Kudrin Calls for Watch on Inflation

Itar-TassAt the Cabinet meeting on Thursday, Kudrin said the 2006 inflation rate would stay within the 9 percent target.
The country's economy has become more sensitive to inflation since the country lifted restrictions on capital currency movements earlier this year, Finance Minister Alexei Kudrin said Thursday.

Kudrin, the Cabinet's leading fiscal hawk, called on the government to keep a close eye on inflation because even a relatively small increase may have a significant impact in the stock market and the banking system.

The government lifted capital-account currency movement restrictions in July, making it easier for foreigners to buy ruble assets but also exposing its strengthening ruble to speculative capital inflows.

"We should keep inflation firmly in check, otherwise we risk becoming a vacuum cleaner for speculative capital from the rest of the world," Kudrin told a Cabinet meeting Thursday.

The currency move and strong economic growth have attracted many foreign investors and led to a dramatic increase in net private capital inflows, expected to exceed $30 billion in 2006.

"With high inflation rates and a strengthening currency, returns on foreign investment in Russia, including investment in government debt, are above average in the world's markets," Kudrin said.

Russia is running a current account surplus as revenues from oil and gas exports flow into the country, forcing the Central Bank to buy foreign currency and creating an upward pressure on the ruble. The bank runs a managed float of the ruble, keeping it stable against a dollar/euro currency basket. But under political pressure to bring price growth in line with forecasts, the bank may allow the ruble to appreciate against the basket to make imports cheaper and take some pressure off the ruble.

Foreign investors closely watch the country's inflation data, and any signs of an overshoot make the ruble a safe bet. The bank has allowed the ruble to appreciate by 4.3 percent against the basket in small moves throughout 2006.

"Given our tight inflation guidance, even half of a percentage point increase is very significant for the stock market," Kudrin said. The benchmark RTS index grew by 65 percent this year hitting an all-time high last Friday.

Kudrin said December price growth in Russia would be higher than in previous months, but full year 2006 inflation was still expected to be about 9 percent, in line with the target. Prices were up 0.6 percent in November.

Kudrin said accelerated spending and excess liquidity in December would also result in higher inflation rates at the start of the New Year.

"December syndrome showed up strongly and will, of course, influence January-February," Kudrin said, declining to give his forecast for consumer price growth in December. Prices surged by 5 percent in the first quarter of 2006.

Prices rose 8.2 percent in the first 11 months of 2006 and Economic Development and Trade Minister German Gref said this week that consumer prices had risen 0.6 percent in the first 18 days of December.