Inflation Scares Central Banker

LONDON -- Central Bank deputy head Konstantin Korishchenko told a sovereign wealth conference that the bank was "really worried" about inflation, while ruling out a stronger ruble as a weapon against price increases.

"There is a risk related to skyrocketing prices for commodities," Korishchenko said on the sidelines of the conference Thursday. "It's a global problem. We are really worried."

The Central Bank and the government are struggling to curb inflation spurred by oil and gas revenue and rising global food costs. They aim to slow price gains to 8.5 percent this year from 11.9 percent in 2007.

Korishchenko said a stronger ruble, which would lower the cost of imports, was not the most effective way to achieve that goal.

"We really think that this tool, the appreciation of the domestic currency, isn't that powerful in fighting inflation because it has a flipside," he said. "It has positive developments for imported goods, but negative developments for flows coming into the country and increasing the money supply."

A decrease in capital inflows would reduce pressure on inflation this year, Korishchenko said. The nation attracted a record $82.3 billion of inflows last year.

The Central Bank plans to switch to inflation targeting, he said. That would mean allowing the ruble, which the bank controls by buying and selling foreign currency, to trade freely, Korishchenko said. He declined to give a date when this would start.

Rising global borrowing costs following the collapse of the U.S. subprime mortgage market have also made it more difficult for Russian banks to obtain funding, he said. He estimated that Russian banks have about $100 billion in foreign debt.

The bank doesn't plan to diversify or change the proportion of currencies it holds in its $494.5 billion foreign reserves, the world's third largest, he said.

In comments at the conference, Korishchenko appeared to disagree with a senior Finance Ministry official on how the newly created National Welfare Fund should be invested.

Roman Shiiko, head of Stabilization Fund management at the Finance Ministry, said the ministry's position was to "invest abroad because of the inflationary pressure."

He added that Russia was considering the Norwegian model for future equity investments for the wealth fund, potentially looking to base it on country rather than currency allocation.

But Korishchenko seemed to agree more with the sentiment of President Vladimir Putin, who said earlier this month that the country could use part of the oil wealth stockpile at home.

"Domestically it's not a one-sided issue. Yes, there is a conflict in managing this money in regards to investing safely into liquid assets, avoiding inflation pressures ... [but] where should we get the money to preserve this relatively high rate of growth?" Korishchenko said.

He noted net capital outflows in the last two months and said foreign investments in Russia were becoming more short-term oriented.

"We should consider the option to channel at least part of the wealth to support domestic growth," he said.

The Finance Ministry is due to present proposals on wealth fund investments by Oct. 1.

Bloomberg, Reuters