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While commenting the main provisions of the new version of the Budget Code, Head of the Budget Policy Department A. Lavrov said that the Ministry of Finances is hoping that the suggested amendments could be adopted during the State DumaТs spring session, so that the three-year federal budget be in effect from the year 2007 onward. He also noted that the three-year budget would be fundamentally different from the currently existing three-year financial plan, which had not been rigidly build into the budget process. On the contrary, revenue and expenditure in the three-year federal budget would be initially consolidated for the whole three-year period, and the expenditures for the last two years would not be strictly fixed, but instead adjusted after the completion of the first year (the socalled Уsliding three-yearФ regime). In A. LavrovТs opinion, the sliding three-year federal budget will ensure a combination of stability and predictability of budget targets, on the one hand, and the possibility for rapid response to a changing situation, on the other.

Besides, in January information was released concerning the upcoming submission to the Government of the draft decree on investing the resources of the RF Stabilization Fund. According to RF Deputy Minister of Finance S. Storchak, presently the new draft decree is being revised by the RF Ministry of Justice. In accordance with the new draft decree, the owner of the resources of the RF Stabilization Fund to be invested in foreign securities is to be the Bank of Russia, which will result in lower risks associated with a possible arrest on the funds, etc.

In January, the Ministry of Finance opened the financing for the measures envisaged for the year 2006 within the framework of priority national projects, as stated by Deputy Minister of Finance T.

Golikova. She said that the financing for the implementation of the National Project УEducationФ had already been opened in the part concerning the additional payments to school teachers for>

D. Polevoi Monetary policy According to the results of the year 2005, the inflation rate in the RF was 10.9%, which is less than in 2004 (11.7%), but much higher than the value forecasted by the RF Government (8.5%). The growth in money supply in 2005 (+ 22.4%) was somewhat lower than in the same period of the previous year (+ 24.3%). By 1 January 2006, the volume of gold and foreign currency reserves reached a new record high of $ 182.2 billion.

The value of the consumer price index in December 2005 amounted to 0.8% (as compared to 1.1% in December 2004 (see Fig. 1). The highest contribution to the consumer price growth in November was made by the growing prices of food commodities: + 1.1% (+ 1.8% in December 2004). According to the monthТs results, the highest growth rate was displayed by fruits and vegetables (+ 5.6%), milk and dairy products (+ 1.5%) and butter (+ 1.4%). The greatest fall in prices was demonstrated by the following commodities: granulated sugar (- 0.3%) and sunflower oil (- 0.2%).

The prices of the commercial services provided to the population in December went up on the average by 0.8%. The highest growth rate in December was displayed by the passenger transport fares (+ 3.2%), pre-school education services (+ 1.7%), the services rendered by cultural organizations (+ 1.2%) and public consumer services (+ 1.1%). No category of services demonstrated any decreases in prices in December.

A significant contribution to the price growth in December was made by the increased prices of non-food commodities: they grew by 0.5 % (as compared to 0.4 % in December 2004). This growth in prices of non-food commodities resulted primarily from the increasing prices of knitwear (+ 0.9 %), clothes and linen (+ 0.8 %) and footwear (+ 0.5 %). It is noteworthy that the prices of motor petrol in December went down by 0.1%.

The growth in the base consumer price index 1 from the beginning of 2005 did not exceed 8.3% (having amounted to 10.5 % in the same period of the preceding year). According to the IETТs monthly bulletin of modeled short-term forecasts of socio-economic indices in the RF, the CPI in January was to be 2.1 %, in February - 1.4%.

The Growth Rate of the CPI in 2002 - 2005 (% 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 - 2005 (monthly %).

During December 2005, the monetary base (in a broad sense2) grew by 386.3 billion roubles, to 2.trillion roubles ( + 15.3 %). The broad monetary base as of 1 December 2005 was 2.53 trillion 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 January, was 2.2 trillion roubles ( + 16.3 %, as compared to 1 December), the correspondent accounts of credit institutions with the Bank of Russia - 508.6 billion roubles (+ 51.6 %), mandatory reserves - 161.billion roubles (+ 1 %), banksТ deposits at the Bank of Russia - 7.2 billion roubles (- 83.5 %), the value of the Bank of RussiaТs bonds held by credit institutions - 32.8 billion roubles (- 65.1 %), the RF Central BankТs liabilities against securities buyout - 0 billion roubles (no changes, as compared to 1 December of last year), while the reserves on operations in foreign currencies deposited at the Bank of Russia - 8.8 billion roubles ( + 41.9 %).

The growth, in December 2005, of the cash-in-circulation volume (+ 16.3 %), with a simultaneous increase in mandatory reserves (+ 1 %), resulted in broadening of the narrow monetary base (cash + mandatory reserves)3 by 6.8% (see Fig. 2).

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 RFТs 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 at the Bank of Russia, includes the funds in corresponding accounts with credit institutions and bank deposits placed at the Bank of Russia.

Jul Jul Jul Jul Jan Jan Jan Jan Oct Oct Oct Oct Apr Apr Apr Apr In December 2005 the gold and foreign currency reserves of the RF CB went up (+ 8.2 %), amounting, as of 1 January, to $ 182.2 billion. In the first three weeks in January they increased by a further 1.3 % and reached the amount of $ 184.6 billion. It should be noted that, according to the IETТs monthly bulletin of modeled short-term forecasts of socio-economic indices in the RF, the volume of accumulated gold and foreign currency reserves accumulated by late March 2006 is to exceed $ 193.billion.

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

1960 1600 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 2004 - 2005.

The RF Ministry of Finance in December of last year made payments against the government external debt in the amount of $ 641.81 million. The debt redemption proper amounted to $ 274.33 million, while the interest payments - to $ 367.48 million.

P. Trunin Financial markets In January, the situation on the Russian financial market remained rather favorable. Thus, Russian eurobondsТ yields to maturity, as seen by the monthТs results, changed only slightly. The roubledenominated government and corporate bonds during the greater part of the month were demonstrating growth, which gave way to a certain decline only at the monthТs end. The principal factor influencing the domestic debt marketТs dynamics was the strengthening of the rouble against the USD, as well as the improving situation with the liquidity in the banking sector. On the share market, the prices of the majority of shares were displaying a marker upward trend, which was due to the rather favorable 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 RussiaТs 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.

When preparing this overview, the author used, as sources, the analytical materials and reviews issued by the УZenitФ Bank, the IC УATONФ, the MICEX and the RF CB, as well as the official web sites of Russian companies - issuers of securities.

billion rubles billion dollars 1-7.09.9-15.06.7-13.07.4-10.08.22-28.12.19-25.01.16-22.02.16-22.03.14-20.04.12-18.05.24-30.11.22-28.12.29.09-5.10.27.10-2.11.macroeconomic situation in Russia, growth on the international raw-materials and capital markets, as well as a number of positive developments in the domestic corporate sphere. As a result, the Russian stock indices reached yet new historic highs.

The government securities market The market of government currency-denominated bonds displayed a certain growth in January.

Early in the month, the yields to maturity of tradable issues went down to the two-month historic lows, in face of lowering yields to maturity of US treasury bonds. However, the general situation remained favorable, due to the high oil prices and the beneficial macroeconomic trends in Russia. At the same time, a comparative analysis of the Russian and US segments showed a certain decrease in the dependency of the Russian eurobond segment on the fluctuations of US government bonds. Nevertheless, later on, after the commentaries of the US Federal Reserve SystemТs (FRS) were released concerning a high probability of a new increase in the interest rate at the next FRSТs session, the yields to maturity of US securities went up, which resulted in a reduced spread in the yields to maturity of Russian and US bonds.

As of January 27, the yields to maturity of Russian eurobonds RUS-30 amounted to 5.51% per annum, those of RUS-18 - to 5.66% per annum. As of the same date, the yields to maturity of Russian eurobonds were as follows: Tranche 7 of the Minfin bonds - 5.11%, Tranche 6 of the Minfin bonds - 4.63%, Tranche 5 of the Minfin bonds - 5.08%, RUS-07 - 5.03%.

FIGURE 1.

Minfin bonds' yields to maturity in November 2005 - January 6.5% Tranche 5 Tranche 6 Tranche 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 01.11.03.11.08.11.10.11.15.11.17.11.21.11.23.11.28.11.30.11.02.12.06.12.08.12.12.12.14.12.16.12.20.12.22.12.10.01.12.01.16.01.18.01.20.01.24.01.26.01.FIGURE 2.

Yields to maturity of the Russian eurobonds with maturity in 2030, 2018 and 2007 in November 2005 - January 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% USD-2030 USD-2007 USD-Early in the year, the government rouble-denominated bond market demonstrated growth, followed by falls in the yields to maturity of a number of issues to their new historic lows. A positive dynamics of prices resulted from the roubleТs strengthening position and the improved liquidity in the banking sector. Later on, the market displayed a certain adjustment, produced by technical factors. A certain decline in prices was the result of positive trends on the currency market and on government external debt market. against the backdrop of falling prices, which was partly due to lowered money liquidity.

In the period between 10 and 27 January, the aggregate turnover on the GKO-OFZ secondary market amounted to approximately 80 billion roubles, the daily average turnover being at the level of 5.billion roubles (about 45 billion roubles, with the daily average turnover at the level of 2.6 billion roubles during the first three weeks in December). Thus, the investorsТ activity in January demonstrated significant growth, as compared to the December indices. On 25 January, there was an auction for the placement of OFZ-PD 25059, where the issue volume amounted to 9 billion roubles, while the actual placement was in the amount of. 6.468 billion roubles, and the weighted average yield was 6.37% per annum.

As of 31 January, the GKO-OFZ market volume amounted to 728.06 billion roubles in face value and 730.23 billion roubles - in market value. The GKO-OFZ market portfolioТs duration was 1884.days.

The corporate securities market The situation on the share market.

January saw significant growth on the Russian share market. During the new yearТs first week of trading the market was demonstrating dramatic growth, in face of a relatively high liquidity, as compared to the same periods of the preceding years. The reason for this favorable start of the year was the noticeably improving situation on the ADR market in respect to Russian shares, the growth of US stock indices and growing oil prices during the New Year holidays in Russia. The highest growth was demonstrated by the shares issued by the Sberbank of Russia and by oil companies. Negative changes were displayed only by the shares of УNorilskii NikelФ, because of the released information concerning the separation, from the company, of its oil-extracting subdivision УPolusФ.

01.11.03.11.08.11.10.11.15.11.17.11.21.11.23.11.28.11.30.11.02.12.06.12.08.12.12.12.14.12.16.12.20.12.22.12.10.01.12.01.16.01.18.01.20.01.24.01.26.01.In the mid-month, despite the noticeably worsened external situation, the Russian share market continued its growth. As before, it was being protected from any falls by the high prices of oil and metals, high money liquidity, as well as by the appearance of some domestic corporate news. At the same time, the trading activity of investors was also continuing to gradually grow. The publication of positive financial reports for last yearТs first nine months by the УLUKoilФ, as well as the announcement of the rather ambitious plans for the development of its business, served as important positive factors for the market.

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