per cent per annum (by 3.14 per cent) (see Figs 1-2).

Within the period from February 24 to March 23 the total turnover of the OFZ secondary market amounted to approximately RUR 8.96 billion with an average daily turnover of RUR 0.47 billion. about RUR 5.78 billion with an average daily turnover of RUR 0.3 billion in February), what demonstrated the growth of average monthly turnover over 55 per cent.

There were no auctions on additional OFZ placements in the period from February 24 to 1 In the course of preparation of the survey, there were used analytical materials and surveys published by the Interfax, MICEX, RTS, RF Central Bank and the materials presented at web sites of Russian issuing companies.

FINANCIAL MARKET 5,25% March 23.As of March 23, Tranche the OFZ market amounted 4,50% to RUR 1129.85 bln at face 3,75% value and to RUR 922.bln at market value.The 3,00% duration of the GKOOFZ market portfolio 2,25% was 1754.16 days, having 1,50% decreased (by 24.days) as compared with 0,75% preceding month (as of 0,00% February 23).

Stock market Stock market situation Fig. 1. Minfi n bonds yields to maturity in January - March Positive trends in the external world markets, based on positive financial performance results for the first two months of 2009 of several international companies, happening due to the grown world oil prices and upgraded global stock indices have contributed to the upsurge of the Russian financial market in March.Moreover, improvement in the domestic market was promoted by the actions of the Russian Government to support the financial market (in particular, the approval by the RF Government a draft of the anti-crisis program for 2009 at the level of RUR 1.trillion, as well as the decision of the RF Government to the allocate RUR 17 billion for the support the agro-industrial enterprises sector, RUR 70 billion for automotive industry and RUR 10.5 billion For the Russian shipbuilding) have also provided a positive impact on investors expectations in general.All those factors have urged the upgrading of the most liquid securities in the Russian stock markets (up to 78 per cent), as well as the majority of MICEX and RTS market stock indices growth up to 30 per cent as of the month results.

Throughout March, an expressed growing dynamics was observed in the Russian stock market (Fig. 3). Herewith, there were short-term corrective trends in the MICEX index.

The minimum value the MICEX index has reached on March 2, having downgraded to 646.79 points (which is by 623.29 per cent less than the relevant indicator for the preceding month).The maximum 12,00% value the MICEX index 10,50% has reached on March 23, 9,00% having reached 849.7,50% points (which is by 732.6,00% per cent points less than 4,50% the relevant indicator for 3,00% the preceding month).

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