Inflation Poses Risk To Renewed Growth

The economy will probably contract 8.7 percent this year, and the nascent recovery still faces risks, particularly faster inflation, Finance Minister Alexei Kudrin said Wednesday.
“We have to achieve a lower level of inflation and low interest rates, keeping bank deposits safe for consumers,” Kudrin told reporters. “It’s the basis for future investments.” Inflation will not exceed 7.5 percent in 2010, he said.
The State Statistics Service said Wednesday that the inflation rate advanced 0.2 percent, the biggest weekly increase since July, in the seven days through Monday as food costs increased. That brought inflation rate for the year to date to 8.8 percent, the service said.
The Economic Development Ministry said Tuesday that inflation would likely reach 8.8 percent to 9 percent this year and slow to between 6.5 percent and 7.5 percent in 2010, down from 9 percent to 10 percent.
“Having won at the first stage of fighting the crisis, we should not relax and should be ready for a second stage. … The second year will be difficult in its own way,” Kudrin said. “Uncertainty is very high, demand and investment remain very low. … There remains a risk of letting inflation go.”
Output in Russia has picked up as prices for commodities gained on improved prospects for a global recovery and bank lending stabilized. The Central Bank has cut the refinancing rate to a record-low 9 percent to help spur lending and curtail a contraction that saw the economy slump a record 10.9 percent in the second quarter.
The economic decline eased in the third quarter, when output fell an annual 8.9 percent. Gross domestic product will continue growing this quarter after increasing during the previous three months, Kudrin said.
Russia may post a net capital outflow in the fourth quarter, Kudrin said. The government boosted budget spending by 27 percent this year compared with 2008, and expenditure will remain at the same level next year, he said.
A stronger ruble and high profit margins available on Russian markets continue to lure speculative capital, the finance minister said.
Kudrin said “hot money” flows played a negative role during the crisis and that Russia might start capping foreign borrowing by state-run companies. It will not, however, revise its plan to sell about $18 billion in debt next year, even after the price of oil rose.
The debt sale is “necessary to gradually shift to a market means of plugging the deficit, which is used by all countries,” Kudrin told reporters. The government has approved borrowing of as much as $17.8 billion on international markets next year in the country’s first bond sale since its 1998 default on $40 billion.
Russia’s return to the sovereign debt market will also allow the country to create a benchmark that can function as a “reference point” for other borrowers, including private companies, Kudrin said.
This year’s 74 percent rise in Urals crude has prompted other policymakers to suggest that the government may need to sell less debt to plug its deficit.
Next year’s deficit will be equivalent to about 6.2 percent to 6.5 percent of gross domestic product, Klepach said, compared with a Finance Ministry estimate of 6.8 percent. The government, which is running its first deficit in a decade, expects the gap will reach 6.9 percent this year.
Standard & Poor’s raised the outlook on Russia’s BBB credit grade to stable from negative on Monday. The move is being taken as “high praise” for the government’s plans to reduce the deficit, Kudrin said. “It also means that Russia will have a good opportunity to borrow on international markets.”
He also said the country’s Reserve Fund would hold 1.8 trillion rubles ($59 billion) at the start of next year, while the National Welfare Fund would be at 2.8 trillion rubles.