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. Last Updated: 07/27/2016

World Bank Urges a Fund for the Future

Russia should come up with a coherent program on what it wants to do with its windfall oil revenues and maybe put some aside for future generations, a World Bank economist said on Tuesday.

"We see a lot of proposals -- let's increase investment, let's decrease taxes -- but we would like to see an attempt to lay down the whole framework," said John Litwack, author of the bank's latest report on the Russian economy.

Russia is running a current account surplus due to its booming oil and gas sectors. Much of the windfall is stashed in the stabilization fund, which was set up in late 2003 to protect the budget against oil price falls.

The World Bank expects the fund to reach $52 billion by the end of 2005 if the oil price stays above $60 per barrel.

Russian policymakers are often at loggerheads over the use of oil revenues with Prime Minister Mikhail Fradkov clashing with his liberal economy and finance ministers over a proposal to lower value-added tax to boost economic growth.

"It is becoming apparent that a lot of what Russia is now accumulating is not just a temporary reserve," said Litwack, the bank's leading Russia economist.

"Some of this money needs to be in a highly liquid fund to protect the budget against fluctuations but some of the money needs to go somewhere else."

The stabilization fund has not yet been invested and has only been used so far to repay $18 billion in debts to the Paris Club of sovereign lenders and the International Monetary Fund this year.

"Creating a fund for future generations and making some longer term investments with higher returns makes sense," Litwack said.

Litwack's comments lent support to a proposal by the head of Russia's financial regulator, Oleg Vyugin, to channel oil revenues into the country's undercapitalized pensions system.

The World Bank report also said Russia's economic boom was slowing as a result of the ruble's real appreciation -- which has eroded the competitive advantage created by the 1998 devaluation and default.

However, the report praised the government and the Central Bank for pursuing a prudent monetary policy and said that the investment climate in Russia was improving.

The IMF has criticized the Central Bank for its policy of keeping a nominal exchange rate stable by buying dollars and urged it to let the ruble appreciate. But Litwack disagreed: "We tend to think that what the Central Bank is doing is good."

The report expressed concerns about a 30 percent spending hike in the 2006 budget but said that government expenditure overall remained within the bounds of reason.

"It is not a disaster yet. What we are worried about is the future. There are certain lobbies that support very sharp increases in government spending that we think will have a destabilizing effect on the Russian economy," Litwack said.

n Russia may have a net inflow of capital this year for the first time since at least 1994 after reporting that $5.6 billion left the country in the first six months, Bloomberg reported.

"It's fully possible," Economic Development and Trade Minister German Gref said Tuesday. "Trends in the third quarter were very positive."