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INTERVIEW-IMF says high oil prices could hurt Russia
By Andrew Hurst

MOSCOW, Jan 16 (Reuters) - High oil prices will drive up the value of the rouble and could slow Russian economic growth unless the government resists going on a spending binge that would further inflate its currency, the IMF's chief representative in Russia said on Thursday.

"The problem is that oil prices are much higher than assumed in the 2003 budget, currently by about $8," said Poul Thomsen, who heads the International Monetary Fund's Moscow office.

Oil prices have shot up in anticipation of a United States-led military strike to oust Iraqi leader Saddam Hussein.

Thomsen also said Russia needed to be ready to cut spending quickly if oil prices plunge should Saddam Hussein be overthrown and replaced with a pro-western government.

Russia's 2003 taxing and spending plans as contained in the state budget are based on the assumption of an average price of $21.5 per barrel of Urals oil. Russian Urals oil was quoted at around $31 a barrel on Thursday.

"High oil prices will cause pressure on the rouble to appreciate and the resulting weakening in competitiveness of Russian producers would have a negative impact on economic growth," Thomsen told Reuters in an interview.

"But by saving the windfall revenue gains associated with high oil prices, the government can do much to reduce the pressures for rouble appreciation and thereby help sustain the economic recovery," he added.

With parliamentary elections looming this year and a presidential poll next, some analysts fear President Vladimir Putin's reform-minded administration will blow the oil windfall in a vote-buying spending spree.

"It is therefore very important to resist the temptation, particularly big in an election year, to use the revenue windfall associated with higher oil prices to raise expenditures," said Thomsen.

"The windfall should be saved in the form of a higher than budgeted fiscal surplus," he added.


Russia's 2003 budget is aiming for a 0.6 percent fiscal surplus with the economy predicted to grow 3.5-4.4 percent after growth of four percent in 2002.

Russia, the world's second largest crude exporter, has a heavily oil-dependent economy which is highly vulnerable to wild swings in oil prices.

A failure by the government to stamp out rampant corruption and slash red tape is widely blamed for strangling growth of job-creating small enterprises.

International financial institutions, including the IMF, the World Bank and regional lending agencies such as the European Bank for Reconstruction and Development have appealed to Russia to step up a drive to diversify its economy away from dependence on oil and gas exports.

Turning to the possibility of an oil price drop if Saddam Hussein is ousted, Thomsen said the economy would languish if crude prices fell to $15 for long.

"Most analysts believe that a drop in oil prices to, say, $15 per barrel for Urals for a prolonged period would have a significant negative impact," he said.

"I believe that the Russian economy under these circumstances would remain mostly stagnant, or grow by 1-2 percent per year at best," he added.

"We should see no acute macroeconomic problems provided that economic policies are adjusted in an appropriate and timely manner," Thomsen said.

With lower oil prices the government would run the risk of accumulating a big fiscal deficit unless it either hiked taxes or reined in spending, but with reserves of almost $50 billion it was unlikely to encounter balance of payments difficulties.

The only way to correct Russia's weakness in the face of gyrating oil prices was to push through structural reforms.

"Investments and restructuring outside the primary commodity sectors have not been satisfactory," said Thomsen.

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