Capital Inflow Jumps to $40Bln

KAZAN -- Russia will exceed this year's target for net private capital inflows as early as May amid a series of fund raisings by private and state firms, which puts inflation targets under further pressure, the Central Bank said Sunday.

"We had $13 billion of net capital inflows in the first quarter, then $17 billion in April alone," said the bank's first deputy chairman, Alexei Ulyukayev.

"This is $30 billion in the first four months and the figure at the end of May is likely to be around $40 billion," he told reporters in Kazan on the sidelines of the European Bank for Reconstruction and Development's annual conference.

Large capital inflows create additional inflation pressures and prompt the Central Bank to resort to its main anti-inflation tool of allowing the ruble to appreciate.

But real effective ruble appreciation is in turn affecting the competitiveness of the Russian industry by hurting export-oriented companies and spurring imports.

President Vladimir Putin has told the government to stick to its initial inflation and real effective ruble appreciation targets -- a goal seen by many analysts as unrealistic due to rising state spending on social programs and infrastructure ahead of the presidential elections in March 2008.

In April the Central Bank raised its forecast for 2007 net private capital inflows to $35 billion from $30 billion.

Government officials have said capital inflows of over $30 billion will force the Central Bank to allow the ruble to appreciate by at least 5 percent.

Large private capital inflows are a result of massive fundraising by Russian companies on international debt and equity markets, including loans and initial public offerings.

A series of major business deals is sucking huge sums into Russia. They include asset sales of bankrupt oil firm Yukos and the world's largest stock market float this year by Russia's second-biggest bank, VTB.

The Central Bank said earlier this month it would raise minimum reserve requirements for banks from July 1 to fight inflation pressures caused by large capital inflows. The move means banks will need to set more money aside at the Central Bank when borrowing from their counterparts abroad, issuing eurobonds or taking deposits from individuals in Russia.

"I would not exclude a further increase in minimum reserve requirements," Ulyukayev said.

The government aims to cut inflation to 8 percent this year from 9 percent in 2006, a figure already questioned by many analysts after consumer prices grew by 4 percent in the first four months of this year.

Putin's top economic aide, Arkady Dvorkovich, said Sunday he believed the Central Bank would fail to meet its 2007 real effective ruble appreciation target of 5 percent, and the figure will be closer to 8 percent.

But Ulyukayev said he believed both the inflation and ruble appreciation targets were still achievable.

"I think the appreciation will be close to the initial estimates," he said adding that inflation was likely to be over one percentage point lower in the first half of 2007 versus 6.2 percent in the first half of 2006.