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. Last Updated: 07/27/2016

Flexibility Urged for Ruble Rate

Russia should allow more flexibility in the ruble's nominal exchange rate to fend off inflation pressures caused by massive capital inflows, the World Bank said in a report released Wednesday.

"While maintaining overall stability on currency markets, various options that would allow more flexibility [nominal appreciation] are nevertheless worthy of consideration in the present situation," the bank said.

The report said hefty bank loans and share offerings by Russian companies have brought a wave of capital into the country this year, potentially jeopardizing efforts to control inflation.

The first five months of the year could see record capital inflows of $45 billion, the bank's report said, citing Central Bank forecasts. That compares with $42 billion for the whole of 2006, it said.

"Money supply growth is reaching record levels, and less of the monetary expansion is being sterilized by accumulation in the stabilization fund than in the past," the report said. "Inflation has remained under control in early 2007, but could well become problematic in the second half of the year."

The bank's chief economist for Russia, John Litwack, told a news conference that he believed the government would find it very difficult to cut inflation to 8 percent this year from 9 percent last year.

"We believe that inflationary pressure is rising, and we won't be surprised if inflation hits 9-10 percent," he said.

The deputy head of the Central Bank, Konstantin Korishchenko, said the most effective and painless means to divert capital inflows was currency controls, which Russia dropped in 2006 when it liberalized the capital account.

The World Bank also said that while industries oriented to domestic consumption may continue to thrive, the strong ruble will not allow Russia to develop manufacturing sectors competitive on international markets.

"The key task of achieving export competitiveness outside of resources and metals will remain difficult in the current environment," the report said.