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#7 - JRL 7003
International Herald Tribune
January 2, 2003
Russian utility curbs slow inflation
Bloomberg News

MOSCOW Inflation in Russia slowed to 15.1 percent in 2002, the lowest rate in five years, as the government limited price increases for natural gas and electricity.

Consumer prices rose 1.5 percent in December, driven by food and services, which were also main contributors to annual inflation, the State Statistics Committee said Tuesday.

The annual inflation rate missed the government's target by 1.1 percentage points, an improvement over 2001, when the rate of 18.6 percent was one-third higher than the goal. The central bank again printed rubles to buy dollars earned from oil exports as the price of Urals blend crude rose 56 percent.

"High oil revenues are a double-edged sword for Russia," said Christopher Weafer, a strategist at Alfa Bank, Russia's largest privately held bank. "They bring much-needed cash into the economy while at the same time making the government's fight to keep inflation low much harder." The government limited increases in utility prices to help combat inflation. Unified Energy System RAO, the national power monopoly, was allowed to raise electricity prices about 22 percent, or half of what the utility requested. Gazprom OAO was permitted to raise domestic natural gas prices by 25 percent after seeking a 37.5 percent increase.

Inflation reached 2,000 percent in 1992, when Russia removed price controls on most goods, and 84.4 percent in 1998, when it let the ruble's value float and it defaulted on $40 billion of debt.

While inflation slightly exceeded 15 percent last year, the ruble declined 4.2 percent against the dollar, eroding the price advantage that domestic producers had over importers.

"The strength in the ruble and high inflation are hurting the competitiveness of Russian manufacturers, both in the domestic and export markets," said Weafer, the Alfa Bank strategist.

Russia's economy grew 4.1 percent in 2002, slowing for the second year, Economy Minister German Gref said last week. It expanded 5 percent in 2001 and 9 percent in 2000. The government has set this year's inflation target at 10 percent to 12 percent.

"Given the high oil prices, meeting the 12 percent forecast will be challenging," said Katya Malopheeva, an economist at Renaissance Capital.

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