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Moscow Times
December 19, 2005
IMF Urges Russia to Raise Investment
By Anna Smolchenko
Staff Writer

Russia's economic growth is becoming increasingly imbalanced and is in danger of slowing down in the near future because of the current low level of investment, a senior International Monetary Fund official said in an interview published Friday.

Following a fact-finding mission to Russia earlier this month, the IMF also warned that problems like inflation, the real appreciation of the ruble and an influx of imports could become more serious in the future.

"Economic growth in Russia is becoming more and more dependent on consumption because investment remains relatively low," the IMF's Paul Thomson told Kommersant. "Thus, economic growth ... is becoming increasingly imbalanced," said Thomson, who headed a weeklong mission to Russia that ended on Dec. 7.

Thomson rapped the government for increasing wages and social expenditures in the budgets for this and year, saying the state should first tackle inflation and speed up reforms.

"There remains the question of whether a mere increase in the financing of education and health care, without reforming these sectors, can make them more efficient," Thomson said.

Under President Vladimir Putin's plan, the government is to pump an additional $4.6 billion into health care, education, agriculture and housing next year.

Thomson reiterated that Russia should adopt a greater exchange-rate flexibility if it wants to control inflation. The Central Bank opposes a freer float, opting instead to juggle the tasks of reducing inflation and limiting the real appreciation of the ruble.

"These two targets are to a certain extent contradictory," Rory MacFarquhar, a Moscow-based economist at investment bank Goldman Sachs, said Friday.

In a report earlier last week, Goldman Sachs commended Russia for keeping inflation on a downward trend. However, it said, the Central Bank's "dual-target policy" cannot be sustained indefinitely.

"We believe the expansionary 2006 budget will lead the Central Bank of Russia to choose to tolerate a more rapid real appreciation towards the middle of next year," MacFarquhar said.

Real ruble appreciation has hit an all-time high of 10 percent this year, while inflation has been hovering around 11 percent. According to Goldman Sachs, inflation is expected to grow to 12 percent next year. The government, meanwhile, is hoping to keep it under 9 percent.

Russia's economic growth is expected to accelerate in the first half of 2006, fueled by strong household demand, Goldman Sachs said in another report released last week, Bloomberg reported. Gross domestic product growth may accelerate to 6.6 percent next year, before slowing to 6 percent in 2007, the report said.

The Russian economy will expand 6 percent this year, Finance Minister Alexei Kudrin said earlier this month.