Part 1. Monetary and CreditSphere and BudgetSphere
1.1. Monetary and CreditPolicy and InternationalMonetary Policy
Analysing the monetary and credit sphereprocesses and policies of the Central Bank of the Russian Federation in 2001one should first of all point out that this sector of the economy is relativelystable compared to the situation of several recent years. The bank of Russiahad practically a complete control both of the inflation behaviour (at least inits part that is determined by money supply) and the foreign exchange and moneymarkets. At the same time the range of monetary instruments grew still morenarrow: in 2001 the refinance rate remained unchanged, the obligatory exportrevenues sale rate was reduced from 75% to 50%, the state securities marketrole remained negligible. The emission of bonds placed on the market by theBank of Russia in autumn 2001 was rather a pilot project. In particular, theauctions for flotation of two bond issues by the Bank of Russia for 4 billionroubles held on September 6, 2001 showed that these securities were practicallyunwelcome on the market. Slightly more that 21% of the securities offered withan average 9.8% income were floated. The auctions for floating the RussianBank’s bonds held inthe period from December 19 to 21 were declared invalid, as the volume of bondsfloated did not exceed 5% of the issue.
The monetary authorities used practically onlyone instrument, intervention on the foreign exchange market. Though in 2001 theCentral Bank of Russia thanks to considerable gold and foreign currencyreserves had a possibility to be more flexible, buying and selling dollars asthe situation prescribed.
On the whole one can single out the followingkey features in the monetary and credit sphere and foreign exchange policytypical of year 2001:
Stabilisation of inflation processes with a concurrent growth ofnon-monetary factors’influence on the inflation behaviour (advance in regulated prices of naturalmonopolies);
Smooth changes in the nominal rouble exchange rate, preservation ofthe low revaluation tempo of Russia’s national currency;
Accumulation of all-time high gold and foreign currencyreserves;
Foreign exchange control liberalisation start;
Slower money demand and economy monetization growthrate;
Bank system capitalization growth and more popular confidence inbank deposits;
Solving the “redundant liquidity” problem of the banking system bymeans of promoting investments into foreign assets and accounts of statebodies;
Wider money supply provided by the banking system by means of bankloans to the private sector, lesser credit rationing.
The above-mentioned issues are discussed inmore detail further.
The inflation rate in Russia in 2001 (by theconsumer price index) amounted to 18.8% (20.1% in 2000), the second lowest forthe whole observation period (11% in 1997). Compared to year 2000 the consumerprices growth rate was lower by 1.3 percentage points. Meanwhile, the CPIfluctuations in 2001 were much wider than in 2000. (See Figure 1)
Consumer prices growth in January 2001equalled to 2.8% (nearly 40% annualised), which was the highest since June1999. Quick growth of consumer prices continued also in February (2.3%). Thehighest growth rate had prices of consumer services (by 4.6% and 4.3%accordingly). In 2001 the seasonal price fluctuations were accompanied by anumber of specific factors that contributed to a higher price growth both inJanuary and the following month, which contradicts to the seasonal consumerprice index trends registered in 1994 – 2000 that showed quick pricereductions already in February after the inflation upsurge inJanuary.
Firstly, the gap between consumer andmanufacturers’ pricesgrowth rate was getting bigger during 2000 and the beginning of 2001 witnesseda usual attempt to reduce it. Secondly, the seasonal growth of consumerservices prices and tariffs of natural monopolies in 2001 was higher than inthe preceding years. In the third place, increase of prices and tariffs forservices and goods of natural monopolies was performed during a period ofseveral months, which to a great extent explains high inflation rates also inFebruary. In the fourth place, the fact that there was an uncertainty aboutexecution of the federal budget in view of debts servicing and acquittance offoreign loans according to the original schedule of payments, sharpenedexpectations of devaluation of the rouble and accordingly the inflationaryexpectations.
Consumerprices growth rate started falling only in the second part of February and inMarch 2001. Nevertheless, inflation in the first quarter of 2001 reached thelevel of 7.2% (annualised rate: 30%). For comparison: in the first quarter of2000 the consumer prices grew by merely 4%. Inflation in the first quarter wasdistributed by category groups as follows: foodstuffs’ index equalled to 7.3%,non-foods’ index grewby 4.0% (non-foods’index growth was to a considerable degree connected with introduction of newcustoms rules and a temporary reduction of TV and radio goods’ imports.); services rose by 12.9%(including a 19.6% increase in housing and communal services and a 10.5%increase in passenger traffic prices). A goods price index analysis shows thatthe major factors for price increase in the first quarter were the seasonaleffects (for foodstuffs) and the increase of prices for services of naturalmonopolies (the housing and communal sector and transport).
In the second quarter the monthly consumerprices increase remained stable at the level of 1.6 – 1.8% (Figure 1). The constraintthat kept the inflation at lower rates at that was the stable nominal roubleexchange rate that ensured lower rates for nonstuff prices’ increase. In this period theinfluence of regulated price started growing smaller, while the role ofseasonal factors increased. In that way in the first six months in 2001 theinflation reached the level of 12.7% (27% annualised). It is noteworthy thatthough the individual price indices ratio in 2001 remained practicallyunchanged compared to 2000, the absolute inflation rate showed to be higher(9.5% in 2000).
Starting in July 2001 there was registered adrastic slowing down of the inflation rate. In June the consumer price indexgrew by merely 0.5%, in August the consumer goods index growth rate came downto the zero-point, in September the CPI equalled to 0.6%. Lower than theseinflation rates were registered in the summer of 1998. Lower inflation rateswere greatly influenced by seasonal factors; specifically fruit and vegetablesprices came down by 14.8% in August. In that way price growth by the results ofthe three quarter of 2001 showed to be equal to the same period of the previousyear (14.1%).
Inflation started growing again at the end ofSeptember 2001. Higher growth rates were caused both by weaker seasonal factorsand by a money emission performed in April – July 2001. A reminder: in October2000 there was registered a local maximum of CPI growth. In October 2001 theconsumer index growth equalled to 1.1%. Besides, in the fourth quarter servicesprices growth rates accelerated (1.9% in October, 1.5% inNovember).
Summing up the year’s results one can single out thefollowing three major features that characterize the inflation processes in theRussian economy of 2001:
- in the first place, the role of nonmonetaryfactors connected with price administration (price increase) of tariffs andservices of natural monopolies for the population have grown. The CPI analysisshows that foodstuffs price index grew by 17.1%, non-foods by 12.7%, whileservice price index grew by 36.9% (including price index in housing andcommunal services, which grew by 56.8%). At the same timemanufacturers’ priceindex in 2001 grew by merely 10.6%;
- in the second place, the within-yearinflation cycle connected with Russia’s foreign debt repayment schedulegot broken. In particular, foreign currency requirements of the Ministry ofFinance of the Russian Federation to repay the debts to the Paris Club becameclear already in February – the beginning of March, not in April and May as before. In thisway the issuing activity of the Central Bank and “return” to the market offunds from the federal budget accounts with the Central Bank slowed down theinflation reduction in the second quarter;
- in the third place, when inflation rategets lower seasonal factors acquire greater significance, in particular, lowerprice increase in summer and the beginning of autumn and higher inflation ratesat the end and the beginning of the year. In August 2001 the consumer pricesgrowth rate was equal to 0%, when in October – December 2001 the CPI grew byapproximately 1.5% per month, which is higher that the average for the year(1.4%).
In 2001 the official rouble exchange ratedropped by 7.03% from 28.16 to 30.14 roubles for one US dollar. The exchangerate dynamics during practically the whole of the year was quite smooth.(Figure 2). Foreign currency market speculators’ activity was only registered inshort periods.
In April 2001 Russia’s Bank chose a more active policyin accumulating its gold and foreign currency reserves. This gave commercialbanks an opportunity to speculate for the rise hoping that the Central bankplaying the role of currency buyer will accelerate rouble depreciation. But theCentral Bank managed to repel the aggression and the rouble exchange rate waschanging rather smoothly. According to our estimates total dollar interventionby the Bank of Russia to protect rouble in April could amount to 400-500million dollars. But the Central bank managed to increase its reserves thatmonth by 2 billion dollars.
In June2001 the rouble exchange rate practically stabilized at the level of 29.1roubles/$. It is evident that foreign currency supply on the market grew due tohigher export sales revenues thanks to oil prices that rose in May 2001. Inparticular dollar auctions volumes at SELT that month were tripled compared toApril and May 2001.
In July 2001 dollar exchange rate growthcontinued. The major factor for rouble depreciation that month, as wee see it,were the increase of free liquidity in the banking sector (correspondentbalances of commercial banks in the Central Bank) and a more active policy ofthe Central Bank in accumulating gold and foreign currency reserves. Besides,it is necessary to take into consideration the influence of exchange rateexpectations and information effects. In particular, the State Duma of theRussian Federation took a decision in July on lower norms for obligatoryforeign currency revenues sales from 75% to 50%. This measure didn’t have any serious influence on therouble exchange rate dynamics in the subsequent months, as far as the actualpart of export revenues sold at exchanges did not exceed 50% and foreigncurrency earnings received by the country due to a permanently high level ofoil prices exceeded the demand (deducting the demand from monetaryadministrators). This information in near-term outlook, though, could causeattempts to speculate for a fall of rouble’s exchange rate, and with the aimof flattening the exchange rate the Central Bank performed severalinterventions in July.
The official exchange rate growth temposlowed down already in August 2001 in spite of the fact that the Ministry ofFinance of the Russian Federation and the Bank of Russia needed more foreigncurrency. Lowered from 75% to 50% norms of obligatory export revenues salesaffected mainly the morning sessions on the foreign currency exchange when theturnover was 1.5 times lower, that is proportionate to lowered foreign currencysales norms (total turnover on the foreign currency market remainedunchanged).
At the beginning of autumn the foreigncurrency market went trough a period of certain turbulence related to externalshocks (after the acts of terrorism in the USA to ensure an undisturbed dollartrade the settlement account of the MMVB in US dollars was transferred to theChase Manhattan Bank). But the Russian Bank had a complete control of thesituation, the main affect of the temporary increase of instability being areduction of the reserves of the Central Bank, while dollar rates remainedpractically unchanged (the exchange rate growth didn’t exceed 10 kopecks, that is 0.3%)and in a couple of days the dollar exchange rate returned to the level of 29.4roubles.
However, the nominal rouble to US dollarexchange rate drop speeded up considerably in October and November 2001. Roublefell in price by 0.4% already in the first week of October and by 0.54% in theperiod between the 24th and31st of October. As wee seeit such a considerable rouble drop is explained both by fundamentalmacroeconomic changes and changes in economic agents’ expectations and seasonal factors:in October – Decemberrouble was getting cheaper to dollar quicker than on average during the year. Apossible long-term fall of oil prices to the level of 15 dollars per barrel canprejudice forecast for next year’s industrial growth rates, GDP and the balance of payment, thiswill also give grounds to expectations about lower foreign currency supply onthe market. The latter in its turn will promote demand for currency from banks.Should the unfavourable scenario prove to be realistic, there will be a higherprobability of rouble devaluation both to support price competitive capacity ofRussian goods and help the Bank of Russia to accumulate gold and foreigncurrency reserves. The latter was indirectly confirmed by statements of thechairman of the Central Bank V.Geraschenko who said that in the presentsituation the priority task for the bank is building-up of gold and foreigncurrency reserves as opposed to rouble exchange rate maintenance. The Novemberinterventions were mainly aimed at flattening exchange rate fluctuations duringthe day, rather than at containing the tendency towards a lower nominalexchange rate of Russia’s national currency.
Moreover, one can make a supposition that incase of oil prices fall and payment balance deterioration the Central Bank willnot prevent the quicker nominal devaluation of rouble hoping for a realdevaluation of Russia’scurrency.
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