FACTBOX: Challenges facing Russia's next president

(Reuters) - Russia votes on Sunday in a presidential election that is almost certain to hand victory to Dmitry Medvedev, the man outgoing President Vladimir Putin has endorsed to replace him.

Though Russia's economy is booming, economists warn the next president will face major challenges if he is to sustain growth. Here are some of the biggest challenges:

INFLATION

The government is struggling to keep inflation under control. Last year it was 11.9 percent, against an official target of 8 percent. To combat it, the government has allowed the rouble to appreciate, an instrument that has not proved fully effective. It also hurts domestic industry because it makes their exports less competitive.

"If inflation were to accelerate much more beyond current levels then that would lead to a loss of public faith and that could back-end into a stability crisis inside the Kremlin," said Chris Weafer, chief strategist with Uralsib bank.

A potentially divisive debate on how to tackle inflation lies ahead. Some in the government want to float the rouble, which would allow the central bank to set its own interest rates and use these to control inflation. Opponents in the government say that would forfeit currency stability, one of the main achievements of Putin's eight years in office.

OIL DEPENDENCY

Russia's budget is dependant on revenues from oil and gas exports. That leaves the country vulnerable to a fall in energy prices that could result from a global economic slowdown.

"If it (the oil price) were to fall back to the same price as last year ... then the budget is looking at a deficit of $60 billion," said Weafer. Medvedev has named diversifying Russia's economy away from oil and gas as a key priority.

RAISING DOMESTIC ENERGY PRICES

The government has announced a plan for substantial rises in domestic prices for gas and electricity, but has been slow in implementing them. Domestic energy prices are artificially low, in effect a state subsidy. The target is for power and gas prices to rise to world levels by 2011. Those increases are likely to be unpopular with voters.

PENSION DEFICIT

Russia's population is ageing. Unless state pension provision is reformed, there will not be enough tax-payers to fund the pensions of the people who will be retiring over the next few years. There is already a pension deficit. The government has no clear policy on how to deal with the problem. One solution, encouraging people to save for their own pensions instead of relying on the state, is also likely to prove unpopular.

THE HANDOVER

Medvedev is likely to stick largely with Putin's government team. Kremlin-watchers though predict a mini-reshuffle. Investors are hoping Finance Minister Alexei Kudrin, an advocate of fiscal prudence, will stay. The changes will be a test for relations between Medvedev and Putin, especially if the new president tries to move members of his own entourage into key posts. Putin and Medvedev must also manage tricky changes in state corporations where rival Kremlin clans have vested interests. A new chairman will have to be appointed at gas giant Gazprom to replace Medvedev. Any changes at state-owned oil company Rosneft, run by Putin loyalists, could cause friction.

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