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. Last Updated: 07/27/2016

Officials Warn of Rising Prices

MTAlexander Zhukov says the government must keep tight control on spending.
Government officials were out in force Monday, reassuring investors that Russia was on track to meet its inflation target for 2005, but they repeated that containing runaway prices depended on maintaining a strict hold on spending.

Deputy Prime Minister Alexander Zhukov was upbeat on the economy, confident the 10 percent inflation target set for this year is secure. "Never in the history of Russia and of the U.S.S.R. has the country's financial position been so durable and stable," said Zhukov.

The government budget will post a record surplus this year and foreign currency and gold reserves might reach $200 billion by the end of the year while the stabilization fund will soar to over 2 trillion rubles ($70 billion) in 2008, Zhukov told foreign investors at a conference hosted by the Renaissance Capital brokerage.

The comments come amid growing concern over rising prices, fueled in particular in recent weeks by the government's decision to tap into its stabilization fund of oil revenues to pay for social programs. That fund was originally set up to mop up inflationary oil revenues and to help smooth budget spending when the price of oil drops.

Central Bank deputy chairman Alexei Ulyukayev also reiterated that Russia would meet its target of 10 percent inflation in 2005, predicting that a bumper harvest this summer would drive down food prices to such an extent that average prices would be unchanged in the third quarter.

But analysts say the monetary authorities are basing their expectations on outdated figures.

The latest government forecasts predict agricultural output this year will be just 2 percent higher than the moderate harvest last year. Grain harvest is actually projected to decline.

"They're hoping for a miracle because they've got nothing else to hope for," said Peter Westin, chief economist at Aton Capital, who estimates that inflation will reach 11.9 percent by the end of the year.

Consumer prices rose by 7.3 percent in the five months to May 31.

Zhukov warned that the state must stay tight-fisted on spending if it wants to cut inflation by 1.5 to 2 percent over each of the next three years and thus reduce annual price growth to 4 to 5 percent by 2008.

Finance Minister Alexei Kudrin reiterated that spending money from the stabilization fund "adds kerosene to the fire" of inflation.

The government currently directs all revenues from oil exports over $20 a barrel to the stabilization fund. The threshold will rise to $27 per barrel next year, increasing state spending by an estimated 326 billion rubles ($11.4 billion).

Any further changes to the stabilization fund "will call into question the commitment to fighting inflation [and] subvert trust in the government that changes its plans every year," Kudrin warned.

Staff Writer Maria Levitov contributed reporting to this article.