from december 2004 to december 2005, by 3, 2 %, and from december 2005 to december 2006 – by 2, 2 %. the real effective ruble exchange rate grew 10. 5 % in 2005, and another 7. 4 % in 2006. analysis of the economic situation does not yet allow us to definitely state that appreciation in the real effective ruble rate has negatively affected gdp growth to date. however, it should be noted that growth in industries producing tradable goods is slower than in sectors producing non - tradables. in 2006, industrial output grew 3. 9 %, while retail trade went up to 13. 9 %, and construction volume increased by 15. 7 %. an important and quite unexpected factor for us, which influenced the macroeconomic situation over the past 18 months, has been the large inflow of foreign private capital. previously, up to and including 2004, we saw a net outflow of private capital. for example, the outflow totalled 25 billion dollars in 2000, and 15 billion dollars in 2001. the year 2005 saw the first net inflow of private capital in a volume of 1 billion dollars. in 2006 the net inflow of private capital grew sharply, reaching around 42 billion dollars. during the first four months of 2007, it exceeded 30 billion dollars. private capital inflow has been boosted by anticipations of further nominal ruble appreciation. in 2006, the volume of foreign currency held in cash by the population and non - financial institutions shrank by 12 billion dollars. the process of dedollarization of the economy has been intensively developing. according to the central bank estimates, the proportion of foreign currency at the end of 2006 ( both in cash and in bank deposits ) in overall money supply was around 15 %, while at the end of 1999 this share exceeded 60 %. the powerful inflow of private capital was partly due to the fact that as of july 1, 2006 all restrictions and burdens on foreign currency operations linked to movement of capital and effective until then were removed. the process of foreign exchange liberalization was fully completed. the improved investment climate and the stable economic situation also contributed to net private capital inflow. the powerful private capital inflow boosted money supply. the m2 aggregate rose by 39 % in 2005, and by 49 % in 2006. in order to restrict money supply growth, the central bank raised interest rates on commercial banks ’ deposits with the central bank several times in 2006 and 2007. currently, the interest

their causes and nature given their potential implications for future economic performance. a first significant finding of empirical analysis is that the dispersion of growth rates across the euro area can largely be explained by differences in trend output growth – reflecting structural factors such as the effects of reforms recently implemented – rather than different cyclical developments. to the extent that such differences in trend output growth are related to normal and positive catching - up processes in the economies of some countries or are the consequence of persistent idiosyncratic shocks, they are not a cause for concern per se and need not have longer - term detrimental effects on inflation, economic activity and job creation. on the contrary, they may be seen as a manifestation of a desirable equilibrating mechanism, contributing to sustainable convergence among euro area countries. a second salient feature of the divergence observed in economic performance across the euro area countries is its persistence. very often the same set of countries are characterised by developments in key economic variables that are systematically either above or below the euro area average. this may suggest that the underlying adjustment mechanisms in the euro area economies are not functioning as smoothly or swiftly as they should. if the persistence of higher than average inflation and stronger than average unit labour cost growth reflects structural rigidities in a country ’ s economy and the implementation of inappropriate policies, this is a matter of concern because of the likely adverse effects on competitiveness, longterm growth and employment creation. iii. iii necessary conditions and appropriate policies for the efficient functioning of monetary union to optimise the economic performance of monetary union, to fully reap its potential benefits in terms of economic dynamism and welfare, job creation and increased per capita income, it is crucial to improve the functioning of product, labour and financial markets. to this end, well - designed and effectively implemented structural reforms and sound fiscal policies are essential in all euro area countries. since monetary policy and the exchange rate are no longer available at the national level as policy instruments and a means of adjusting to specific shocks and the challenges posed by globalisation, other adjustment mechanisms become even more important. at the beginning of the 1990s the level of dispersion of inflation rates across the euro area countries was, on average, around 6 percentage points ( standard deviation measured in unweighted terms ). in 2006 inflation dispersion was only 0. 7 percentage point. this implies that dispersion in the euro area is currently broadly in line with inflation dispersion among the key 14 us metropolitan statistical