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. Last Updated: 07/27/2016

Government Reveals Forecasts for 2006

The Cabinet on Thursday outlined the key parameters for the 2006 budget and approved the government's three-year plan for economic development.

Finance Minister Alexei Kudrin said the 2006 budget would be based on economic growth of 5.9 percent, a ruble-dollar rate exchange rate of 27.2 rubles per dollar, and a drop in inflation to 7.8 percent. The ministry is expecting a budget surplus of 0.5 percent, he said.

Petrodollars pouring into the country, coupled with growing consumer demand and the government's reluctance to allow the ruble to strengthen, have caused inflation to balloon. This year the government expects inflation to hit 10 percent, compared to 11.7 percent in 2004.

"I am not ruling out that we will need to use the entire range of instruments, including additional strengthening of the ruble, to check inflation," Kudrin said Thursday, Interfax reported.

Kudrin also said that external borrowing was unlikely for the next three years, as the government plans to seek loans from domestic lenders.

"The probability of borrowing on capital markets abroad remains extremely low, with the exception of already-agreed loans from foreign governments and international financial organizations," the government said in a statementon its web site. Kudrin also reiterated Thursday that the government plans to pay off some of Russia's $110 billion external debt ahead of schedule.

The Finance Ministry has looked at the mid-term future based on two forecasts -- one expected and one more pessimistic.

The expected scenario is based on an average world oil price of $34 per barrel in 2006 and between $33 and $35 per barrel in 2007 and 2008. The pessimistic forecast puts the price of crude at $28 per barrel for the entire period.

"This means that we have an opportunity to see how budget expenditures would fit into more reasonable oil prices, for which we should be ready," Kudrin said, Interfax reported.

Prime Minister Mikhail Fradkov appeared to be pleased with Kudrin's economic plan, particularly with the fact that next year's budget is expected to maintain a surplus.

"The 2006 budget is being formed with a surplus, which is an absolutely necessary condition for securing financial and economic stability and restricting inflation,'' Fradkov said, Interfax reported.

Analysts expressed skepticism over the government's ability to tame inflation at 7.8 percent.

"I don't believe it, since no explanation has been offered on how this goal will be achieved," said Alexei Moiseyev, economist at Renaissance Capital. His own calculations put 2006 inflation at a minimum of 9 percent.

Al Breach, chief strategist at Brunswick UBS, was even more pessimistic about the government's inflation expectations.

"This forecast does sound optimistic. I have the inflation 12 percent this year and next year," he said.

Breach, however, said that other figures and goals announced Thursday, including the intention to replace foreign debt with domestic borrowing, indicate that the government was maintaining "a prudent policy."