UPDATE 3-Russia faces elections with budget woes, firm rouble

Sun Jun 26, 2011 12:40pm EDT

Related Topics

* Fin Min points at pre-election budget risks

* Econ Min sees moderate inflation, no need for rate rise

* Econ Min sees strong rouble upside in mid-term

* Points to current account downside risks from 2014

(Recasts with Fin Min comments)

By Andrey Ostroukh

STRASBOURG, France, June 26 (Reuters) - Russia's government has promised voters more social spending than it can muster without threatening the country's fiscal stability as elections approach, a deputy finance minister warned on Sunday.

With a parliamentary election due in December, and presidential poll in March 2012 in which Prime Minister Vladimir Putin or President Dmitry Medvedev could run, Russia has pledged extra funds for social programmes and domestic output.

"If all programmes announced by the government are fulfilled the budget spending could reach 29 percent of GDP," Sergei Shatalov, a deputy to hawkish Finance Minister Alexei Kudrin, told the Russian Economic and Financial forum in Strasbourg.

"And this is a serious danger for the financial stability of the state," he said, adding Russia is not ready to withdraw fiscal stimulus measures that helped the country out of the crisis of 2008-2009.

In the first five months of the year, Russia, the world's largest oil producer, has been running a budget surplus thanks to rallying oil prices which have ensured inflows of dollars and support for the rouble despite weakening economic fundamentals.

It has also underpinned a strong rouble which has made crucial imports cheaper for Russian consumers.

"In the course of increasing rouble flexibility pledged by the central bank, and given the current account, the rouble's potential to firm is great, despite capital account dynamics," Deputy Economy Minister Andrei Klepach told the forum.

The rouble has firmed 8 percent versus the dollar this year and could have gained more if not for net capital outflows of more than $50 billion in the past seven months.

Russians appear to be behind the leakage. Uncertainty over who will be elected president in 2012, high levels of rouble liquidity, and yields lower than in recent years are factors that could be prompting outflows.

Klepach said 2011 net capital flow balance could be "slightly negative".

Russia had a current account surplus of $31.8 billion in the first quarter but maintaining a solid surplus will require higher revenue, which implies higher oil prices, as the stronger rouble spurs imports that eat away the surplus.

"The current account surplus ... may entirely shrink by 2014," Klepach said, adding current policies could contribute to such a development.

"I think it poses risks. The budget policy, forex policy are inclined to support the economy's growth and do not really match each other."

MODERATED

The central bank has no urgent need to raise interest rates to combat inflation that has moderated and is likely to go lower thanks to seasonal factors, Klepach said.

The central bank will meet on interest rates on June 30 and is widely expected to leave the policy unchanged after it said last month "an acceptable balance" between fierce inflation, one of voters' top concerns, and economic growth had been found.

Klepach reiterated Russia will meet its full-year inflation target of less than 7.5 percent due to a seasonal decline in prices for vegetables and fruits, unless there is another global wave of food price rises.

Since the start of the year, consumer prices have risen by around 5 percent, challenging the central bank's more optimistic forecast for a 6-7 percent inflation in 2011.

(Editing by David Hulmes)

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