Russian officials warn against "hasty" fiscal stimulus

MOSCOW Thu Apr 18, 2013 1:42pm EDT

Russia's President Vladimir Putin speaks to ExxonMobil and Rosneft officials in the Pacific island of Sakhalin via a video link, as Putin visits Ulan-Ude in the Republic of Buryatia April 11, 2013 in this picture provided by RIA Novosti. REUTERS/Aleksey Nikolskyi/RIA Novosti/Pool

Russia's President Vladimir Putin speaks to ExxonMobil and Rosneft officials in the Pacific island of Sakhalin via a video link, as Putin visits Ulan-Ude in the Republic of Buryatia April 11, 2013 in this picture provided by RIA Novosti.

Credit: Reuters/Aleksey Nikolskyi/RIA Novosti/Pool

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MOSCOW (Reuters) - Two senior Russian officials warned political leaders on Thursday against rushing into more spending to stimulate a struggling economy at the risk of higher inflation.

Russia's $2.1 trillion economy expanded by just 1.1 percent in the first quarter, significantly below the Kremlin's target of 5 percent, prompting President Vladimir Putin to urge the government to boost social spending and aid ebbing growth.

Officials and analysts have laid into the central bank this year for placing too much emphasis on inflation over growth and Prime Minister Dmitry Medvedev has said the government will consider stimulus to avert recession.

But Elvira Nabiullina, soon to take over as head of the central bank, said that continuing the steady reduction of inflation remains the priority, while First Deputy Prime Minister Igor Shuvalov said that hasty moves to boost growth by spending were wrong and dangerous.

"I am against boosting economic growth at the expense of ... inflation," Nabiullina, a 49-year-old former economy minister who will replace bank chief Sergei Ignatyev in June, said in remarks cleared for publication on Thursday.

Shuvalov, speaking at the Sberbank Investment Forum, said that the government should approach the slowing expansion of the economy judicially.

"The most important (thing) is not to descend into a discussion of any fiscal measure to tweak the situation artificially to show that our growth rate starts changing dramatically," Shuvalov said.

"Should the government do something hastily? I think that there should not be any hasty reaction, because it is erroneous and dangerous."

NO RECESSION, BUT DISSATISFACTION

The Economy Ministry warned last week that Russia risks sliding into a recession, weakening Moscow's stock markets and the rouble to multi-month lows as expectations grew that the bank will cut borrowing rates soon.

Both Nabiullina and Shuvalov said that the economy was performing below its potential, but Shuvalov said the country was not facing a recession.

"What there is, is a dissatisfaction with the pace of economic growth," he said.

"We have a ready plan of how to act in response to a severe crisis, but as long as the situation is not developing in such a way, the government should not act hastily," Shuvalov said.

Like most major emerging economies, Russia has to grow faster than its peers in the developed world to keep unemployment low and households prosperous and 1 percent growth compares to trend rates of between 5 and 10 percent over the past decade.

The central bank had argued for months that "aggregate output remains close to its potential level" to justify keeping borrowing costs steady, but it left the phrase out of its April statement while keeping rates unchanged.

Bankers say a softening of monetary policy would spur lending to industry and increase its output.

"I expect a rate cut, but not related with the arrival of a new head," German Gref, chief executive of Russia's largest bank Sberbank, said at the forum earlier in the day, adding that he sees inflation easing soon.

Russian inflation is still relatively high, at 7.1 percent in mid-April compared to the central bank's target of 6 percent by the end of 2013 and its base interest rate of 5.5 percent.

Shuvalov said that the Russian government disagreed with those who are calling for greater tolerance of inflation as a way to boost growth.

Analysts say that as with most major policy moves in Russia, the final decision is likely to lie with Putin.

"If it's a question of increasing inflation to boost growth, we don't support this discussion, we are against it," Shuvalov said.

"These are heated debates and I hope that soon, also publicly, we will be able to announce the government's final position. We will consult with the president, get it approved."

(Additional reporting by Katya Golubkova and Oksana Kobzeva; Writing by Lidia Kelly, editing by Jason Bush/Patrick Graham)

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