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. Last Updated: 07/27/2016

Officials Fret as Capital Inflow Passes Estimates

ST. PETERSBURG -- Net inflows of capital into the country exceeded $60 billion in the first five months of 2007, but the pace should slow, Central Bank Chairman Sergei Ignatyev said Thursday.

The inflows have created a major headache for policymakers as they try to curb inflation this year to 8 percent, hampered by lacking a full range of policy instruments to insulate the $1 trillion economy from a surfeit of cash.

But Ignatyev said a raft of capital market transactions -- the auction of assets in bankrupt oil firm Yukos and equity fund raisings by state-controlled banks Sberbank and VTB -- had now peaked.

"We expect the inflow of private capital to slacken off, a slowing of growth in foreign exchange reserves and a very substantial slowing of growth in money supply," Ignatyev told a banking conference in St Petersburg.

Inflows of capital have accelerated since the government lifted capital controls last July and totaled $41.6 billion for the whole of 2006, after just $900 million in 2005.

The Central Bank targets a stable nominal ruble exchange rate against a currency basket to defend Russia's economic competitiveness, buying dollars and printing rubles to finance the purchases.

That has fueled annual money supply growth of 62 percent, and stoked speculation that the Central Bank may allow the ruble to appreciate -- as it has done in the past -- to rein in price pressures.

Ignatyev was seconded by Finance Minister Alexei Kudrin, who said the capital inflows would neither upset efforts to limit inflation nor destabilize the ruble exchange rate.

"Capital inflows are not creating a critical situation on inflation or the exchange rate," Kudrin said at the same conference. "The economy can digest greater sums without any inflationary fallout."

Ignatyev and Kudrin spoke as new figures showed that the Central Bank's gold and foreign exchange reserves reached a record $403.6 billion on June 1. That is up by $100 billion in the current year to date.

Ignatyev said he was happy with the currency structure of the Central Bank's reserves, which had not changed in a year. They comprise around 50 percent dollars, 40 percent euros, 10 percent sterling and one percent yen.

But, increasingly, reserves accumulation is being driven by capital inflows. The current account surplus narrowed to $14 billion in the first five months of 2007 due to booming imports from $36 billion in a year earlier, Ignatyev said.

Since the lifting of capital controls last year, policymakers have been keen to curb market expectations that they will allow the ruble to rise against the central bank's target currency basket of 55 cents and 45 euro cents.