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. Last Updated: 07/27/2016

Illarionov Sounds Oil, Ruble Alarm Bells

Russia has no obligation to dance to OPEC's tune and should not reduce oil exports, Andrei Illarionov said Monday.

Speaking at a seminar on real exchange rate appreciation and economic growth, President Vladimir Putin's top economic adviser said cutting crude exports would hurt the economy.

Illarionov's remarks came as visiting OPEC Secretary-General Ali Rodriguez and President Rilwanu Lukman met with Prime Minister Mikhail Kasyanov and other top officials in an effort to convince Russia to reduce crude exports.

Oil was one of the best-performing sectors of the economy in January and February, with 8.7 percent production growth over the same period in 2001, according to industry sources. Illarionov said agreeing to second-quarter crude export cuts would endanger an already fragile economy, with real ruble appreciation, a measurement of inflation and the currency's strength in relation with the currencies of Russia's main trading partners, a main factor in slowing the rate of growth in industrial production over the past three months.

The real ruble exchange rate is at 81 percent of the level it was at in July 1998, the month before the government devalued the currency and defaulted on its debts. The benefit -- import substitution as domestically produced goods become price competitive with foreign goods -- has been evaporating as the real rate climbs upward. Imports grew 19 percent in 2001, according to the State Statistics Committee.

For every 1 percent the real rate rises, gross domestic product growth is expected to slow by 0.5 percent, and it has already reached a point where the economy could start shrinking, Illarionov said, based on analysis of the past four years. But any talk of recession before September would be premature, he said.

To keep inflation within the government's forecast of 12 percent to 14 percent for the year and fight real ruble appreciation, the government should rein in tariffs of the natural monopolies -- Unified Energy Systems, Gazprom and the Railways Ministry, Illarionov said.

In addition, he called for cutting government spending as a percentage of GDP. He also urged the government to continue paying down its sovereign debt, calculate its budget with an oil price of $10 to $12 per barrel and plow all excess revenues into a stabilization fund.