over June the volume of deposits of the RF governmental bodies increased by 1.7% and made RUR 7.trillion.
In June currency inflow into the country remained at a high level, which resulted in continuing ruble appreciation in real terms. For instance, as a result of June the real effective RUR exchange rate went up by 0.2% (as compared with 0.9% registered in the respective period of the preceding year): the index of the RUR real effective exchange rate made 1355 (see Fig. 3). As a result, over January-June the RUR appreciation in real terms against the basket of currencies made 4.5%, which is equal to the figure of January-June 2007. According to our estimates, in 2008 the value of this indicator will reach 6.6%.
It should be remembered that according to broad definition the monetary base is not a monetary aggregate, but characterizes the liabilities of the Bank of Russia denominated in the national currency. The narrow defined monetary base is a monetary aggregate (one of the characteristics of the amount of money supply) fully controlled by the RF Central Bank The level registered in January of 2002 is indexed as Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Apr Changes in the Monetary Base and in the Gold and Foreign Currency Reserves in 2007 - 3200 Monetary Base (billion rubles) Gold and Foreign Currency Reserves (billion dollars) Source: RF Central Bank Fig. 2 Dynamics of Monetary Base (According to Narrow Definition) and Gold and Foreign Currency Reserves in the Russian Federation in 2007ЦIndicators of Ruble`s Exchange Rate Dynamics 38 36 34 32 30 28 26 24 22 20 Official USD/RUR exchange rate (end of period) Official EUR/RUR exchange rate (end of period) Value of the two-currency basket Real effective exchange rate index (right scale) Source: RF Central Bank, authorТs calculations Fig. 3 Indices of Ruble Exchange Rate in January 2005 - June billion rubles billion dollars 1-7.12.2-8.02.5-11.05.7-13.07.8-14.09.5-11.04.7-13.06.16-22.06.18-24.08.20-26.10.10-16.11.22-28.12.12-18.01.23-29.02.15-21.03.17-23.05.19-25.07.26.05-1.06.28.07-3.08.29.09-5.10.26.04-2.05.28.06-4.07.RUR Jul Jul Jul Jan Jan Jan Jan Sep Sep Sep Mar Mar Mar Mar Nov Nov Nov May May May May By the middle of June the USD exchange rate at the world forex market had strengthened considerably, but unfavorable macroeconomic statistics on the US economy, published at the end of the month, lead to dollar anew dropping down to the level of the beginning of the month. At the same time USD official exchange rate against RUR went down: by the end of the month the USD exchange rate made RUR 23.46 as compared with RUR 23.74 registered on June 1. It should be noted that the ruble strengthened as to the twocurrency basket6: the value of the two-currency basket7 dropped by 10 kopeck from RUR 29.61 to RUR 29.51. As a result, the EURO / Ruble exchange rate increased by the end of the month up to RUR 36.91..
Over the 1st quarter of the current year RF external debt went up by 2.9% from USD 463.5 bln (34.5% of the GDP) to USD 477.1 bln (32% of the GDP).At the same time government external debt reduced by USD 5.4 bln and was equal to USD 41 bln (2.7% of the GDP) on 1 April. External debt of the private sector increased by USD 18.8 bln (2.7% of the GDP) over January-March and was equal to USD 436 bln (29.2% of the GDP). It should be noted that the external debt of the banking sector went up by USD 7.7 bln (41% of the total increase in the external debt of the private sector), and of other sectors - by USD 11.1 bln (59% of the total increase in the external debt of the private sector). It should be underlined that over the corresponding period of the previous year banksТ external debts rose by USD 9.7 bln, which was equal to 28.5% of the total increase in the external debt of the private sector. Thus, this year external debt growth rates have reduced, which is primarily accounted for by the development of crisis phenomena at the world financial market.
Starting with 1 July 2008 the RF Central Bank changed the method for calculation of the RF international reserves assets. From now on debt securities comprising reserves will be taken into account at market price.
Earlier these tools were included in the reserves at amortization value, that is at the cost of purchase taking into consideration interests accrued. It should be noted that the new approach is in accordance with the best examples of the world practice and its introduction can only be welcomed, since its use will enable estimating the current amount of the reserves more accurately. At the same time it should be born in mind that account of securities comprising reserves at the market price can lead to the increase in volatility of the amount international reserve assets. The difference between the volumes of assets calculated by the old and the new method is not significant. For instance, by 1 January 2008, their estimation at market price exceeded the estimation at amortization value only by 0.3%, and on 1 June was, in contrast, below by 0.4%.
On 14 July the Bank of Russia once again raised refinancing rate, as well as interest rates on credit and deposit operations carried out by the Bank of Russia. Bank refinancing rate was raised by 0.25 percentage points and made 11% per annum. Since the refinancing rate is the base interest rate for all credit operations of the Bank of Russia, its change resulted in the similar change of other interest rates of the RF Central Bank.
Ставка (% годовых) Type of credit До изменения После изменения Intraday 0 Overnight 10.75 Lombard 7.75 - for terms making 7 9 - for terms making 7 days;
days; 9 - for terms making 1 days 8.75 - for terms making day Loans against bill pledging, assignment of rights and 9.75 claims under loan agreements of organizations for the period up to 30 days Loans against bill pledging, assignment of rights and 7.75 - up to 90 calendar 8 - up to 90 calendar days;
claims under loan agreements of organizations or guaran- days; 9 - from 91 to 180 calendar tees of crediting organizations 8.75 - from 91 to 180 cal- days endar days The two-currency basket is the RF Central Bank operational indicator in its foreign exchange policy. Currently the share of EURO in the currency basket makes 45%, USD - 55% The two-currency basket is the RF Central Bank operational indicator in its foreign exchange policy. Currently the share of EURO in the currency basket makes 45 per cent, US $ - 55 per cent.
Moreover, the interest rate for Уcross-currency swapФ transactions has also been raised from 8.75% to 9%, while interest rates on direct REPO transactions increased by 0.25 p.p. (from 8.75% to 9% per annum for day term and from 7.75% to 8% per annum for the period of 7 days).
This measure taken by the Bank of Russia is due to the sustention of high prices growth rates in RF. It should be noted that at present Russian banks experience no problems related to liquidity, which is testified by comparatively low interest rates at the market of inter-bank crediting, low demand for federal budget allotments as well as low volumes of direct REPO operations. The renewed inflow of private capital also contributes into the increase in liquid resources volumes in banking system. In order to sterilize excessive money supply the Bank of Russia has also increased interest rates on deposit operations: on deposits under standard condition "tom-next", "spot-next" and "on demand" from 3.5% to 3.75% per annum, "1 weekФ "and" spot-week" from 4% to 4.25% per annum. This measure is aimed at making deposits more attractive for credit organizations, and therefore, at sterilizing excessive liquidity.
Thus, the RF Central Bank has taken measures aimed at the tightening of the monetary policy. It should be reminded that this year it has been the fourth case of interest rates raise: earlier, the RF Central Bank had already raised the refinancing rate by 0.25 p. p. on 4 February and 29April and 10 June. From our point of view, in the environment of significant inflation acceleration these measures are well justified. However, it should be kept in mind that due to an insignificant effect of the interest rates set by the RF Central Bank on the national financial market (for instance, despite the increase, refinancing rate in real terms is still negative) the measures taken by the Bank of Russia are rather psychological in nature and are to demonstrate the CB high motivation for curbing inflation. Besides, the raise of the interest rates carried out in three stages is rather unsubstantial. It should be noted that such a small increment of increase in the interest rates seems to be rather strange in the current situation in Russia, where it has no such significance as in developed countries. Besides, increase in interest rates will not have a considerable effect on inflation processes in case of continuing large-scale private capital inflow and further growth of prices for mineral resources used as sources of power.
Budgetary and Tax Policy O. Kirillov The RF State Duma and the RF Government are working on the adoption of the budget for 2009-2011.
The decision on the increase of the expenses in the following three years by 0.5% of the GDP expected in 2008 has already been made. Against the background of the low incomes of the federal budget in terms of GDP proportions in the current year, there are ongoing discussions on the necessity of reduction in the tax burden on the economy. Means of the RF Reserve Fund and the RF National Welfare Fund, invested in the American hypothecary corporations bonds, are not planned to be cashed before the maturity date.
This July the RF State Duma and the RF Government started discussions on the priorities of the middleterm budget for 2009-2011. The GovernmentТs priorities are based on the program statements made by V.
Putin and D. Medvedev. The working group on specification of earnings and expenditures of the federal budget has been created. This is connected with the actual growth of earnings in the regions and new tax initiatives. According to the declaration of Alexey Kudrin, Vice Prime Minister, the procedure of УzeroФ reading is expected to be finished in the first days of August, when the first meeting of trilateral commission on interbudgetary relation has taken place and the work in other directions have also finished. It is expected that the forecast of the socio-economic conditions for the RF development will be specified, taking into account correction in the growth rates, prices for oil, inflation, import growth rates and average wages increase. All these factors will influence the RF budget earnings and must be reflected adequately when approving the law on the budget.
The RF Government has already approved the increase in the planned expenditures for 2009-2011 by RUR 224 bln. These funds will be required for the reform of the health care, for which total of RUR 18 bln will be added for three years. RUR 63 bln was allotted for the support of the agriculture. RUR 96.5 bln has been decided to add to develop the Far East and the Transbaikalia, RUR 10 bln - to maintain and investigate the subsoil, RUR 9 bln - to create immovable property cadastre, RUR 4.7 bln - to develop nuclear icebreaker fleet, RUR 5.5 bln - to develop education.
Let us analyze current trends in the RF federal budget execution. The dynamics of the main parameters of the federal budget of the RF in 2006 through 2008 are presented in Table 1.
Table Main parameters of the RF federal budget in 2006 through 2008 (in % of GDP) 2006 June 2007 2007 June Revenues 23.5 23.4 23.9 23.Expenditures 16.2 15.6 18.4 16.Deficit (Ц)/ Surplus (+) 7.4 7.7 5.5 7.Source: RF Ministry of Finance, IET calculations.
In January through June 2008, the revenues of the federal budget demonstrated the lowest values as compared with the corresponding periods starting with 2005. This is the consequence of low monthly earnings in March, May and June of the current yea, when the figures of the federal budget revenues were at the level of 20% of the GDP, which is by far lower than the average level of 23Ц26%. The reduction in revenues is also affected by some slow-down of the Russian economy growth on the whole.
Across the major tax administrators (see Table 2) the reduction in the revenues of the federal budget is accounted for by the drop in revenues from the federal tax service. As compared with January-June 2008, in 2007 earnings from this administrator were higher by nearly 1.4% of the GDP. The reduction in earnings mentioned occurred mainly because of the value added tax for goods, sold in the RF territory, and to a lesser extent due to excises and single social tax earnings.
It should be noted that since by the end of the first half of 2008 the inpayments from the Federal Tax Service make 52.3% of the value planned for the year, there should not be a sharp growth in taxes expected.
As to the earnings form the Federal Customs Service, the earnings from this administrator are higher than in the corresponding period of the previous year (+ 1.3%) due to high world prices for mineral resources used as energy carriers and oil, especially. It should be remembered that main incomes, forming earnings of the Federal Customs Service are export customs duties for oil, gas and goods, produced from oil.
The changes in earnings from other administrators are insignificant, and in aggregate the share of other inpayments in the total amount of the revenues of the federal budget is about 6%.
Table Amounts of Revenues of the RF Federal Budget in 2006 through (as percentage of the GDP) % of the cash execu 2006 June 2007 2007 June 2008 tion of the FB as in Taxes and other payments admin11.2 11.7 11.5 10.3 52.istered by the Federal Tax Service Taxes and other payments administered by the Federal Customs 10.7 10.2 9.9 11.5 53.Service Revenues administered by the Federal Agency for Management 0.2 0.2 0.2 0.1 37.of Federal Property Revenues of the federal budget administered by other federal 1.2 1.4 2.2 1.3 94.agencies Total revenues 23.5 23.4 23.8 23.2 54.Source: RF Ministry of Finance, IET calculations.
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