Before moving to the forecast our decision is based on I would like to touch upon the current situation. Russian economic situation The recent months saw considerable changes in the global economy, primarily in the global commodity market, which have a direct impact on the Russian economy. Urals crude price fell by over 40% as against the highest price in June. Some other Russian export commodities have also experienced price decrease. Oil price dynamics have become one of the main reasons of ruble depreciation. Discussions of multiple interconnections between the foreign exchange rate and oil prices have currently become a popular trend which should not be taken literally. There should be understanding that it is not the only factor of exchange rate fluctuations. They are also caused by the situation in the Russian and global economy, domestic and foreign financial markets, and by the expectations of the economic agents. In particular, the ruble exchange rate was affected by the restricted access of Russian companies and banks to external markets raising concerns regarding the upcoming external debt payments. However, the impact of the external factors on the economic situation should not be considered unidirectional. External trade restrictions and ruble exchange rate dynamics have enhanced the competitiveness of Russian exports and boosted import substitution. The recent months see accelerated annual growth rates of industrial production (almost two-fold in September-October as against 1.5% in the first six months of the year) and improved sentiment of manufacturers. Net export contribution to GDP growth increased.

Time lag of the reaction of the banking sector to the change of the Bank of Russia key rate remains large though, according to our estimates, gradually shrinking. This refers to deposit rates as well. As lags shrink, the effectiveness of the interest rate channel of the Bank of Russia monetary transmission mechanism will improve. As for the foreign exchange transmission channel, its impact is complicated due to the high volatility in the foreign exchange market which resulted, inter alia, from the restricted access of Russian banks and companies to external markets. In order to normalise the situation with foreign exchange liquidity, the Bank of Russia has introduced reverse transactions to provide it. Interest rates on these transactions have been decreased to the level of LIBOR rates plus 0.5 pp. The volume of foreign exchange liquidity provision is determined by the demand estimates based on the balance of payments forecast. The next one-year repo auction of 15 December will accept Eurobonds and provide for the possibility of early deal termination by borrowers. In the near future the Bank of Russia also intends to consider the introduction of foreign exchange lending secured by non-marketable assets. Foreign exchange loans, extended by banks to companies with stable income in foreign currency, are supposed to be eligible as collateral. Bank of Russia forecast The current situation requires updating the forecasts and adjusting the policy to ensure financial and price stability enabling the economy to adjust to the new conditions and start developing as quickly as possible.