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. Last Updated: 07/27/2016

Kudrin Criticizes Monetary Policy in '06

The high pace of the ruble's real appreciation is the main flop of the country's economic policy in 2006, Finance Minister Alexei Kudrin said in an interview published Tuesday.

"The failure is the very high rate of ruble appreciation," Kudrin told Vremya Novostei in response to a question on what was this year's main economic policy failure.

"Such high appreciation rates can be tolerated for, say, one year, but not two to three years in a row. If the national currency strengthens by 50 percent in 5 years, it is a serious blow for the economy," Kudrin said.

The ruble has appreciated by 8.3 percent in real terms against the basket of currencies of the country's trading partners since the start of the year. It was also up by 9.23 percent in nominal terms against the dollar in 2006.

The country is set to hit its full-year 2006 inflation target of 9 percent, the first single-digit inflation rate since the collapse of the Soviet Union. It will also post higher-than-expected rates of economic growth and investment.

But lower inflation comes at a cost of accelerated ruble appreciation. Kudrin is one of the most prominent opponents of the appreciation policy the Central Bank uses to fight inflation.

The Central Bank controls the ruble exchange rate by buying up mainly dollar-denominated oil and gas export revenues. A stronger ruble makes imports cheaper but hurts exporters.

The Central Bank has let the ruble appreciate by 4.29 percent in small moves throughout the year against a dollar-euro currency basket it uses to guide its exchange rate policy.

It argues a stronger ruble also makes imported machinery and technology cheaper and helps domestic manufacturers.

Kudrin disagreed, saying the economy was feeling the heat.

"Some industries and product categories have already suffered this year, especially when it affects the agricultural sector. ... It is cheaper to import cheese than to produce it," Kudrin said.

Kudrin said lowering inflation was the main tool to curb further appreciation of the ruble. He said 2006's performance in combating inflation was marred by an increase in the ruble's real effective appreciation rate, calculated using inflation levels in Russia and its trading partners.

"The appreciation is a result of high inflation. Therefore restraint in government spending ... is one of the most effective tools for, among other things, curbing the ruble appreciation," he said.

Kudrin is the leading government fiscal hawk, facing an uphill struggle to limit government spending on social needs and infrastructure projects.

"Many of my colleagues are wrong. They think that if they spend budget money on development they can achieve this development, even if inflation stays high," Kudrin said. "But the fight with inflation is the fight for development."

Replying to a question about his decision last Tuesday not to allow the Audit Chamber to conduct an investigation into the Central Bank, Kudrin said this decision was not caused by any particular intergovernmental disagreements.

"We understand that in some instances financial authorities will attract the attention of the Audit Chamber," Kudrin said. "But at the moment there is already an investigation being carried out there by the Prosecutor General's Office."

(Reuters, MT)