Updated September 18, 2008

   In August, the price growth decelerated and even stopped in

the majority of the world countries.

However, in Russia, the inflation is escalating – it reached 0,3% within the half of September, according to the calculations of Rosstat (Federal State Statistics Service). Moreover, since the beginning of the year, the inflation attained 10%.

   As for the other countries, on the contrary, the inflationary pressure is falling.

Within the August, the prices of the USA fell by 0,1%, and the annual index (growth for 12 months) went to 5,4% down. In August, the prices of both Euro area and the overall European Union fell by 0,1%. It is the first price drop within the four months in the Eurozone.

In August, the prices in Germany fell by 0,4%, in Greece – by 1,1%, in Slovenia – by 0,7%, in Spain and Poland – by 0,2%. The prices remained unchanged in Ireland and France.

   In China, the prices are falling already within four successive months: in August, the annual index fell to 4,9% (the peak was in February – 8,7%), since it was backed by the severe restriction of consumer spending.

Now, the government can increase the prices for the state-funded energy resources.

According to the calculations of Morgan Stanley, in 2007, China's budget allocated $27 billion for this funding.

   The inflation fell due to the prices drop for primary products.

Oil fell by 36% as compared to the July maximum of $147,27 per barrel. Six food products, the prices of which monitors the Food and Agriculture Organization of the United Nations, fell by 8,2% since June. The grain fell by 13,6%, dairy products – by 12%. In December, the futures on wheat will be traded at the level of $7,3 per one bushel, and in February it attained $13,5. In Australia, the harvest of wheat exceeds the level of the last two years combined, and in China and India – higher than the last year's.

Nevertheless, on Philippines, the inflation attained 12,5% in August (the record for 16 years). Moreover, the inflation grows both in Chile and in Sri Lanka.

   As for Russia, the core reason of prices growth is the increase of the budget's expenditures by 40%, Troika Dialog's senior economist Evgeny Gavrilenkov says.

"The countries, where the inflation is 2-5% per year, don't have such growth", he announces.

   However, Russia has crossed already the inflationary peak, Mr.

Gavrilenkov supposes. The peak fell to June-July, and by the year-end, the inflation attains 14%. The measures on the backing of the financial markets announced on September, 17 will compensate the capital outflow, and

will not result in the considerable

inflation growth, he says. The core reason of the inflation growth worldwide is

the soft monetary policy of the USA and China, the economists of the Petersen Institute for International Economics Adam Posen and Arvin Subramanian state. Mr. Gavrilenkov agrees that the USA have influenced indirectly on the growth of Russia's inflation, since the dollar weakening and the oil prices growth have led to the growth of the currency revenue, the budgetary funding and, as a result, to the inflation growth.

Updated September 16, 2008

   The statistics of grain

gathering published by the Russian Ministry of Agriculture confirmed the summer forecasts of the Ministry on the most bumper harvest in Russia over the 15 years: after 78% of land was handled, the growth exceeded

the indices of the previous year

by 20 million tons, and it is the highest index of the Russian export in 2007-2008.

In the opinion of the market participants and analysts, the troubles related to the harvest will accelerate the implementation of the government's plans on the strengthening of Russia's presence at the grain market.

   According to the data published by the Ministry of Agriculture, this year, the agency recorded the highest grain harvest over the last 15 years.

As of September, 15, 78% of the crop acreages in Russia gave 95,3 million tons of grain, and it is 21,3 million tons more as compared to

the previous year. The forecasts of the Ministry's head Aleksey Gordeev on the record grain harvest are a bit lower than the real figures.

The most bumper grain harvest was recorded in the core industry region, in the Southern federal district, – 33,1 million tons, in the Central federal district the harvest reached 23 million tons, and in the Volga federal district – 27,2 million tons. Three districts increased the crop yield by 8 million tons on average as compared to 2007, and the productivity growth, provided mainly with the large agricultural farms, totaled 21,2%. Thus, in the Siberian, Ural and Far Eastern districts the indices are lower, than the previous year. As of September, 15 the gathering of grain in the southern Russia that brought about 10 million tons of grain more is finished, and thus, the figures of the 2008 harvest can change, but insignificantly.

   It is better to remind that the harvest of 2007 was good, however, it was insufficient to stabilize the prices at the Russian internal market, since in autumn, 2008, after the prices for wheat had gone up sharply at the world markets (it was the beginning of the world price rise for food), the government of

the Russian Federation tightened the state regulation of the grain markets. From 2007-end, the export of wheat and the range of other grain was restricted by the tax duties, and the Ministry of Agriculture intensified the grain interventions; and in spring, 2008, it was announced about the plans to incorporate the state grain trader that would own no less than 25% of the grain export from Russia (in 2007, it totaled nearly 14 million tons).

   The record harvest of 2008 could reduce the state's activity at the grain market, however, the market participants consider that it would accelerate the scenario announced by first Vice Premier Victor Zubkov in May, 2008.

In the opinion of Ivan Nikolaev from Renaissance Capital, "such bumper harvest will accelerate the establishment of the state grain corporation, and it is a quite positive aspect". "The distribution of harvest is uneven, since some districts don't have good harvest, and in some regions it is even lower, than the previous year. The key problem is the shortage of freight cars and grain elevators", Dmitry Rylko from IKAR Company states.

   The bumper harvest can result in the core problem of

the grain market – the transport one, the head of OGO Group Ilya Karpov agrees.

"We don' t have enough freigh

t cars. However, when such problems with grain transportation arise, it is "locked" in the regions, but it will not result in the sharp prices drop". According to the forecasts of OGO Group, the present situation will not impede the growth of the export volume; however, the imbalances at the grain market that will escalate with the larger harvest, will intensify the necessity of the state interventions. In the Group are convinced that the interventions of the Ministry of Agriculture at the market will be directed to support prices and the profitability of the grain farms. It is better to remind that the interventions of 2007-2008 were targeted at cutting prices at the market.

   However, as per the forecasts of Renaissance Capital, the structures of the Ministry of Agriculture will both buy in and sell grain.

"The core volume of the harvested grain is of the 5th class, or feed grain.

Russia doesn't require such high amount of this type of grain, and its price will fall.

The prices for other grain will continue to grow, because it is insufficient.

Secondly, the export will grow as well, but the capacities of the seaports are insufficient also, therefore grain will be transported via the railway, and it is expensive", Mr. Nikolaev supposes. It is better to remind that in July, 2008, after the first data on the future harvest had appeared, the Russian Ministry of Agriculture declared that the success of the agribusiness wouldn't suspend the incorporation of the state grain trader and the activity expansion at the grain market.

Updated September 16, 2008

   In August, the growth of industrial production grew to 4,7% as compared to 3,2% in July and the dire results of June – 0,9% of growth. The head of the Russian Ministry of Economy Elvira Nabiullina, presenting the preliminary August data within the meeting of the government, declared that "the indices rebound". The economists surveyed consider that the industrial growth equals the indices of trend, and the latter is lower than the industrial growth' s indice

s of 2007.

   On September, 15, within the meeting of the presidium of Russia's government, the head of the Russian Ministry of Economy Elvira Nabiullina presented the preliminary August data on the condition of the Russian industry to the colleagues.

On September, 16, Rosstat (Federal State Statistics Service) will publish the first official data of the industrial growth, however, the Economy Minister has already declared that "the overall data of the industry development demonstrates the positive dynamic". It is better to remind that in summer, the analysts were speaking about the slowdown in the industrial production. According to the Minister, after in June the growth rates fell to 0,9%, and in July grew to 3,2%, August that is traditionally an unfavorable month for the industry, demonstrated the positive dynamics of 4,7% as compared to August, 2007. Within eight months of this year, the industrial production increased by 5,3%. "The indices of the industrial growth rebound", Mrs. Nabiullina declared.

   According to the data of the Minister, the process sector shows positive dynamics as well: in August, the processing grew by 6,5% (by 4,6% in July), and within eight months – by 7,6%, and the index is higher than the growth of the overall industrial production.

Moreover, in August, the mining sector, another problem of Russia's government lately, grew by 0,7% as compared to August, 2007, and in July it fell by 1,8%.

   The economists surveyed explain partly the August rates growth by "the base effect". Aleksey Morozov from HSBC marks that in August, 2007 the growth rates of the industrial production slowed down significantly (from 10,3% in July to 3,7% in August) and this fact "influenced partly on the results of August, 2008". The economists will not explain the growth rates in the process sector until Rosstat publishes the detailed data on the industrial production for August – Rosstat exactly has fixed the deceleration of the investments' growth rates in spr

ing-summer. Mr. Morozov links the growth recovery in the extractive sectors with new Lukoil's field launched in July – Yuzhno Khylchuyu oil field.

   In the meantime, Vladimir Salnikov from the Center for Macroeconomic Analysis and Short-term Forecasting names traditionally the indices of the industry for June and July as "market fluctuations that mean nothing". "According to the data of Rosstat, there is no catastrophe, however, the fall of growth rates is obvious", the economist says.

Mr. Salnikov considers that the August growth rates of the industry at the level of 4,7% "resembles the truth, since the growth equals the level of trend".

   The economists explain the fall of

the industrial growth by several short-term factors, such as the shortage of employees, the infrastructure limitations, the absence of available production capacities, as well as the acceleration of inflation and the tightening of terms of getting loans.

It is better to remind that in July, the investments in the fixed capital reached RUR 730 billion, and the growth in real (inflation adjusted) terms totaled 9,9% as compared to July, 2007. It is the lowest index since the beginning of 2006, and in July, 2007 it equaled 25%. Moreover, in 1H 2008, Rosstat fixed some drop in the real money income of the population living in Moscow and four regions of Russia for the first time during the latest years, and this drop influences on the reduction of consumer demand.

   However, in the opinion of the majority of the economists surveyed, the August data on the industrial production allows speaking about the implementation of the "soft landing" scenario or about the deceleration of growth rates of the Russian economy – 5-6% of the industrial growth forecasted by the Economy Ministry

for this year become more and more realistic.

Thus, the August data on the industrial production doesn't cover the consequences of

the war conflict in Georgia.

Its indirect influence on the industry (through the investors' assessments of risks) will emerge in autumn.

However, now, the influence of the military situation on Russia's economy is one of the core issues at the meetings of the Russian Union of Industrialists and Entrepreneurs (RUIE) and other enterprise unions with President Dmitry Medvedev.

Updated September 9, 2008

   Russia's economy, despite the world financial crisis and deceleration of growt

h rates of some world-leading countries, is still accelerating. According to the latest data published by Rosstat (Federal State Statistics Service), in 1H, the country's GDP grew by 8% in real money terms.

Thus, the growth rates were lower in 2Q,

than in 1Q – 7,5% against 8,5%. The experts ask not to cherish the illusion about high growth rates of the economy.

In 3Q, the results may worsen. At the moment, along with some deceleration of GDP' s growth rate

s, the experts mark its poor quality. The growth is attained mainly due to the industries that don't' relate to the real sectors of

the economy. In the experts' op inion, even they will demonstrate the drop of their positive dynamics

in 3Q.

   Such sectors as fishing (20,2%), trade (11,7%), transport and communication (9,4%), and construction (18,7%) demonstrated the highest growth of the value added in 2Q.

The growth in the manufacture was lower – 6,6%. According to the data of the statistics service, the fall was recorded in only one key industry of the economy – in mining (-1%). In the meantime, in August, Rosstat published the disappointing data, according to which, within the period of January-July, the industrial production grew by 5,4% against 7,6% as compared to the analogical period of

the previous year.

Thus, the July growth was only 3,2%. However, in June, the growth rates fell to 0,8%. The indices of oil extraction are falling each month: within seven months of this year, 283 million tons of oil and gas condensate were extracted, and it is 0,8% less as compared to the analogical period of the previous year. Thus, in July, the drop reached 1,9%, whereas in January-February, 2008, the extraction grew by 0,6% as compared to the first two months of the previous year, and it means that the tendency of oil extraction drop accelerates.

   According to the data of this year, fishing that has demonstrated the impressive growth, occupies less than 1% in the structure of Russia's GDP, whereas mining – about 10%, and manufacture – 17%. However, trade and service sector increase severely their presence – the stake of the latter reaches about 18% and continues to grow.

   In the experts' opinion, the relatively favorable situation in Russia's economy will worsen gradually, despite the growth in its certain sectors. "It is quite obvious that we can' t say any

thing positive about the real sector.

The growth of GDP's indices is guaranteed by means of trade as well that still plays the major role in the economy, about 18%, plus it grows by 12%", as the director of FBK's department for strategic analysis Igor Nikolaev says. "It is better to mark that the trade's stake reaches 10% in the developed countries, when in Russia this index is more than twofold". In the analyst's opinion, this fact dissatisfies, since the quality of the economy growth falls, moreover, the indices of the growth itself are falling as well. Therefore, the data of the statistics shouldn't delude. "The results of 3Q can be disappointing as well, since the June data has been quite alarming", as Mr. Nikolaev warns. "In July-September, the indices will worsen obviously; thus, even trade and other sectors of the unreal economy, if we can say so, will go down.

So, it is useless speaking about the modernization of economy in such conditions".

   According to the preliminary calculations of Rossta t

published on September, 1, in August the inflation was 0,2%. So, the hopes of the deflation didn't fulfill because of the prices' rise for meat and meat products.

There is little chances that the inflation will be lower than the last year's level (11,9%). Moreover, the Central Bank announced already that it suspended the tightening of the monetary policy.

   According to the preliminary calculations of Rosstat (Federal State Statistics Service), in August the inflation level can settle at 0,2%. The statistical service's conclusion was based on the study of consumer prices for August, 19-25: within this week, the consumer price index (CPI) didn't change. Thus, within the nine months of 2008, the inflation reached 9,5%, and 14,8-14,9% on the annualized basis.

   The majority of economists, including the Bank of Russia's management, expected that in August-September, the market would observe some deflation, or the CPI reduction, due to the seasonal price cut for food products. Despite the fact that Rosstat records the considerable price drop for all fruits and vegetables, it didn't happen. Within the studied week, carrot became the "record-holder" of the price cut – it lost 7,4%, potato occupies the 2nd place with 5,9%, then white head cabbage (5,2%) and onion (4,0%). The price for such food products as meat (beef – 0,8%), meat products (sausages, wiener, canned meat – 0,7-0,9%), rice (0,7%), confectionery (0,5-0,6%) and salt (1,1%) grew.

   In the monthly study of

the economic situation published recently, the Ministry of Economy was cautiously optimistic concerning the inflationary processes.

As it was marked in the document, in July "the inflation on the annualized basis started falling for the first time after its growth since March, 2007 – the annual inflation was 14,7% after the peak in June of 15,1%". The majority of the ec onomists surveyed expected the inflati

on deceleration on the annualized basis. This process doesn't take place yet, and the inflation is still very high.

   The key reasons are given in the study of the M

inistry of Economy. First, it is "the outstripping growth of the consumer demand for commodities and services as compared to their supply restricted by the insufficient competition"; second, "the continuing adjust of the internal prices to the high world prices (for food products foremost)". The last factor is of primary importance for Russia as compared to the developed countries, since in Russia the stake of expenses for food products in the consumer basket is higher, than in the developed countries.

In other words, the Ministry of Economy reminds again about the conventions of the inflation index: if the amount of the food products in the basket (characteristic of the countries with the relatively high income of the population) was less, the CPI would grow slower.

   However, there is the third factor about which the Min

istry of Economy reminds as well – the tightening of the monetary policy. The policy of the Central Bank and the continuing net outflow of the foreign capital already resulted in the considerable deceleration of growth rates of the money offer

and in the growth of the

interest rates.

On September, 1 another revision of reserve requirements that should lead to the additional tightening of the monetary policy came into effect. Only when some time passes, we will see how effective the steps of the Central Bank are. The first deputy chairman of the Central Bank Gennady Melikian warned already that the bank intended to make a pause: not to raise the interest rates and the reserve requirements for some time.

The pause lasts to October at least. The Central Bank requires some time to analyze the reaction of the Russian economy to the reduction of the money offer, and to assess the price rise in September,

as well as to analyze the scales of the capital outflow that followed the aggravation of the geopolitical situation after the war conflict in South Ossetia.

Updated August 28, 2008

    China,

the core world's exporter of steel, started to cut prices – only by 5% yet. Russia's metallurgical companies will cut the prices for their products in 4Q as well.

The majority of analysts and market participants consider that this drop is seasonal and the peak of prices for the metal falls to 2009.

However, some experts suppose that the price maximum has been already crossed and the price drop for steel starts next year.

    In October, Baosteel Corporation, one of the leading steel producers, will cut prices for the basic types of its steel products by the average of $29,24-43,86 per ton. "The price for the cold-rolled steel products will fall by $43,86 per ton, and the galvanized steel will fall by $29,24 per ton, and one ton of the hot-rolled pickled steel products will fall by $14,6 in October", as the agency reports. Shanghai Securities's expert Zhu Limin names the price drop for the iron ore imported from India to China among the reasons of such

price cut. Still, the source is talking about the reduction of the internal demand for steel products in Ch

ina. According to the data of Lehman Brothers, in July the ton of the hot-rolled rental products totaled $870 per ton in China. So, the drop totals about 5% taking to account this price.

    China is one of the key exporters of steel products worldwide and it directly influences on the level of pricing in the industry.

Therefore, the revision of the metal price that since 2004 grew by 140% as per the calculations of Deutsche Bank, is assessed as the beginning of the falling trend at the whole market. However, the opinions of the industry participants on this issue were different.

"The steel production is a seasonal business, and the prices drop in 4Q takes place each year", as Deutsche Bank analyst on metallurgy Olga Okuneva marks.

   Actually, as per the forecasts of Novolipetsk Steel JSC, in 4Q the prices for the semifinished products (slabs) and hot-rolled products will cut by 5-10%. International Iron & Steel Institute doesn't see any fundamental reasons for the prices correction in the industry. The growth of demand for steel and rolled products in 2009 will remain at the level of 2008 and will total 6,3%, as it is said in the company's review. "I don't think that the peak of prices rise for steel is over, since the prices for steel and rolled products will be higher in 2009 than in 2008", as Olga Okuneva marks.

According to the forecasts of Deutsche Bank, in 2009 the core raw material of the metallurgical companies – iron ore and coal – will grow by 5-10% more. However, thereafter

the prices will settle at the steel market, as Mrs.

Okuneva says.

   However, Lehman Brothers' forecasts are less optimistic. The banks' top-analyst Vladimir Zhukov expects that in 2009 the prices for the steel rolled products will drop within 5%. On the background of the production volumes' growth, the abolition or reduction of export duties on steel products is expected in China, as China Securities Journal reports.

At the same time, the experts expect that the growth rates of the economy in Europe and the USA decelerate. All these factors combined will result in the balance of demand and supply and will influence on prices, as Vladimir Zhukov explains.

Updated August 20, 2008

   In July, 2008 the Federal Tax Service set the absolute record on taxes collection – within a month they for the first time exceeded RUR 1,5 trillion

without the VAT, as well as in April, 2008. So, the overall sum totals more than RUR 1 trillion.

July's core achievement is the acceleration of income taxes that totaled more than RUR 0,4 trillion.

The economists can't explain the reasons of such rapid growth of taxes payment because in summer, 2008 large M&A deals explaining surges of the income tax didn't take place.

   Within the first seven months

of 2008 the Federal Tax Service (FTS) transferred to Russia's budgetary system RUR 6,31 trillion, of which RUR 2,71 trillion received the federal budget, the extra-budgetary (the pension fund and others) – RUR 0,92 trillion, and the rest was transferred to the regional and municipal budgets. The revenues to the budgetary system went 37,3% up as compared to the analogical period of the previous year.

It is better to mark that revenues to the federal budget were growing quicker: for January-July they totaled RUR 5,68 trillion, and it is 46,6% more than in the previous year. These differences are explained by the rapid growth of the FTS's surplus: for the first seven months the FTS transferred RUR 2,63 trillion to the budget.

   The tax revenues are accelerating due to several factors: inflation, economy growth followed by the population's income growth, improvement of tax discipline and, finally, high prices for the Russian raw materials.

All these factors influence on the tax statistics.

Within seven months, the income tax grew to RUR 0,93 trillion, and it is 39,3% more as compared to the analogical period of the previous year. During this time, the incomes and salaries grew by nearly 30%, and the rest is obviously explained by the net salaries.

  The MET on oil (Mineral Extraction Tax) has demonstrated the highest growth among all basic taxes – the collected sum is RUR 0,95 trillion, and it is 73,9% more than in January-July, 2007.

This tax's rate is linked to the world oil prices, and in 1H 2008 they set new records. The income tax just accelerated.

Firstly, its revenues grew by 46,4% (to RUR 1,65 trillion), it is quicker than the income growth of the Russian enterprises, as per the data of Rosstat (Federal State Statistics Service). In January-May, 2008 it increased by 34,6%. Secondly, in 2008 the monthly dynamics of its revenues was unstable.

If in June only RUR 0,1 trillion of this tax was transferred to the federal and regional budgets, in July it was already RUR 0,42 trillion. It is better to mark that the last figure corresponds to the taxable income at nearly $70 billion.

   None of the economists surveyed could explain the reasons of such volatility; the majority of them either referred to unawareness of the FTS' data, or evasively reasoned saying that "maybe, it is somehow linked to the accounting reporting". The central body of the agency is traditionally refuses to comment.

However, the reports of the FTS's Administration for the Moscow Province traditionally give three explanations of taxes growth: "active control work of the tax bodies in relation to unprofitable organizations", "payment of the income tax from stocks sale" and "revenues growth of the income tax from a surplus received as dividends". Moscow's stake in the income tax is huge (about 20%), but it can't give clear explanations of such surge. There was no data about deals with stocks for billions of dollars recently, as the M&A was almost dead in summer, 2008.

Updated August 15, 200 8

During August 2-8, the Central Bank's (CB) international reserves grew $200 million only. The core reason is the euro weakening to the US $. According to some economists, a week before the military operations started in South Ossetia the market observed the foreign capital inflow of $4-5 billion. On August, 8, on the background of a panic at the currency market, it was replaced by the sharp outflow. Both economists and the CB's representatives hope it ends soon.

On August, 14, the CB reported about the change of the international reserves' level (the present name for gold and currency reserves) for August, 2-8.

Within the accounting period they surged to the historically maximum levels of $597,5 billion. However, the reserves' growth totaled $200 million only – the minimum index since March, 2008.

"It is quite surprising that during the first week of August we observed some reserves' growth at all, taking to account the major rates change of the euro to the dollar and prices for gold. In terms of revaluation, the reserves lost nearly $9 billion for the week", Rory MacFarquhar from Goldman Sachs marks.

According to the estimations of Aleksey Moiseev from Renaissance Capital Investment Company, due to the US $ strengthening to the euro, the CB's international reserves were overvalued for $11 billion.

It means that there was the net foreign capital inflow to Russia during the first week of August, as the economists surveyed marked.

In the unchanging currencies' rates and prices for gold, in the current payments position, the international reserves' growth corresponds to the zero capital inflow at nearly $5 billion. Calculations of the net capital inflow for August, 2-8, range from about $4 billion (Goldman Sachs) to $5 billion (ING Russia, Renaissance Capital).

However, on Friday, August, 8, at the currency market started some panic followed by the total sale of ruble assets and the ruble drop to the dual

currency basket. Thus, the CB was actively selling dollars to nonresidents, as Stanislas Ponomarenko from ING Russia reminds. On August, 11, the Ministry of Finance head Aleksey Kudrin declared that there was the capital outflow on August, 8.

Mr. Ponomarenko estimates the Friday outflow at $7 billion.

In the CB agree that the war conflict in South Ossetia

provokes the short-term capital outflow.

CB's first deputy chairman Aleksey Ulyukaev reported about this on Tuesday, August, 12, and marked that it wouldn't influence on the situation with the capital inflow in 3Q. It is better to remind that in 2008 the CB expects the net capital inflow at $40 billion level. "According to the results of 1H, our inflow was $13 billion, and we had some inflow in July as well.

I think that there will be some net capital inflow in Russia in 3Q and it continues in 4Q as well", Mr. Ulyukaev said. Moreover, he marked that Russia would take advantage of the short-term capital outflow.

When the CB steps up the reserve requirements and the ruble exchange-rate range, the bank ousts the short-term borrowings in order to make the foreign capital inflow more stable and predictable, and to attain a drop of a money offer growth and inflation as well.

The capital outflow will not be scale and long-term, as the economists hope.

"I think that everything calms down soon. The oil dollars continue stably coming to Russia", Aleksey Moiseev marks. Rory MacFarquhar is less confident: "We think that the capital inflow will suffer from the political climate tightening, but we continue seeing a potential for the ruble strengthening in the nearest months". Still Yaroslav Lisovolik and Georgy Kartashev from Deutsche Bank examine the scenario of the capital outflow in the published review devoted to the consequences of the war conflict in South Ossetia.

Thus, as per their estimations, even under the worst scenario, the growth rates of investments will fall by 2-3%, and GDP – by 0,4-0,5%.

Updated August 15, 2008

In 1H 2008 the volume of foreign investments in Russia's economy totaled $46,5 billion, and this figure is 22,9% less as compared to the ana logical period of the previous year,

as the Federal State Statistics Service (FSSS) reported.

In 1H 2008 the direct foreign investments in Russia totaled $11 080 million, and it means that their volume fell by 30% as compared to the analogical period of the previous year.

Moreover, contributions to the capital reached $7 033 million (the 4,6% growth), and loans from the foreign co-owners of enterprises totaled $3 530 million (the 59% drop), leasing – $66 million (the 40,2% growth), other direct investments – $451 million (the 5,6% drop).

In 1H 2008 the portfolio foreign investments in Russia reached $1 152 million and it is 4,4% more as compared to the level of the analogical period of 2007, including investments in stocks and shares – $948 million (the 12,8% drop).

Other investments in Russia totaled $34 298 million and it is 21% less as compared to the corresponding index of 1H 2007.

In addition, the trade loans reached $7 468 million (the 55,3% growth), other loans totaled $25 819 million (the 32,6% drop), of which over a peiod of time less than 180 days – $2 817 million (the 63,6% drop), and over 180 days – $23 002 million (the 24,7% drop). Other components of investments reached $1 011 million or became quadrupled.

In 1H 2008 the majority of foreign investments was directed to the area of wholesale and retail trade, to the maintenance of vehicles, motorcycles, household appliances and individual supplies ($13,479 billion), including Great Britain that directed to this area $3,936 billion, Cyprus – $3,679 billion, Luxemburg – $1,503 billion.

In 1H 2008 the mining industry received $4 557 million. The Netherlands became the leader by investments in the area of fuel and energy resources' extraction with $1,686 billion.

Expert comments
Olga Belenkaya, deputy head of Sovlink JSC analytical department

The drop of foreign investments' volume is quite logical.

Previous year scale IPOs were held: the Savings Bank, VTB Bank.

In addition, Rosneft used huge loans to take part in the auctions of Yukos's assets purchase.

Nothing of that kind took place this year.

Moreover, one shouldn't forget about the world liquidity crisis, as a result of which both portfolio investments and loans have been reduced.

According to the results of this year, we expect

the double drop of

the foreign capital inflow.

Updated August 7, 2008

As of July, 1 nonresidents stake in an aggregate authorized capital of all Russia's lending institutions totaled 26,8%, and increased by 1,7% since early year.

Foreigners own 100% in 70 banks, and they own controll

ing interests in 26 more.

"On the one hand, foreign capital expansion positively influences on the development of the banking services market, as it stimulates competition, pushes the Russian lending organizations to develop technological basis and offer various products range to clients", as Prospekt Investment Company analyst Veronika Chekina marks.

"On the other hand, the Russian banking system becomes more dependent on political or economic risks, as in case problems at the Russian market arise or the world financial situation worsens, foreigners are inclined to funnel funds out of the developing countries".

In the expert opinion, as long as the international financial markets will "run a fever", and foreign investors' fears for "business safety" in Russia will grow, one should not wait substantial foreign presence increase in capital of the

Russian banks. "However, as soon as the situation improves, foreign capital inflows back, as the Russian banking services market is far from saturation and possesses the enormous potential", as Veronika Chekina forec

asts.

"Whatever happens, the foreign capital stake will gradually grow, but one should not expect accelerated rates here", as Barrel Investment Company analyst Sergey Yurov supposes.

In his opinion, foreign investments inflow means foremost that Russia continues to penetrate into the world financial system.