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. Last Updated: 07/27/2016

Cabinet Backs $6Bln Extra State Spending

The government on Thursday approved a 161 billion-ruble ($6 billion) hike in 2006 spending, as it seeks to allocate windfall revenue generated by sky-high oil prices.

Deputy Finance Minister Tatyana Golikova said ministers had approved budget amendments that foresaw an overshoot in revenues this year by 1.12 trillion rubles ($41.8 billion).

"The amendments have been approved and we expect the revised budget to land in the State Duma on Nov. 4," Golikova told reporters after the Cabinet session.

Even with additional spending plans, the government still expects to run a 1.7 trillion-ruble surplus, equivalent to 6.2 percent of gross domestic product, according to figures released by the government before the Cabinet met.

"This kind of budget slippage is to be expected, given the high oil prices and large overshoot in budget revenues," said Rory MacFarquhar, an analyst at Goldman Sachs.

Of this year's total overshoot, 307 billion rubles ($7.8 billion) will not be absorbed by the $77 billion budget stabilization fund, which collects taxes levied on oil priced above $27 per barrel.

Unspent money will be sent to the fund at the start of 2007. The government plans to spend the windfall on building houses for army servicemen, repairing the country's potholed roads and on airports, as well as on education and health projects.

Finance Minister Alexei Kudrin, the government's most prominent fiscal hawk, discussed the increase this week with President Vladimir Putin, who asked him to ensure the spike did not stoke inflation.

The government is close to meeting a 9 percent 2006 inflation target, economists polled in October said, but an injection of extra budget cash could spur prices next year.

Golikova dismissed inflation worries: "We believe this spending will not have any consequences for inflation."

Public institutions have a tendency to hold back budget funds throughout the year and frantically spend them in December. This spending spree traditionally results in a spike in consumer prices in January.

MacFarquhar said the government had only spent 2.8 trillion rubles ($105 billion) as of the end of September, implying that 35 percent of annual primary spending will come in the last quarter of 2006.

Russia has been reaping the benefits of the oil bonanza in 2006, but most recently the price of Urals crude, its main export blend, has fallen by 38 percent since its July highs.

The fall, combined with a rise in export duties, caused a liquidity shortage on money markets in October, pushing up interbank rates and forcing banks to turn to the Central Bank to borrow money.