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Moscow Times
May 31, 2006
President Targets Growing Inflation
By William Mauldin
Staff Writer

President Vladimir Putin on Tuesday called for greater efforts to tackle inflation and said the burgeoning stabilization fund should be split into two parts -- a rainy-day fund and one for future generations.

Putin, outlining a 10-point budget plan for next year, also called for higher pensions and salaries for the military and other state employees -- extra spending that some analysts said could hurt rather than help the fight against inflation.

"Consistent efforts to reduce inflation rates must be at the center of the government's attention," Putin said in his annual budget address, which was sent in written form to the Federal Assembly. "Anti-inflationary measures must focus on eradicating the causes of high inflation instead of suppressing spikes in inflation."

In last year's budget address, Putin also attacked inflation, and said it would be unacceptable if the government failed to meet its inflation targets.

The Economic Development and Trade Ministry this week raised its inflation forecasts for the next two years by half a percentage point to a range of 6.5 to 8 percent for 2007 and a range of 4.5 to 6 percent for 2008, Interfax reported. The government aims to restrict inflation to 9 percent this year.

In a research note to investors, Troika Dialog said the "measured budget policy" outlined in the address should contribute to financial stability and lower inflation in the future.

But Rory Macfarquhar, an economist for Goldman Sachs, said he doubted the government would directly attack inflation by letting the ruble appreciate against the dollar in the near term.

"The ultimate weapon they have is a stronger exchange rate, but that's not the weapon they want to use," Macfarquhar said. "They're going to only allow just enough appreciation to get them the kind of monetary tightening that they need to remain on their downward inflationary path, and no more."

Government officials fear that a stronger ruble would hurt the country's export-dominated economy, since the expenses of oil companies, for example, must be paid in rubles, even as their products are sold in dollars.

But some economists have said that allowing the ruble to strengthen would be better for the Russian economy in the long term than relying on a cheap ruble to boost exports.

"That means that you're relying on somewhat artificial and transient advantages rather than allowing industry to become more competitive in a global sense," Macfarquhar said.

For the last few years, analysts say, the government has typically gone on a spending spree for most of the year and then switched to tightening its belt in an effort to meet its inflation target by year's end.

Besides the perennial inflation problems, Putin talked about splitting the stabilization fund into two parts, keeping one part as a cushion against a collapse in oil prices and holding the balance for future generations.

"We need a clear division between the part of the stabilization fund where money is accumulated to minimize the negative effects of any oil price slump -- the reserve part -- and funds accumulated above this amount -- the fund for future generations," Putin said.

Established in 2004, the $71.5 billion stabilization fund is currently being converted from rubles into high-quality bonds denominated in dollars, euros and pounds sterling. Finance Minister Alexei Kudrin said last week that he hoped to invest a portion of the fund in riskier assets such as Western blue-chip stocks.

Analysts hailed the idea of splitting the fund, comparing it to similar projects in Norway and Kazakhstan, also oil-rich nations.

"It's because they've got so much cash they don't know what to do with it," said Al Breach, a Russia strategist at UBS. "There's one side of it that's a rainy-day deposit account -- it doesn't make much sense to add much more to that part of it."

Since part of the fund is unlikely to be needed anytime soon, it would make sense to invest that part in stocks, which despite their ups and downs consistently provide greater returns over time.

Putin said the fund should not be used for budgetary items other than paying down foreign debt.

Separately, Kudrin said Tuesday that he hoped Russia could repay all of its foreign debt by the end of the year. After signing an agreement on settling $1.6 billion in Soviet-era debt with Kuwait, Kudrin indicated that all foreign debt -- including some $22 billion owed to the Paris Club of sovereign creditors -- could be repaid in 2006, Reuters reported.

Some nations, including Germany, have been reluctant to settle the debt early, insisting on continued payments according to the original schedule.