CBR Quarterly Inflation Review - Q4 2004
Central bank: cbr | Type: quarterly_review | Date: 2004-12-31

THE CENTRAL BANK
OF THE RUSSIAN FEDERATION
(BANK OF RUSSIA)
Quarterly
Inflation
Review
2004 Q4
Research and Information Department
Introduction .................................................. 1
Major Inflation Indicators ................................. 3
Quantitative and Qualitative
Monetary Indicators ..................................... 21
Statistical Addendum .................................... 30
2004 Q4
The world energy prices were observed
to grow considerably in 2004. This factor
and the unstable supply of some goods had
an adverse effect on inflation in a number
of countries. In Russia, these processes took
the form of the accelerated growth of petrol
and food prices, which prompted a relatively
high increase in consumer prices as a whole.
The high world energy prices contrib-
uted to the stepped-up development of
domestic industries. The economic growth
went along with the rise in wages and em-
ployment. The increased public propensity
for consumption expanded demand for
consumer goods and services and, conse-
quently, provided upward pressure on con-
sumer prices. The slower growth of labour
productivity compared with 2003 restricted
the possibility of slowing inflation. The trend
towards the growth in the prices of paid ser-
vices exceeding the growth in the prices of
goods observed in the past few years also
had an adverse effect on inflation.
Given a relatively high share of imports
in the retail trade turnover, the appreciation
of the national currency contained growth
in the prices of imported consumer goods
and, consequently, their domestic ana-
logues. The exchange rate fluctuations ex-
erted more noticeable influence on the price
dynamics of non-food products than on the
price dynamics of foodstuffs. As Russian
foodstuffs continued to be highly competi-
tive on the domestic market in 2004 due to
both traditional quality and price, the ex-
change rate dynamics largely affected them
through producer prices in the food indus-
try, the industry that uses imported raw
materials more than any other industry. As
Introduction
for non-food prices, the exchange rate af-
fected them directly owing to their lower
competitiveness.
The main reasons for the higher-than-
projected consumer price growth in 2004
were outside the monetary sphere.
The growth of ruble supply in 2003-
2004 did not bring about any significant in-
flationary consequences as it went along
with the expansion of demand for money
due to high economic growth rates, the in-
creased monetisation of the economy and
its de-dollarisation. The increase of less liq-
uid ruble components (time ruble deposits)
prevailed in the structure of the money sup-
ply growth. At the same time, the share of
cash in the M2 aggregate did not expand.
This situation, coupled with other factors,
exerted influence on money velocity and the
inflation dynamics.
The money supply dynamics in 2004
reflected the monetary and exchange rate
policy pursued by the Bank of Russia, and
also the government’s budget policy to-
wards the formation and build-up of the
Stabilisation Fund of the Russian Federation.
As foreign currency continued to flow into
the domestic market in large amounts, the
Bank of Russia took measures to contain
money supply growth and its monetary
policy was aimed at restricting the expan-
sion of the monetary base and absorbing the
banking sector’s excess liquidity. About a
half of the monetary authorities’ money
supply created by an inflow of foreign cur-
rency was absorbed through the mechanism
of money accumulation in the Stabilisation
Fund of the Russian Federation.
2004 Q4
Along with its daily fixed-rate deposit
operations on standard terms, in 2004 Q4
the Bank of Russia continued to hold deposit
auctions and auctions to place its own
bonds, and also carried out operations to sell
bonds from its trade portfolio without a
commitment of reverse repurchase to ab-
sorb growing banking liquidity. In Q4 credit
institutions showed stronger demand for
Bank of Russia instruments to place their
available funds while the range of market
instruments offered to soak up liquidity ex-
panded through operations with the Bank
of Russia’s own bonds (OBR). Sales volumes
at modified reverse repo auctions con-
tracted sharply as the money market, in par-
ticular, offered alternative and more attrac-
tive instruments to credit institutions to
place their available funds.
The prevailing money supply path in
Russia will not affect core inflation signifi-
cantly in the first half of 2005, considering
the existing lag between them. However,
this path suggests uncertainty about the
stable dynamics of monetary indicators in
the future. To some extent, this is due to the
lag’s fluctuations and the possible change
of its length.
2004 Q4
According to the Federal State Statis-
tics Service (Rosstat), consumer prices rose
by 11.7% in December 2004 as compared
with December 2003. Therefore, despite its
fall on 2003 (12%), inflation exceeded the
official target in 2004 (8-10%). Consumer
prices rose by 3.5% in 2004 Q1, 2.5% in Q2,
1.8% in Q3 and 3.4% in Q4. Inflation stood
at 10.9% on average in 2004 as against
13.7% a year earlier.
Core inflation equalled 10.5% in De-
cember 2004 as compared to December of
the previous year (it was 11.2% in the same
period of 2003). Prices of the goods in-
cluded in the core inflation calculation grew
by 2.4% in 2004 Q1, 1.8% in Q2, 2.4% in
Q3 and 3.5% in Q4.
Estimates show that growth in the
prices of goods and services included in the
calculation of core inflation in 2004 ac-
counted for 8.5 percentage points, or
72.0%, of overall consumer price growth as
against 9.1 percentage points, or 75.9%, in
2003. Thus, core inflation’s contribution to
overall consumer price growth was smaller
than last year.
The high level of core inflation regis-
tered in the past two years has been caused
mostly by volatile, short-term rather than
long-term factors.
In 2004, a major factor of the slowing
growth in the prices of goods and services
included in the calculation of core inflation
was the reduction of the growth rate for
non-food prices. At the same time, the fast
growth in the prices of foodstuffs, espe-
cially the prices of meat and poultry, bread
and bakery products, contributed to higher
core inflation.
The price dynamics of foodstuffs in
2004 were affected by the growth of meat
prices on the world market, the lower meat
supply on the domestic market and by a
poor grain harvest in Russia and Europe in
2003.
Non-food prices rose by 7.4% in De-
cember 2004 as compared with December
2003 (in the same period of 2003 they in-
Major Inflation Indicators
2004 Q4
Table 1
Inflation rates on the consumer goods market as a whole (%)
Growth
(December 2004
on December
Growth
(December 2003
on December
2002)
Result
Food prices excluding vegetable and fruit prices 13.1 11.8 Acceleration
by 1.1 times
Non-food prices 7.4 9.2 Retardation
by 1.2 times
Prices of goods and services included in core inflation calculation 10.5 11.2 Retardation
by 1.1 times
Prices of paid services provided to households 17.7 22.3 Retardation
by 1.3 times
Prices of services regulated at federal or regional levels* 19.6 22.9 Retardation
by 1.2 times
Vegetable and fruit prices 3.3 -4.2
* Bank of Russia estimate.
creased by 9.2%). The prices of non-food
products grew by 1.4% in 2004 Q1, 2.0% in
Q2, 2.0% in Q3 and 1.8% in Q4. The most
significant increase from among non-food
products in 2004 was registered in the price
of petrol, which grew by 31.3% and consid-
erably exceeded the growth in prices of
major non-food products. After its consid-
erable growth in 2004 Q2 and Q3 (by 13.6%
and 11.4% respectively), the price of petrol
increased by 3.2% in Q4. The significant
price rise reflected high world energy prices
and, correspondingly, the rapid growth of
prices in the oil-extracting and oil-refining
industries. In 2003, petrol appreciated by
16.8%.
The prices of major non-food products
grew slower in 2004 than in 2003. Televi-
sion and radio set prices were observed to
drop (by 1.5%) in December 2004 as com-
pared with December 2003.
Estimates show that in 2004 non-food
price growth accounted for 2.0 percentage
points, or 17.1%, of overall consumer price
growth as against 2.5 percentage points, or
21.0%, in 2003.
As was the case in 2003, food prices,
excluding vegetable and fruit prices, grew
faster than non-food prices in 2004.
In December 2004, food prices as a
whole rose by 12.3% as compared with
December 2003 as against 10.2% in the
same period of the previous year. Food price
growth stood at 3.8% in 2004 Q1, 2.1% in
Q2, 1.2% in Q3 and 4.7% in Q4.
Food price growth calculated with-
out taking account of vegetable and fruit
2004 Q4
Table 2
Food price inflation (%)
Growth
(December 2004
on December
2003)
Growth
(December 2003
on December
2002)
Outcome
Bread and bakery products 16.7 30.4 Retardation
by 1.8 times
Cereals and legumes 11.6 17.0 Retardation
by 1.5 times
Pasta 14.6 14.0 Slight acceleration
Meat and poultry 19.6 8.9 Acceleration
by 2.2 times
Fish and seafood 11.5 9.9 Acceleration
by 1.1 times
Milk and dairy products 12.8 13.1 Slight retardation
Butter 6.8 11.4 Retardation
by 1.7 times
Sunflower oil 2.1 7.6 Retardation
by 3.6 times
Granulated sugar 7.5 -5.6
Alcoholic beverages 8.7 9.9 Retardation
by 1.1 times
prices accelerated to 13.1% in December
2004 as compared with December 2003
(11.8%). Growth stood at 3.2% in 2004 Q1,
1.9% in Q2, 2.7% in Q3 and 4.7% in Q4.
In 2004, growth in the prices of this
group of products accounted for an esti-
mated 6.5 percentage points, or 55.7%, of
overall price increment on the consumer
goods market as against 5.9 percentage
points, or 49.1%, in the same period of
2003.
The most significant growth in Decem-
ber 2004 as compared with December 2003
was registered in the prices of meat and
poultry, bread and bakery products and
pasta. Although the prices of bread and
bakery products grew less in 2004 than in
2003 (16.7% as against 30.4%), this growth
was significant and was due to a poor grain
harvest in Russia and Europe in 2003.
The price of granulated sugar increased
by 9.1% in July 2004 month on month and
by 1.2% in August. In the subsequent
months, the price of granulated sugar was
observed to decline. These dynamics re-
flected a high level of price volatility for this
2004 Q4
On 2004 Grain Harvest
According to preliminary figures of the Federal
State Statistics Service, the gross grain harvest
equalled 78.0 million tonnes in 2004, which is 16.2%
more than in 2003 and 10% less than in 2002. The
grain harvest averaged 68.5 million tonnes in 1996-
2001. The harvest of grain grew due to both the ex-
pansion of the sowing areas (by 3.8%) to 43.6 mil-
lion hectares and the increase of crop yields (by
5.5%) to 18.8 centners per hectare.
The share of wheat rose to 58.2% in the struc-
ture of grain crops in 2004 as against 50.8% a year
earlier. The wheat harvest totalled 45.3 million
tonnes, or 33% more than in 2003; the gross wheat
harvest increased largely due to the growth of wheat
yields by 22.8%. The relative quality of wheat in the
2004 harvest dropped and the share of milling wheat
declined to 72% as against 74% in the previous year.
A poor harvest of rye was gathered in 2004 as a
result of the reduction of sowing areas due to the
considerable loss of winter crops in the Upper
Reaches of the Volga River and in the Urals, i.e., in
the traditional rye-growing regions. Rye yields de-
clined by 14.7%.
The most significant growth in 2004, as com-
pared with the previous year, was registered in gross
maize harvest, which increased by 63.7% while maize
yields went up 30.9%.
By its Regulation No. 1545-r, dated December 1,
2004, the Government of Russia took a decision to
make purchase interventions in the amount of up to
4.9 billion rubles in 2004 to stabilise the grain mar-
ket given the surplus supply on the domestic market.
product due to the unstable world market
situation.
Meat and poultry prices rose by 19.6%
in December 2004 as compared with De-
cember 2003 (they grew by 8.9% in 2003
as a whole). At the same time, the dynam-
ics of meat and poultry prices were differ-
ent. Beef and pork prices rose by 26.3% and
34.0% respectively in December 2004 as
compared with December 2003 (beef prices
were up 2.1% in 2003 and pork gained
2.6%), while poultry prices inched up 1.1%
as against 22.9% in 2003. The gap between
the rates of growth in meat and poultry
prices, created by the accelerated increase
in poultry prices from May to November
2003, became smaller from the start of
2004.
Growth in the prices of some food-
stuffs in December 2004 as against Decem-
ber 2003 slowed down as compared with
the same period of 2003 (growth in sun-
flower oil prices slowed by 3.6 times, butter
by 1.7 times, cereals and legumes by 1.5
times).
The food price dynamics reflected the
growth of producer prices in the food in-
dustry, which rose by 11.4% in 2004 (by
14.8% in 2003), and the growth of agricul-
tural producer prices. The selling prices of
farm produce increased by 17.7% in 2004
as against 24.7% in 2003.
Vegetable and fruit prices rose by
3.3% in December 2004 as compared with
December 2003 (they were down 4.2% in
2003).
Vegetable and fruit price dynamics in
2004 were less volatile than they have been
in the last few years. In June 2004, vegetable
and fruit prices rose by 13.9% as compared
with December 2003 (in the same period of
2003, they increased by 33.7%). It was the
2004 Q4
Table 3
Major bread and bakery product market indicators (% growth)
2004 2003
Bread and bakery product output (January-December as % of January-December
of previous year)* -3.6 -4.7
Gross grain harvest
- by farms of all kinds 16.2 -22.6
Wheat imports (growth, January-December as % of January-December
of previous year)
- volume by 2.1 times by 2.4 times
- value* by 3.0 times by 2.9 times
Prices (December as % of December of previous year)
- producer prices 17.2 32.8
- grain selling prices 11.7 65.0
- consumer prices 16.7 30.4
- wheat import prices* -0.6 95.2
* Estimate based on Rosstat data for respective years.
smallest growth registered in this period in
ten years. Therefore, the low level of veg-
etable and fruit prices in the first half of
2004 precluded any significant decline in
these prices typical of July-October. In the
second half of 2004, vegetable and fruit
prices decreased by a lowly 9.3% as against
28.4% in the same period of 2003.
According to estimates, in 2004, the
growth of vegetable and fruit prices ac-
counted for a rise in the general rate of in-
flation by 0.2 percentage points, or 1.5%.
In 2003, the downward contribution of the
decline in vegetable and fruit prices to con-
sumer price growth stood at 0.2 percentage
points, or 1.8%.
Excluding such products as bread and
bakery products, pasta, flour, meat (beef
and pork), poultry and petrol from the con-
sumer price index, this aggregate’s growth
in December 2004 as compared with De-
cember 2003 was slower than inflation by
an estimated 1.2 percentage points (in 2003,
it was also slower by 1.2 percentage points).
The downward contribution of the exclusion
of meat and poultry in 2004 was 0.6 per-
centage points (it was upward in 2003 and
stood at 0.2 percentage points); bread and
bakery products, pasta and flour 0.3 per-
centage points (1.3 percentage points in
2003) and petrol 0.3 percentage points (0.1
percentage points in 2003).
Prices of the paid services provided to
the public rose 17.7% in December 2004 as
compared with December 2003 (22.3% in
2003). In 2004 Q1 they increased by 6.4%,
Q2 by 4.3%, Q3 by 3.0% and Q4 by 3.0%.
The slowing of growth in paid service prices
was due to the slowing of government-
regulated service prices, which in December
2004 increased by an estimated 19.6% as
compared with December 2003 as against
22.9% a year earlier. As for the government-
regulated prices, mention should be made
first of all of the slowing of growth in rent
and amenities charges.
Nevertheless, growth in rent and
amenities prices was most significant in
2004 at 23.5% as against 28.7% in 2003.
There was a considerable rise in pre-school
2004 Q4
Table 4
Major meat and poultry market indicators (% growth)
Meat and poultry Beef Pork Poultry
2004 2003 2004 2003 2004 2003 2004 2003
Food production (January-December as %
of January-December of previous year)* 1.2 10.5
Livestock** and poultry production (January-December
as % of January-December of previous year)
- by farms of all kinds -0.3 4.9
- by agricultural enterprises 2.0 8.0 -7.6 1.8 -5.2 15.5 18.7 12.4
Imports* (January-December as % of January-December
of previous year)
- volume -6.8 -11.5 -7.6 -15.8
- value 2.8 -6.5 -5.0 -16.0
Prices (December as % of December of previous year)
- producer prices 22.0 12.1 33.8 1.3 41.5 6.1 -0.5 25.8
- livestock and poultry selling prices 23.6 9.2
- consumer prices 19.6 8.9 26.3*** 2.1*** 34.0*** 2.6*** 1.1 22.9
- import prices* 6.8 5.5 0.2 2.5
Livestock population* as of end of month (December
as % of December of previous year)
-6.7 -6.7 -11.1 -7.8
* Estimate based on Rosstat data for respective years.
** Livestock and pigs.
*** Exce
pt boneless meat.
On the state of the world and domestic
meat markets
As the growth of world meat supply slowed
down due to a considerable increase in demand, beef
prices, according to the World Bank’s data, for low-
and medium-income countries rose by 10.8% in De-
cember 2004 as compared with December 2003 (by
17.1% in December 2003 on December 2002). The
prices of beef rose by 26.9% on average in 2004 as
compared with 2003.
The growth of the contract prices for meat im-
ported into Russia (excluding poultry) was observed
in the last three years. Year on year, they increased
by 10.3% in 2002, 6.1% in 2003 and 13.9% in 2004.
Overall, the contract prices of meat (excluding poul-
try) rose by a third in the last three years.
The contract prices of poultry were observed to
grow in 2002 and 2004. Year on year, they rose by
8.4% in 2002, declined by 0.2% in 2003 and went
up by 2.8% in 2004. As a result, they rose by 11.2%
in the last three years.
The volume of meat imports into Russia (exclud-
ing poultry) dropped by 6.3% in 2003 after it had
grown by 30% in 2002 year on year and declined by
another 6.0% in 2004. The volume of poultry im-
ports was observed to contract in the last three years
(by 1.2% in 2002, 15.8% in 2003 and 7.6% in 2004).
The import volumes of meat (including poultry) fell
by 6.8% in 2004 year on year and by 11.5% in 2003
after their 11.1% growth in 2002. As a result, the im-
port volumes of meat (including poultry) contracted
by 17.5% in the last two years.
On the whole, the supply of meat (including
poultry) on the domestic market (meat production
and meat imports) fell by an estimated 3% in 2004
year on year (it also declined by 3% in 2003). The
share of imported meat on the domestic market de-
creased to 56% in 2004 (to 58% in 2003).
Many factors exerted influence on the domes-
tic market. In the last few years, the livestock popu-
lation was observed to decline steadily in the farms
of all kinds. As of the beginning of January 2005,
the livestock population fell by 6.7% year on year
2004 Q4
(also by 6.7% as of the beginning of 2004 and by
2.1% as of the beginning of 2003). The pig popula-
tion declined by 11.1% as of that date (by 7.8% as of
the beginning of 2004 and was observed to grow by
8% as of the beginning of 2003). The reduction of
the livestock population in agricultural organisations
was more considerable as of the beginning of Janu-
ary 2005: the population of livestock fell by 10.3%
and that of pigs by 15.8%.
As the livestock population declined, the farms
of all kinds reduced livestock production in 2004. Ag-
ricultural organisations reduced cattle raising for
slaughter by 7.6% and pig production by 5.2%.
The tense situation with agricultural output in
2004 accelerated the growth of the selling prices of
livestock products by 1.7 times as a whole year on
year (December on December). The growth of live-
stock and poultry selling prices accelerated more con-
siderably, by 2.6 times to 23.6%. The price growth
acceleration in cattle breeding has been observed for
the second consecutive year. In 2003, the selling
prices of livestock products rose by 12.4% (in 2002,
they remained at the December 2001 level) while
cattle and poultry selling prices went up by 9.2% (in
2002, they remained also at the 2001 level).
Food industry enterprises increased the produc-
tion of meat, including 1
st category subproducts by
1.2% in 2004 (by 10.5% in 2003 and by 8.5% in
2002). Beef output fell by 13.9% in 2004 year on
year and pork production by 10.4%. In 2003, their
production was observed to rise by 0.5% and 25.6%
respectively.
The growth of the producer prices of meat in
the food industry accelerated considerably in 2004.
As the producer prices of meat increased by 22% as
against 12.1% in 2003 (they dropped in 2002), beef
prices rose by 33.8% and pork prices by 41.5% (by
1.3% and 6.1% respectively in 2003). Therefore,
growth in the producer prices of beef accelerated by
26 times and the producer prices of pork by 6.8 times
in 2004 year on year.
The accelerated growth of the producer prices
of meat led to the accelerated growth of consumer
prices in 2004 as compared with 2003. Thus, the
consumer prices of 1
st category beef rose by 26.3%
in 2004 as against 2.1% a year earlier and the con-
sumer prices of pork went up 34.0% as against 2.6%.
In 2003, beef prices grew slower than in 2002 (2.1%
as against 3.1%) while the growth of pork prices was
actually at the level of the previous year (2.6% as
against 2.5%).
The reduction of beef and pork production on
the whole contributed to the accelerated growth of
producer prices in the food industry. As a result, the
growth of consumer prices also accelerated. The con-
sumer price dynamics follow changes in producer
prices.
The rise in living standards and the expansion of
consumer demand are the factors that influence con-
sumer price dynamics. In 2004, retail meat and poul-
try sales rose by 6.0%, including poultry sales by 7.2%
year on year (meat and poultry sales increased by
6.1% in 2003). A trend towards growth in the pur-
chasing power of an average per capita money in-
come was observed in the last few years with regard
to beef (except boneless meat). Thus, this indicator
increased by 16.6% in 2002 year on year, 29.7% in
2003 and 7% in 2004.
tuition fees (21.6%). Despite the significant
growth of communications service charges
in the last four months of 2004, they rose
9.9% over the year (the lowest figure for
the last ten years). The supply of communi-
cations services offered to the public ex-
panded 19.0% in 2004 as compared with
2003.
Growth in paid service prices in 2004
was faster than growth in the prices of
goods, which stood at 10.3%. Estimates in-
dicate that growth in paid service prices in
2004 accounted for 3.0 percentage points,
or 25.7%, of overall consumer price growth
as against 3.8 percentage points, or 31.7%,
in 2003.
The analysis of the distribution of in-
creases in the prices of goods and services
in 2001-2004 (December on December of
previous year), based on a selection of more
than 400 kinds of consumer goods and ser-
vices and made without taking account of
their weights in consumer expenses, re-
vealed a continuous decline in the average
rate of price growth
1. However, each year’s
decline had its specifics.
1 Price growth distributions shown in the charts are based on a smoothed histogram. Twenty growth ranges with a span of 2% each
have been used.
2004 Q4
2 The median value of a multitude of growth values, i.e., 50% of the price growth values are above the median and 50% of the price
growth values are below the median.
In 2003, inflation slowed as compared
with 2002 due to a contraction of the share
of goods and services with a fairly high rate
of price growth. This phenomenon
characterises the process of price dynamics
between different groups of goods and ser-
vices evening out and reflects macroeco-
nomic stability. At the same time, the range
of growth in the prices of the bulk of con-
sumer goods and services remained virtually
unchanged in 2003 as the slight change of
the distribution median
2 (10.5% as against
11.4% in 2002) indicates.
In 2004, inflation slowed not so inten-
sively as a year earlier. Nevertheless, growth
in the prices of goods and services in the
principal growth range was observed to slow
(the median value stood at 8.5% or 2 per-
centage points more than in the previous
year). This phenomenon confirms the stable
2004 Q4
nature of inflation reduction because the
price slowdown affected a broad range of
goods and services.
In 2004, the biggest growth (a sample
average) was registered in service prices,
and the smallest in non-food prices. How-
ever, there was little difference between the
price growth medians calculated for the bulk
of foodstuffs and non-food products.
A statistical analysis of food price in-
creases indicates a fall in the sample aver-
age in 2004. As compared with 2003, the
form of distribution changed. In 2003, the
bulk of foodstuffs (79.2%) were within the
1-17% price growth range while in 2004 this
range expanded to 3-21% and included
80.2% of all foodstuffs. At the same time,
the distribution of food price increases was
characterised by two local highs within the
6% and 15% growth ranges. The second
growth range included bread and bakery
products, pasta and flour whose prices
demonstrated relatively fast growth in the
first half of 2004 due to a poor grain har-
vest in 2003. The share of products with a
high price growth increased. Meat and meat
products dominated this group of food-
stuffs.
The distribution of non-food price in-
creases was characterised by a pronounced
maximum and small dispersion reflecting
the extent of growth deviation from the
average value. Therefore, the increases in
the prices of most goods in this group re-
mained within a narrow range. Thus, in
2004, goods in the 1-11% price growth range
accounted for 82.3% of all non-food prod-
ucts. In the same period of 2003, the prin-
cipal price growth range was 5-15% and
goods in this range accounted for 80.4%.
Slowing growth in the prices of goods
in this group in 2004 was due to slowing
growth in the prices of non-food products
in the main growth range. At the same time,
as a result of growth in petrol prices, the
share of non-food products whose prices
rose significantly expanded compared to the
previous year.
The distribution of service price in-
creases in 2004 is characterised by a sharp
peak corresponding to the 13-15% growth
range and a considerable shift of the me-
dian as compared to the 2003 figure. The
share of services reflecting a high price
growth fell considerably. At the same time,
as was the case in 2003, the share of ser-
vices whose prices rose insignificantly con-
tinued to be quite large.
In 2004, the standard deviation reflect-
ing the price growth difference from the
average value narrowed for both foodstuffs
and paid services as compared with 2003
but was still larger than for non-food prod-
ucts. The standard deviation for non-food
products increased as compared with 2003
due to the fast growth of petrol prices,
which considerably exceeded the growth of
prices of most goods.
Although consumer prices rose by 11.7%
in Russia as a whole in December 2004 as
compared with December 2003 (by 12.0%
2004 Q4
3 The regional difference ratio is calculated as the difference between the cost of a fixed set of goods and services in the most
expensive and the cheapest region related to the federal cost of this set.
in 2003), inflation in some federal districts
was higher than in the previous year. Thus,
consumer prices in the Central, Southern,
Volga and Urals federal districts grew faster
than in 2003 by 0.4, 1.2, 0.2 and 0.1 percent-
age points respectively.
According to estimates, differences
between constituent members of the Rus-
sian Federation with respect to the cost of a
fixed set of goods and services used by the
Federal State Statistics Service for inter-re-
gional comparison of household purchasing
power tended to narrow in 2004. The re-
gional difference ratio
3 decreased from
43% in 2003 to 41% in 2004. Such dynam-
ics are largely due to the slower increase in
consumer prices in the Far Eastern federal
district where the consumer basket is the
most expensive and the faster growth of
consumer prices in the Southern and Volga
federal districts where the consumer basket
is the cheapest.
As was the case in 2003, vegetables and
fruit were characterised by the largest dis-
persion of price growth rates in constituent
members of the Russian Federation in 2004.
Thus, vegetable and fruit prices were ob-
served to decline by 0.1% in the Siberian fed-
eral district and rise by 5.6% in the Central
federal district. Growth in the prices of non-
food products and foodstuffs, excluding
vegetables and fruit, was, on the contrary,
about the same in all the federal districts.
In 2004, the rates of growth in the
prices of paid services provided to house-
holds slowed down considerably in the Si-
berian federal district (by 9.5 percentage
points) year on year, whereas the respec-
tive figure for the Russian Federation as a
whole was 4.6 percentage points.
External economic conditions
World economic growth accelerated in
2004 as compared with 2003. In the IMF’s
estimate (the World Economic Outlook,
September 2004), the world production of
goods and services expanded by 5% (by
3.9% in 2003) and registered the largest
growth for the past 28 years (this growth
did not exceed 4.8% per annum from 1977
to 2003). According to preliminary data of
the US Department of Commerce’s Bureau
of Economic Analysis, US real GDP increased
by 4.4% in 2004 (by 3% in 2003).
The stimulating economic policies pur-
sued by many countries, the improvement
of corporate financial performance and the
growth in employment reinvigorated world
business activity in 2004. The expansion of
final domestic demand largely resulting
from increased fixed capital investment
played a significant role in the acceleration
of growth in the production of goods and
services in developed countries in 2004. In
particular, as the dollar depreciated against
the currencies of most countries, US trad-
ing partners, in 2004, the expansion of fi-
2004 Q4
nal domestic demand in these states was a
major factor of the increase in economic
growth rates. In the IMF’s estimate, final
domestic demand in the group of
industrialised nations rose by 3.2% as com-
pared with 2.2% in 2003.
Higher inflation observed in the group
of industrialised nations and in emerging
economies in 2004 was due, first of all, to
dynamic economic growth and the increase
of demand for goods and services. In the
USA, these factors led to an increase in the
base consumer price index, which excludes
the prices of energy products and food-
stuffs.
The growth of food prices, especially
meat prices, was a significant inflationary
factor in the world in 2004. The increase of
world oil prices played a large role in this pro-
cess. The US dollar’s depreciation stimulated
the increase of prices on the US market of
consumer goods and services but contained
inflation in the countries whose currencies
gained against the greenback.
In 2004, the US Federal Reserve raised
five times its target for the overnight inter-
bank loan rate (the federal funds rate):
from 1% to 1.25% in June, to 1.5% in Au-
gust, to 1.75% in September, to 2% in No-
vember and to 2.25% in December. The rais-
ing of this target in June 2004 was its first
change from June 2003: last time the fed-
eral funds rate was raised in May 2000 while
in January 2001 — June 2003 it was reduced
by 5 percentage points. Meanwhile, the of-
ficial refinancing rate of the European Cen-
tral Bank has not been changed since June
2003. In December 2004, for the first time
since April 2001, the US federal funds rate
exceeded the refinancing rate of the Euro-
pean Central Bank.
LIBOR rates on US dollar-denominated
deposits with terms from one month to one
year rose by 0.3-0.8 percentage points on
average in 2004 as compared with the pre-
vious year (in 2003, they dropped by 0.6-
On some aspects of the Federal Reserve’s
monetary policy
The transition of the US Federal Reserve to a
tighter monetary policy was logical during a cyclic
surge of the US economy, which officially was
recognised to start in November 2001. In 2003, the
fears of deflation due to insufficient investment and
the slow payroll growth in the US economy prevented
the Federal Reserve from commencing a restrictive
cycle in its policy. In 2004, these fears ceased to be
relevant. On the contrary, inflation rose considerably
under the influence of larger domestic demand, and
also temporary situational factors related to the
dollar’s depreciation and the increase of energy and
food prices.
Traditionally, the increase in oil prices is accom-
panied by the fall of the US dollar due to the role of
the USA as the main consumer and a large net im-
porter of energy products. At the start of the fourth
quarter of 2004, world oil prices reached an
unprecedentedly high level. At the same time, the
reports on positive shifts in the US economy and the
rise of US interest rates failed to give any significant
support to the dollar on world forex markets during
that period. From mid-November to the end of 2004,
the US dollar exchange rate to the single European
currency was over $1.3 to the euro.
2004 Q4
0.8 percentage points). The yield on US
treasury bonds with maturity from two to
ten years rose by 0.3-0.7 percentage points
(it fell by 0.6-1 percentage points in 2003).
In December 2004, LIBOR rates on US dol-
lar-denominated deposits with all terms and
the yields on US treasury bonds with all ma-
turities were higher than LIBOR rates on
euro-denominated deposits and the yields
on EMU securities (in December 2003, they
were lower, on the contrary). The growth
of interest rates in industrialised nations
contained the flow of speculative capital
into Russia.
In 2004, the dollar lost 10.1% on aver-
age against the euro as compared with
2003. The dollar also depreciated against the
Japanese yen, British pound and many other
currencies, including the currencies of
Russia’s leading trading partners, such as the
Swiss franc, Danish krone, Swedish krona,
Hungarian forint, Polish zloty, Czech
koruna, Slovak koruna, Lithuanian litas,
Latvian lat, Estonian kroon, Romanian leu,
Turkish lira, Kazakhstan tenge, South
Korea’s won and Indian rupee. The dollar
rate against the Ukrainian hryvnia in 2004
was virtually the same as in the previous
year. The dollar appreciated against the
Belarusian ruble.
A fundamental factor of the US dollar’s
depreciation was the expansion of the US
current account deficit, which increased the
doubts of forex market players about the
country’s ability to finance it adequately in
the future through an inflow of capital to
the US economy. The accelerated growth of
world oil prices in the autumn of 2004
sharply undermined confidence in the dol-
lar. As a result, the exchange rate of the
dollar against other major world currencies
in 2004 was lower than in 2003 despite the
dollar’s significant gains in the period from
mid-February to mid-May 2004.
The terms of Russia’s trade with foreign
countries in 2004 improved as compared
with 2003 due to the accelerated growth in
export prices.
The world economic situation affected
directly the dynamics of consumer prices
and prices in various branches of the
economy and exerted indirect influence on
production dynamics and supply and de-
mand on the country’s forex market.
The situation on world commodity mar-
kets was extremely favourable for Russian
2004 Q4
exporters in 2004. According to Bank of
Russia estimates, the average level of world
market prices of major Russian exports, ad-
justed to their structure, rose by 21% in 2004
as compared with 2003. The price of Urals
crude grew 26.8% to $34.6 per barrel, the
price of petrol increased 37%, diesel fuel
36%, fuel oil 3% and natural gas in Europe
9.5%. Non-ferrous metal prices increased
by 30% as the price of aluminium gained
20%, copper 61% and nickel 44%.
As the world prices of energy products
and other raw materials went up, Russian
producers raised the prices of their ana-
logues on the domestic market.
The favourable price situation on world
commodity markets for Russian exporters
and the increased demand for goods and
services exported by Russia led to a growth
in exports and an increase of the country’s
trade surplus.
According to preliminary balance of
payment data, exports expanded by 39.9%
in 2004 year on year to $182 billion and im-
ports grew by 24.7% to $94.8 billion. The
trade surplus reached a record high of $87.2
billion, an increase of 45.6% on 2003 when
it stood at $59.9 billion.
Oil and ferrous metals accounted for
most of the growth in the value of exports
in 2004. Exports of petroleum products,
non-ferrous metals, natural gas and engi-
neering goods also increased. According to
the latest statistics of the Federal Customs
Service and the Federal State Statistics Ser-
vice, the share of energy products in the to-
tal value of exports slightly increased, while
the share of ferrous metals expanded con-
siderably.
Imports grew mostly due to greater im-
ports of investment goods. Consumer goods
imports rose chiefly as a result of growth in
the import of non-food consumer goods
and some foodstuffs.
The current account surplus reached a
record high as it increased by an estimated
$22.8 billion in 2004 as compared with 2003
to $58.2 billion or 10% of GDP as against
8.2% of GDP in 2003. The significant in-
crease in exports was the main reason for
growth.
The capital and financial account defi-
cit (net of the changes in reserves) rose from
$800 million in 2003 to an estimated $5.4
billion in 2004. The private sector’s net capi-
tal outflow increased to $7.8 billion from
$1.9 billion in 2003.
According to balance of payments
data, the inflow of foreign investment to
the private sector of the Russian economy
fell to $31 billion in 2004 from $33.3 billion
in 2003, as the banking sector’s foreign debt
obligations in 2004 grew less than in 2003.
However, foreign capital inflow to the non-
financial enterprise sector increased to $24
billion as against $22.1 billion in 2003. For-
eign direct investment in the non-financial
enterprise sector stood at an estimated $6.6
billion as against $7.5 billion in 2003, while
2004 Q4
foreign capital inflow in the form of credits
and loans amounted to $13.8 billion as
against $15.1 billion in 2003. At the same
time, capital inflow in the form of portfolio
investments accounted for $3.6 billion,
whereas in 2003 there was a portfolio in-
vestment outflow of $400 million.
Private capital outflow increased as in-
vesting abroad became more attractive. Pri-
vate sector investments in foreign econo-
mies increased to an estimated $29.9 billion
in 2004 as against $26.9 billion in 2003. At
the same time, capital outflow from the
non-financial enterprise and household sec-
tors totalled $25.9 billion or the same
amount as in 2003, while capital outflow
from the banking sector increased to $4 bil-
lion from $1 billion in 2003. The de-
dollarisation of the Russian economy con-
tinued. In 2004, the amount of foreign cur-
rency cash accrued by the non-financial en-
terprise and household sectors contracted
by $2.9 billion (in 2003, it fell by $6.6 bil-
lion).
Russia’s international reserves rose by a
record amount of $47.6 billion in 2004 (in
2003, they expanded by $29.1 billion) and
as of January 1, 2005, they aggregated
$124.5 billion as against $76.9 billion as of
January 1, 2004. By the end of 2004, Russia
had sufficient gold and currency reserves to
finance imports for 11.6 months as com-
pared with 8.9 months a year earlier.
Domestic economic conditions
A high level of production and invest-
ment activity influenced consumer price in-
flation in 2004.
GDP growth equalled 7.1% in 2004 as
against 7.3% in 2003.
Industrial production expanded by 6.1%
in 2004 year on year (by 7% in 2003). The
slowing of industrial output growth in 2004
was largely due to the year-on-year slow-
down of production growth in the fuel sec-
tor (by 1.3 times), ferrous metallurgy sector
(by 1.8 times), non-ferrous metallurgy sec-
tor (by 1.7 times) and food industry (by 1.3
times). These sectors account for over 50%
of entire industrial output. At the same time,
production growth accelerated in the ma-
chine-building industry from 9.4% in 2003
to 11.7% in 2004, the chemical and petro-
chemical industry from 4.4% to 7.4% and
the wood-paper industry from 1.5% to 3%.
Agricultural output increased by 1.6%
in 2004 as against 1.3% in 2003. However,
in the first half of 2004, agricultural pro-
duction declined by 1.2% as against 0.6%
in January-June 2003.
Transport freight turnover in 2004 in-
creased by 6.2% as compared with the pre-
vious year (2003 growth stood at 7.7%).
Railways increased their freight turnover by
8%, automobile transport 5.2% and pipe-
line transport 6.2%.
Investor and consumer demand re-
mained high in 2004. Fixed capital invest-
ment grew by 10.9% year on year (in 2003,
it increased 12.5%).
In 2004, as in the past few years, the
sectors that were the major recipients of in-
vestments were the fuel sector, transport
and the housing and utilities sector. In Janu-
ary-September 2004, these sectors received
50.6% of all investments made by large and
medium-sized enterprises and organisations
(in January-September 2003, these sectors
accounted for 54.2%). As for the structure
of the sources of fixed capital investment,
47.4% were investors’ own funds and
52.6% were borrowed funds (in January-
September 2003, the respective percent-
ages were 46.2% and 53.8%). The share of
budget funds contracted significantly, from
18.8% in the first nine months of 2003 to
2004 Q4
16.9% in the first half of 2004. At the same
time, the share of bank loans expanded
from 5.2% to 7.7%. This is the highest level
for the nine months of the year since 1997.
In 2004, gross capital formation rela-
tive to GDP remained at the level of 2003
and equalled 18.3% (18.0% in 2002). At the
same time, gross capital formation growth
slightly accelerated year on year. In 2004,
gross capital formation increased by 13.9%
as compared with 13.2% in 2003.
Real disposable money income in 2004
rose by 7.8% as compared with the previ-
ous year (in 2003, it increased 14.9%). The
continued growth of household money in-
come contributed to greater consumer
spending.
The increase in public propensity for
consumption in 2004 put upward pressure
on consumer prices. As the problems of
some large lending institutions aggravated
in April-July 2004 and the public confidence
in the banking sector as a whole eroded
while yields from investment in US dollar
cash were persistently low, consumer
spending rose significantly in 2004 2H. In
particular, the rates of growth in retail trade
turnover in 2004 Q3 and Q4 reached their
maximum values for these periods since
1998 (112.5% and 113.6% respectively as
compared with the same periods of 2003).
According to figures of the Federal State
Statistics Service, the growth in household
spending on final consumption totalled
111.3% in 2004 and exceeded the 2003 level
by 3.8 percentage points.
The situation on the labour market im-
proved in 2004 compared to 2003. The
number of jobs in the economy increased
and the number of jobless declined in 2004
as compared to 2003. Of the total economi-
cally active population, 91.8% were gain-
fully employed in 2004 and 8.2% were clas-
sified as unemployed according to ILO
methodology (91.4% and 8.6% respectively
in 2003).
Job growth created conditions for con-
sumer price increases, but growth in labour
productivity contained this process.
Inflation was affected by price dynam-
ics in industries whose output goes directly
to the consumer goods market and was ac-
companied by growth in production costs.
According to estimates, producer price
growth in these industries accounted for 8.6
percentage points of growth in the prices
of goods and services included in the core
inflation calculation in 2004.
Production cost dynamics were the re-
sult of growth in industrial producer prices,
which rose by 28.3% in December 2004 as
compared with December 2003 (they in-
creased 13.1% in the same period of 2003).
Quite rapid growth in industrial producer
prices was caused by growth in the world
prices of energy products and other raw
materials.
Overall, analysis shows that industrial
producer price growth and consumer price
growth slow down. Despite their different
year-to-year dynamics, in December 2004,
2004 Q4
industrial producer prices increased by 5.1
times as compared with December 1997 and
consumer prices rose also as much over that
period (by 5.2 times).
The most significant growth in producer
prices in December 2004 as compared with
December 2003 was registered in the fuel
sector (64.7% as against 1.4% in the same
period of 2003) and ferrous metallurgy sec-
tor (65.8% as against 28.8%). At the same
time, producer prices in the electric-power
industry grew less than in 2003 (11.5% as
against 13.9%). Therefore, the dynamics of
producer prices in these industries kept their
main features in 2004. In the past few years,
the most significant growth in producer
prices was registered in the fuel sector and
metallurgy sector. In December 2004, as
compared with December 1997, producer
prices in these sectors rose by 7.0-7.7 times.
The price growth in other industries was
relatively moderate and ranged from 3.5 to
4.6 times. The smallest growth in producer
prices was observed in the electric-power
industry.
Growth in freight transportation
charges in December 2004 stood at 9.3%
as compared with December 2003 (23.5%
in the same period of 2003). At the same
time, railway fares increased by 12.6% as
against 26.5% in the same period of 2003.
According to preliminary data of the
Federal State Statistics Service, real wages
increased 10.8% in 2004 year on year as
against 10.9% in 2003. The excess of real
wage growth over growth in the production
of goods and services amid the widening
gap between labour productivity and wage
dynamics is a factor of additional inflation-
ary pressure on the economy. At the same
time, the dynamics of real pensions contin-
2004 Q4
ued to lag behind GDP growth and have not
yet recovered to the 1997 Q4 level. In 2004,
the growth of this indicator equalled 5.5%
as compared with the previous year (4.5%
in 2003).
The average monthly nominal imputed
wage in 2004 stood at 6,828 rubles, an in-
crease of 22.9% (it was observed to grow
by 26.1% in 2003).
In 2004, the low level of competition on
the Russian market of hydrocarbons and
metals and the increase in the world prices
of these products led to a faster growth of
producer prices in the oil industry and the
metallurgy sector than price growth in most
sectors of the economy. The increase in fuel
and raw material prices was a factor of
growth in costs in all the sectors of the
economy.
The increase of oil extraction tax and oil
export duties due to growth in world oil
prices exerted additional influence on the
rise of costs in oil production. The share of
taxes and duties in the sector’s costs rose
from 36.4% in January-September 2003 to
42.7% in January-September 2004. The
growth of costs in the sector, where eight
vertically integrated companies produce
about 90% of oil and control the sales mar-
ket, was neutralised by the increase of the
sector’s producer prices. According to esti-
mates, production profitability in the oil in-
dustry as a whole increased from 17.3% in
January-September 2003 to 23.3% in Janu-
ary-September 2004.
Ferrous and non-ferrous metallurgy
sectors where producer prices are also
largely influenced by the pricing policy of
vertically integrated companies registered
an increase in production profitability from
15.7% to 24.1% and from 18.3% to 23.8%
respectively. The considerable excess of
profitability in the oil industry and metal-
lurgy sector over the industry’s average
(12.1%) is a proof of insufficiently devel-
oped competition in these sectors, which
exerts steady pressure on costs in all the sec-
tors of the Russian economy.
Pricing policy in the light and food in-
dustries, on the contrary, is formulated in
the conditions of competition, including
from imported goods. This factor restricts
the short-term growth of consumer prices
and creates stimuli for an increase in pro-
duction efficiency, which leads to the reduc-
tion of costs and, therefore, prices in the
2004 Q4
long-term perspective. However, produc-
tion modernisation was impeded by the low
financial potential of these sectors. Esti-
mates indicate that in the first nine months
of 2004, the production profitability of
large and medium-sized enterprises in the
food industry fell by 0.3 percentage points
to 5% while light industry continued to op-
erate at a loss (0.6%). At the same time, the
faster growth in fuel and raw material prices
in 2004 did not result in any sharp growth
of production costs in these industries and
the cost structure remained virtually un-
changed suggesting that enterprises used
resource-recovery technologies.
The rate of production capacity
utilisation affects, to a certain extent, infla-
tion dynamics in the economy. According to
surveys of managers at key industrial enter-
prises, the average rate of production ca-
pacity utilisation in December 2004 was
58%. The highest rates of production ca-
pacity utilisation were registered in the fuel
sector (82%), ferrous metallurgy sector
(79%) and wood-paper industry (74%),
and the lowest in machine-building and
metalworking (49%), light industry (52%)
and the food industry (53%). At present,
there is a backlog of unused production ca-
pacity, which can be utilised if demand for
traditional goods rises or new products are
manufactured.
Relatively low inflationary expectations
were a major factor responsible for moder-
ate price growth both in industry and on the
consumer market. According to surveys
conducted by the Russian Government’s
Centre for Economic Studies, the inflation-
ary expectations of managers at key indus-
trial enterprises in 2004 were slightly lower
on average than in 2003. The growth of sell-
ing prices in the near future was predicted
by 29-35% of the respondents as against
31-35% in 2003.
2004 Q4
Exchange rate
In 2004 Q4, the ruble exchange rate
dynamics continued to be influenced by the
high world prices of energy products and a
strong foreign trade surplus. Changes in the
dollar/euro rate on the world markets re-
flecting the rise of the single European cur-
rency against the US dollar also had a major
effect on the exchange rate dynamics on the
Russian forex market during that period. As
a result, in 2004 Q4, the ruble was observed
to gain significantly against the dollar and
weaken against the euro.
As the dollar fell against the euro on the
world markets in 2004 Q4, the expectations
of the national currency’s appreciation
against the dollar to the level of 27.5-28.0
rubles to the dollar by the end of 2004 con-
siderably increased the amount of specula-
tive forex trading. As a result, the ruble rose
significantly against the dollar and weak-
ened in relation to the euro.
On the whole, the ruble’s nominal rate
against the dollar increased by 1.47 rubles
Quantitative and Qualitative Monetary Indicators
over the quarter or by 5.3% to 27.7487
rubles as of January 1, 2005. Since the start
of 2004, the national currency had
strengthened by 1.70 rubles or by 6.1%. The
nominal rate of the ruble against the US
dollar increased by 1.6% in October, 2.2%
in November and 1.4% in December. The
average exchange rates changed by 0.5%,
1.7% and 2.4% respectively over these
months suggesting the intensification of the
ruble’s rally by the end of 2004. The ruble
gained 4.3% against the greenback in real
terms in 2004 Q4 as compared with 2004
Q3.
In 2004 Q4, the ruble’s nominal rate
weakened against the single European cur-
rency in the euro segment of the Russian
forex market following the world trends of
the euro’s rise against the US currency. The
continuous rise of the euro rate on the Rus-
sian forex market was observed throughout
the quarter. The most significant fall of the
ruble exchange rate against the single Eu-
ropean currency was registered in Novem-
2004 Q4
ber when it declined by 0.68 rubles or 1.8%.
The Russian national currency weakened by
0.62 rubles (1.7%) against the euro in Oc-
tober month on month and by 0.51 rubles
(1.4%) in December.
The ruble’s average rate against the
euro declined by 1.7% in October, 2.1% in
November and 0.7% in December. The ruble
depreciated against the single European cur-
rency by 1.2% in real terms in 2004 Q4 as
compared with 2004 Q3. Since the begin-
ning of 2004, the euro rate had grown by
0.74 rubles (by about 2%). As of January 1,
2005, the nominal rate of the ruble against
the euro stood at 37.8409.
In 2004 Q4, the ruble’s real effective
rate against foreign currencies declined by
0.8% quarter on quarter. On the whole, the
ruble’s real effective rate grew by 4.7%
against foreign currencies in 2004 (Decem-
ber on December).
Interest rates
The average price of short-term funds
determined by the Bank of Russia interest
rates corridor tended to decrease in 2004.
This situation created conditions for the
consistent reduction of interest rates on
bank loans extended to non-financial bor-
rowers and greater affordability of credit
resources for the real sector of the economy
and reflected positive inflationary expecta-
tions.
The interest rates on deposit operations
carried out on standard terms were not re-
viewed by the Bank of Russia in 2004 Q4
and shaped the lower boundary of the in-
terest rates corridor. The rate on tom-next
deposits accounting for the largest share of
credit institutions’ funds placed on deposits
equalled 0.5%. The Bank of Russia overnight
2004 Q4
loan rate, the upper boundary of the corri-
dor, was unchanged. The average weighted
interest rate at four-week deposit auctions
equalled 1.59% p.a. in Q4 and 3.05% p.a.
at three-month deposit auctions. The aver-
age weighted yield on Bank of Russia bonds
(OBR) ranged within 4.2-5.7%. The rates of
liquidity provision on repo operations
changed within the range of 6.1-7%.
The Bank of Russia refinancing rate re-
mained unchanged at 13% in 2004 Q4.
As the banking sector liquidity increased
in 2004 Q4, interest rates on the money
market and the rates on commercial banks’
operations continued to fall within the in-
terest rate corridor. The average quarterly
MIACR on overnight interbank ruble loans
declined by over three times in Q4 as com-
pared with Q3.
The average weighted rate on loans to
non-financial enterprises with all maturities
fell from 11.0% p.a. in October to 10.1% p.a.
in December. In January-December 2004,
this interest rate dropped by 2.3 percentage
points.
The term structure of interest rates on
ruble-denominated financial instruments
with different maturity periods was deter-
mined in the fourth quarter of 2004 by fluc-
tuating money demand and supply in the
main segments of the financial market given
real inflation exceeding the projected 2004
inflation target. Loans with a term of 6 to
12 months were the most expensive credit
resources for enterprises in the fourth quar-
ter (13.4% p.a. on average over the quar-
ter) in the structure of interest rates by ma-
turity. Loans with such maturity appreciated
by 0.6 percentage points in Q4 as compared
with Q3, although their cost dropped by 1.9
percentage points as a whole in 2004.
The most dynamic decline in 2004 was
registered in the interest rates on loans with
a term of one to three years (by 4.5 percent-
age points in January-December). As a re-
sult, the cost of loans with such maturity
was the lowest in the fourth quarter as com-
pared to other maturities (except interest
rates on loans with a term of up to one
month). This fact reflected the market play-
ers’ expectations of a further decline in in-
terest rates on loans in the medium-term
perspective.
The strong demand for loans from
households along with insufficient compe-
tition enabled banks to maintain higher in-
terest rates on loans to individuals as com-
pared with loans to enterprises. In 2004 Q4,
the interest rate on loans with all terms was
unchanged on the whole (20.5% p.a.). As
compared with Q3, the average interest rate
on loans to households rose by 1.3 percent-
age points in Q4 and by 1.9 percentage
points in January-December 2004.
The general trend towards the fall of
market interest rates was also observed on
the deposit market. The average interest rate
on household time deposits dropped from
8.8% p.a. to 8.3% p.a. in 2004 Q4 and by
2.0 percentage points since the beginning
of the year. Banks reduced most actively
2004 Q4
their interest rates on long-term deposits.
The interest rate on household deposits with
a term of one to three years fell by 1.2 per-
centage points to 8.0% p.a. in Q4 and by
3.0 percentage points in 2004 on the whole.
During 2004, deposits with a term of
six to 12 months registered the highest in-
terest rates. The average interest rate on the
deposits with such maturity was 0.2 per-
centage points higher in Q4 than in Q3.
The yield curve of banks’ lending opera-
tions in the fourth quarter of 2004 became
more salient. The slight increase in interest
rates on operations with terms from six
months to a year in October-December
caused this sector of yield curve to move
upwards. The shape and the shift of the
yield curve of banks’ lending operations can
be regarded as evidence of some decrease
in market players’ medium-term inflation-
ary expectations.
Yields on government securities were
observed to decline from the start of 2004
till the end of March, when they registered
the lowest value (6.6% p.a.). After that,
following the flotation of three long-term
2004 Q4
OFZ issues (with maturities in 2025, 2028
and 2029) from the Bank of Russia portfo-
lio, the yields on government bonds were
observed to grow and then stabilise at 7.9%
p.a. in December. The yields on the govern-
ment bond portfolio fluctuated within a
range of 1.5 percentage points in 2004.
As turnovers on the secondary govern-
ment securities market increased by 30% in
Q4 as compared with Q3, the GKO-OFZ
yield curve retained its rising slope. No in-
flation risk premium was included in the
price of short-term government bonds while
the ensuing yield level was determined by
the structure of demand on the money mar-
ket. The medium- and long-term inflation-
ary expectations of market players were
unchanged from the previous quarter.
The price indicator volatility of most
ruble-denominated financial instruments
was moderate in the fourth quarter of 2004.
There were no serious imbalances in the in-
terest rate structure by instrument with dif-
ferent maturity periods. The yield curves of
key financial instruments mostly had a ris-
ing slope, reflecting the relatively stable na-
ture of the short- and medium-term infla-
tionary expectations of Russian financial
market players. That the yield curves of the
various longest-term instruments remained
almost flat in 2004 Q4 may testify to a cer-
tain degree of inertia in market players’ ex-
pectations.
Money supply
In 2004, M2 growth rates slowed to
35.8% from 50.5% a year earlier. In 2004
Q4, money supply registered its largest
growth over the year, as it grew by 17.1%
(16.7% in 2003 Q4). The increase corre-
sponded to the seasonal fluctuations of
money supply dynamics caused by the De-
cember peak growth.
The cumulative effect of the acceler-
ated growth of money supply in 2003 and
in the first two months of 2004 exerted up-
ward pressure on core inflation dynamics
throughout 2004. Since there is a lag be-
tween M2 money supply growth and core
inflation, this pressure reached a peak in the
third quarter of 2004 (July-October). How-
ever, as this trend changed in March 2004
and M2 growth started to slow down (from
57.4% to 35.4% from March to September
2004) after a long period of acceleration,
the upward pressure on prices was allevi-
ated. This was also facilitated by inflation’s
reduced susceptibility to changes in the dy-
namics of monetary indicators. Neverthe-
less, core inflation growth accelerated in the
second half of 2004 largely due to reasons
outside the monetary sphere. The slowing
of the annualised rates of growth in the
ruble supply, registered from March to Au-
gust 2004 and observed to resume in De-
cember 2004, can slightly reduce its pres-
sure on core inflation in the first half of
2005, given that other factors remain un-
changed.
The gap between M2 and GDP growth
rates
1 grew narrower in 2004; it reached the
2003 Q1 level in the third quarter of 2004
and was virtually unchanged in the fourth
quarter of 2004. Its contraction contributes
to weaker inflationary pressure, given the
adequate dynamics of the velocity of the
economically sound path.
The greater-than-expected fall in M2
velocity in the first half of the year contained
price growth in 2004, balancing out the cor-
relation between the expansion of the
1 This gap characterises the part of monetary growth that exceeds the level necessary to finance the increased amount of transactions.
Its increase can serve as evidence of the inflationary pressure of money supply growth on inflation.
2004 Q4
money supply and economic growth. In the
second half of 2004, some factors, espe-
cially instability in the demand for the do-
mestic currency caused the dynamics of
money velocity to deviate noticeably from
the medium-term trend. On the whole,
money velocity slowed down by 11% in 2004
as against 15% in 2003. The above change
in the trend of the money velocity dynam-
ics may require a tighter monetary policy in
2005.
The rates of cash growth (M0 monetary
aggregate) equalled 33.8% as against
50.3%.
The intra-year cash dynamics largely
retained their seasonal fluctuations of the
past years. At the same time, the ruble’s
depreciation against the US dollar in April-
September 2004, and also instability in the
banking sector, which prompted the sum-
mer crisis of confidence and an outflow of
deposits from banks, led to a noticeable in-
2004 Q4
crease in household demand for cash for-
eign exchange during that period. As house-
holds’ net purchases of foreign exchange
expanded, growth in cash rubles kept by in-
dividuals slowed down and M0 grew con-
siderably less in 2004 Q2 and Q3 (9.5% and
1.4%) as compared with 2003 Q2 and Q3
(22.3% and 4.4%), and also in 2004 as a
whole.
Therefore, the influence of cash growth
on inflation was, most likely, less consider-
able in 2004 than in the previous year.
Against the backdrop of the downward
trends in the dynamics of cash and funds in
transaction accounts, the rates of growth
in the money aggregate in the monetary
survey definition slowed to 30.5% by the
end of 2004 from 45.6% a year earlier.
The growth rates of quasi-money, the
aggregate that comprises less liquid com-
ponents of the money supply used by eco-
nomic agents as savings, were higher in
2004 than in the previous year. This aggre-
gate showed unstable intra-year dynamics.
Its growth accelerated from 30.7% in 2003
to 37.6% in 2004 due to a faster increase in
the foreign currency component as com-
pared with 2003. Nevertheless, ruble-de-
nominated deposits grew faster than for-
eign currency deposits.
The change in economic agents’ de-
mand for the domestic currency and foreign
exchange, which intensified the mutual in-
ter-flow of ruble and foreign currency
funds, was one of the factors determining
the dynamics of monetary aggregates in
2004. That is why, the dynamics of the ruble
monetary aggregates (M0, M1 and M2) dif-
fered from the dynamics of the aggregates,
which included non-financial agents’ for-
2004 Q4
eign currency-denominated assets. The rate
of growth of M2X, the aggregate compris-
ing money and quasi-money, slowed from
an annualised 38.5% as of January 1, 2004,
to 33.7% as of January 1, 2005. It was con-
siderably less significant than the slowing of
M2 growth.
As the growth of foreign currency de-
posits accelerated, despite a decline in the
value of cash foreign currency, the dynam-
ics of broader contingent aggregate M2Y
comprising both cash and non-cash foreign
currency funds demonstrated an upward
trend in 2004 as a whole. The annualised
M2Y growth accelerated in the fourth quar-
ter and was faster in 2004 than in the previ-
ous year (24.6% and 20.4% respectively).
The M2X rate of dollarisation, the share
of the foreign currency component in the
money supply structure in the monetary sur-
vey definition, dropped by 1.3 percentage
points in 2004 to 17.6% (it fell by 6.5 per-
centage points in 2003). The ruble compo-
nent of quasi-money continued to predomi-
nate in M2X (28.6% as of January 1, 2005,
as against 26% as of January 1, 2004).
The slowing of the Russian economy’s
de-dollarisation in 2004 was also
characterised by changes in the structure of
the M2Y aggregate. The lower M2Y rate of
dollarisation largely reflects the flow of eco-
nomic agents’ funds from foreign currency-
to ruble-denominated assets. Against the
backdrop of the opposite dynamics of for-
eign currency deposits and cash foreign ex-
2004 Q4
change, the share of all foreign currency
funds in broader aggregate M2Y stood at
about 28% as of January 1, 2005. It dropped
by almost 6 percentage points over 2004 (its
decline in 2003 was more considerable, by
13 percentage points).
The increase in the banking sector’s
claims on the non-financial sector of the
economy in 2004 was a major source of
growth in the money supply: in 2004 it
amounted to 1,370.4 billion rubles. At the
same time, the dynamics of monetary indi-
cators were also affected by the continued
growth of banking sector net foreign assets,
mainly caused by the Bank of Russia’s pur-
chases of foreign exchange on the domes-
tic market. The increase in the banking
sector’s claims on non-financial enterprises
and the expansion of banking sector net
foreign assets in the fourth quarter ac-
counted for about 40% of their annual
growth.
The broad monetary base grew 30.6%
in 2004 Q4 (29% in 2003 Q4). The share of
banking sector’s funds in correspondent
accounts with the Bank of Russia increased
from 12% to 20% in the broad monetary
base in October-December (from 10% to
16% in the same period of the previous
year). The share of credit institutions’ funds
absorbed by the Bank of Russia through its
OBR, reverse repo and deposit operations
dropped from 6.3% to 4.5% in the mon-
etary base over the quarter and from 12.6%
to 9.6% taking into account the credit in-
stitutions’ required reserves.
The accumulation of funds in the gen-
eral government’s accounts caused by the
expansion of the Stabilisation Fund, had a
serious restraining effect on money supply
growth. Growth in the value of the
Stabilisation Fund’s accounts was faster in
the fourth quarter than in the third quarter
of 2004 (172.5 billion rubles as against 120.6
billion rubles). However, for the first time
in the past few years, the balances of the
government’s accounts with the Bank of
Russia were observed to grow, suggesting
a change in the nature of budget policy’s
influence on the dynamics of monetary in-
dicators.
2004 Q4
Consumer price dynamics by group
of goods and services (month on month, %)
Monthly
inflation
Core
inflation
Food price
growth
Growth in food
prices,
excluding
vegetable
prices
Vegetable and
fruit price growth
Non-food
price growth
Service price
growth
January 2.4 1.2 2.5 1.3 13.1 1.1 4.4
February 1.6 0.9 1.2 0.8 4.1 0.9 4.2
March 1.1 0.7 1.0 0.6 3.9 0.8 1.7
April 1.0 0.6 1.0 0.5 4.2 0.6 1.8
May 0.8 0.6 0.7 0.4 2.5 0.6 1.5
June 0.8 0.6 0.8 0.6 2.3 0.5 1.2
July 0.7 0.7 0.4 0.7 -1.8 0.5 1.9
August -0.4 0.7 -1.4 0.8 -17.2 0.6 0.7
September 0.3 1.1 -0.2 1.1 -11.2 0.9 0.9
October 1.0 1.4 1.1 1.8 -5.6 1.0 0.8
November 1.0 1.1 1.2 1.3 1.0 0.8 0.4
December 1.1 1.0 1.5 1.2 4.1 0.6 0.9
Full year (December
on December)
12.0 11.2 10.2 11.8 -4.2 9.2 22.3
January 1.8 0.9 1.6 1.3 5.5 0.5 4.1
February 1.0 0.8 1.1 1.1 1.5 0.4 1.6
March 0.8 0.7 1.1 0.9 2.8 0.4 0.6
April 1.0 0.8 0.8 1.0 -0.6 0.6 2.0
May 0.7 0.6 0.4 0.5 -0.7 0.8 1.4
June 0.8 0.5 0.8 0.4 4.8 0.7 0.9
July 0.9 0.8 1.0 1.0 1.5 0.6 1.3
August 0.4 0.7 0.1 0.8 -6.3 0.5 1.0
September 0.4 0.9 0.0 0.9 -9.0 0.9 0.6
October 1.1 1.3 1.4 1.7 -2.7 0.7 1.2
November 1.1 1.1 1.5 1.5 2.2 0.7 0.8
December 1.1 1.0 1.7 1.4 5.4 0.4 1.0
Full year (December
on December) 11.7 10.5 12.3 13.1 3.3 7.4 17.7
Statistical Addendum
2004 Q4
Consumer price dynamics by group of goods and services
(on accrual basis since start of year, %)
Monthly
inflation
Core
inflation
Food price
growth
Growth in food
prices,
excluding
vegetable
prices
Vegetable and
fruit price growth
Non-food
price growth
Service price
growth
January 2.4 1.2 2.5 1.3 13.1 1.1 4.4
February 4.1 2.1 3.7 2.2 17.8 2.0 8.8
March 5.2 2.8 4.8 2.8 22.4 2.8 10.6
April 6.2 3.4 5.8 3.3 27.6 3.5 12.6
May 7.1 4.0 6.5 3.8 30.8 4.1 14.2
June 7.9 4.7 7.4 4.4 33.7 4.6 15.6
July 8.7 5.4 7.8 5.1 31.4 5.1 17.8
August 8.3 6.2 6.3 6.0 8.7 5.7 18.7
September 8.6 7.3 6.1 7.1 -3.4 6.6 19.7
October 9.7 8.9 7.3 9.1 -8.9 7.7 20.7
November 10.8 10.1 8.6 10.4 -7.9 8.6 21.2
December 12.0 11.2 10.2 11.8 -4.2 9.2 22.3
January 1.8 0.9 1.6 1.3 5.5 0.5 4.1
February 2.8 1.7 2.8 2.3 7.1 0.9 5.8
March 3.5 2.4 3.8 3.2 10.1 1.4 6.4
April 4.6 3.2 4.7 4.2 9.5 2.0 8.5
May 5.3 3.8 5.2 4.8 8.7 2.8 10.0
June 6.1 4.3 6.0 5.2 13.9 3.4 11.0
July 7.1 5.1 7.1 6.2 15.6 4.0 12.5
August 7.6 5.8 7.2 7.1 8.3 4.6 13.6
September 8.0 6.8 7.2 8.0 -1.4 5.5 14.3
October 9.3 8.1 8.7 9.9 -4.0 6.3 15.7
November 10.5 9.3 10.4 11.5 -1.9 7.0 16.6
December 11.7 10.5 12.3 13.1 3.3 7.4 17.7
2004 Q4
Consumer price dynamics by group
of goods and services (over quarter, %)
Inflation Core
inflation
Food price
growth
Growth in food
prices, excluding
vegetable prices
Vegetable and
fruit price growth
Non-food price
growth
Service price
growth
I 5.4 2.8 4.2 2.1 22.6 2.7 14.5
II 3.4 1.5 3.0 0.7 20.1 3.1 5.1
III 1.2 2.3 -1.4 1.8 -21.6 2.1 7.3
IV 4.3 3.2 4.9 3.6 15.5 2.5 5.5
I 5.2 2.8 4.8 2.8 22.4 2.8 10.6
II 2.6 1.8 2.5 1.6 9.3 1.8 4.5
III 0.6 2.5 -1.2 2.6 -27.8 1.9 3.6
IV 3.1 3.6 3.9 4.3 -0.8 2.4 2.1
I 3.5 2.4 3.8 3.2 10.1 1.4 6.4
II 2.5 1.8 2.1 1.9 3.5 2.0 4.3
III 1.8 2.4 1.2 2.7 -13.4 2.0 3.0
IV 3.4 3.5 4.7 4.7 4.8 1.8 3.0
2004 Q4
Inflation Growth Structure (percentage points)
Inflation growth over period since start of year due to changes
in prices by group of goods and services
Foodstuffs* Non-food
products
Paid
services
Vegetables and
fruit
Inflation over
period, %
Core
inflation
Non-core
inflation**
January 0.7 0.3 0.8 0.7 2.4 1.0 1.4
February 1.1 0.5 1.5 0.9 4.1 1.7 2.4
March 1.4 0.8 1.8 1.2 5.2 2.3 2.9
April 1.7 1.0 2.2 1.4 6.2 2.8 3.4
May 1.9 1.1 2.4 1.6 7.1 3.3 3.8
June 2.2 1.3 2.7 1.8 7.9 3.8 4.1
July 2.6 1.4 3.1 1.6 8.7 4.4 4.3
August 3.0 1.6 3.2 0.5 8.3 5.0 3.2
September 3.6 1.8 3.4 -0.2 8.6 6.0 2.7
October 4.5 2.1 3.5 -0.5 9.7 7.2 2.5
November 5.2 2.4 3.6 -0.4 10.8 8.2 2.6
December 5.9 2.5 3.8 -0.2 12.0 9.1 2.9
January 0.6 0.1 0.7 0.3 1.8 0.8 1.0
February 1.2 0.2 1.0 0.4 2.8 1.4 1.4
March 1.6 0.4 1.1 0.5 3.5 2.0 1.6
April 2.1 0.5 1.4 0.5 4.6 2.6 1.9
May 2.4 0.7 1.7 0.4 5.3 3.1 2.2
June 2.6 0.9 1.9 0.7 6.1 3.5 2.6
July 3.1 1.1 2.1 0.8 7.1 4.2 2.9
August 3.5 1.2 2.3 0.4 7.6 4.7 2.8
September 4.1 1.5 2.5 -0.1 8.0 5.5 2.5
October 5.0 1.7 2.7 -0.2 9.3 6.6 2.7
November 5.8 1.9 2.9 -0.1 10.5 7.6 2.9
December 6.5 2.0 3.0 0.2 11.7 8.5 3.3
* Excluding vegetables and fruit.
** Growth in the prices of goods and services excluded from the calculation of the base consumer price index.
2004 Q4
Monthly inflation growth due to changes in prices
by group of goods and services
Foodstuffs* Non-food
products
Paid
services
Vegetables and
fruit
Inflation over
period, %
Core
inflation
Non-core
inflation**
January 0.7 0.3 0.8 0.7 2.4 1.0 1.4
February 0.4 0.2 0.7 0.2 1.6 0.7 0.9
March 0.3 0.2 0.3 0.2 1.1 0.6 0.5
April 0.3 0.2 0.3 0.3 1.0 0.5 0.5
May 0.2 0.2 0.3 0.2 0.8 0.4 0.4
June 0.3 0.1 0.2 0.1 0.8 0.5 0.3
July 0.3 0.1 0.4 -0.1 0.7 0.5 0.2
August 0.4 0.1 0.1 -1.1 -0.4 0.6 -1.0
September 0.5 0.2 0.2 -0.6 0.3 0.9 -0.6
October 0.9 0.3 0.1 -0.3 1.0 1.2 -0.1
November 0.6 0.2 0.1 0.0 1.0 0.9 0.1
December 0.6 0.2 0.2 0.2 1.1 0.8 0.3
January 0.6 0.1 0.7 0.3 1.8 0.8 1.0
February 0.5 0.1 0.3 0.1 1.0 0.6 0.4
March 0.4 0.1 0.1 0.1 0.8 0.6 0.2
April 0.5 0.2 0.4 0.0 1.0 0.6 0.3
May 0.3 0.2 0.2 0.0 0.7 0.5 0.2
June 0.2 0.2 0.2 0.3 0.8 0.4 0.4
July 0.5 0.1 0.2 0.1 0.9 0.6 0.3
August 0.4 0.2 0.2 -0.4 0.4 0.5 -0.1
September 0.5 0.3 0.1 -0.5 0.4 0.7 -0.3
October 0.9 0.2 0.2 -0.1 1.1 1.0 0.2
November 0.7 0.2 0.1 0.1 1.1 0.9 0.2
December 0.6 0.1 0.1 0.3 1.1 0.8 0.3
* Excluding vegetables and fruit.
** Growth in the prices of goods and services excluded from the calculation of the base consumer price index.
2004 Q4
Contribution to Inflation Growth (%)
Contribution to inflation growth over period since start
of year by group of goods and services
Foodstuffs* Non-food
products
Paid
services
Vegetables and
fruit
Core
inflation
Non-core
inflation**
January 27.5 12.4 31.6 28.5 40.6 59.4
February 26.7 13.4 37.1 22.8 41.8 58.2
March 27.3 14.9 35.3 22.5 44.2 55.8
April 27.0 15.3 34.7 23.1 44.9 55.1
May 26.9 15.9 34.5 22.7 46.1 53.9
June 28.1 16.0 33.7 22.2 47.9 52.1
July 29.7 16.2 35.2 18.8 50.2 49.8
August 36.5 19.1 38.9 5.5 60.7 39.3
September 41.6 21.2 39.3 -2.1 69.1 30.9
October 46.7 21.6 36.4 -4.7 74.3 25.7
November 48.5 21.7 33.6 -3.8 76.3 23.7
December 49.1 21.0 31.7 -1.8 75.9 24.1
January 35.8 7.6 40.3 16.3 43.2 56.8
February 42.3 9.0 35.4 13.3 50.0 50.0
March 45.0 10.3 30.2 14.5 55.3 44.7
April 46.1 11.7 31.5 10.7 57.5 42.5
May 45.3 14.2 32.1 8.5 58.5 41.5
June 42.3 15.3 30.6 11.8 57.2 42.8
July 43.5 15.3 29.9 11.3 58.8 41.2
August 47.0 16.5 30.8 5.7 62.6 37.4
September 50.9 19.1 30.9 -0.9 68.4 31.6
October 54.2 18.7 29.3 -2.3 70.9 29.1
November 55.4 18.3 27.2 -1.0 72.0 28.0
December 55.7 17.1 25.7 1.5 72.0 28.0
* Excluding vegetables and fruit.
** Growth in the prices of goods and services excluded from the calculation of the base consumer price index.
2004 Q4
Contribution to monthly inflation growth
by group of goods and services
Foodstuffs* Non-food
products
Paid
services
Vegetables and
fruit
Core
inflation
Non-core
inflation**
January 27.5 12.4 31.6 28.5 40.6 59.4
February 25.5 15.0 45.0 14.6 43.7 56.3
March 29.7 20.3 28.3 21.7 53.0 47.0
April 25.5 17.2 31.6 25.7 48.7 51.3
May 25.9 21.2 33.1 19.8 55.3 44.7
June 38.4 16.6 26.9 18.1 62.7 37.3
July 46.8 18.9 50.7 -16.4 74.7 25.3
August Estimate impossible for negative value
September 164.8 72.9 50.5 -188.3 270.6 -170.6
October 86.6 25.6 14.2 -26.4 114.6 -14.6
November 63.8 23.3 8.4 4.5 94.1 5.9
December 53.8 14.2 15.1 16.9 71.7 28.3
January 35.8 7.6 40.3 16.3 43.2 56.8
February 53.5 11.5 26.8 8.1 61.8 38.2
March 54.6 14.8 11.5 19.2 74.2 25.8
April 49.6 17.1 36.3 -2.9 65.1 34.9
May 40.1 29.6 35.6 -5.2 64.9 35.1
June 22.7 22.7 21.0 33.7 48.2 51.8
July 50.3 15.6 25.3 8.7 68.1 31.9
August 101.5 35.8 46.0 -83.3 122.3 -22.3
September 117.0 63.9 34.1 -115.0 164.9 -64.9
October 75.6 16.9 19.0 -11.5 86.8 13.2
November 63.4 15.6 12.0 9.0 79.4 20.6
December 56.7 7.1 13.1 23.1 71.7 28.3
* Excluding vegetables and fruit.
** Growth in the prices of goods and services excluded from the calculation of the base consumer price index.
2004 Q4
2004 Q4
2004 Q4
2004 Q4
2004 Q4
2004 Q4
© The Central Bank of the Russian Federation, 2005
Research and Information Department