IMF urges Russia to cool economy

The International Monetary Fund urged Russia on Thursday to adopt a leaner budget and raise interest rates to cool brisk demand and keep inflation from consuming one of Europe's top economic performers.

The guidance came amid signs that prices were starting to take off in the second half of the year thanks to a spike in tariffs that the government had kept in check until President Vladimir Putin's May swearing in to a third term.

Fund directors completed their annual visit with Russia -- its bank lending healthy and sovereign debt at just nine percent of GDP -- showing remarkable resilience to a global economic slowdown driven by the eurozone debt crisis.

The IMF praised the strength of Russia's recovery from the 2008-2009 global financial crisis and complimented the central bank for introducing broader exchange rate flexibility that has helped establish more natural market rates.

But it concluded by noting that the cabinet's immediate priority was now "to manage domestic demand in order to avoid overheating" -- a reference to consumer spending outpacing potential supply.

The Fund's directors "generally recommended a gradual further tightening of monetary policy to contain underlying pressures and anchor (inflation) expectations," the IMF said in a statement.

Some IMF officials cautioned however that the sheer weight of Europe's problems could eventually bring Russia's own banking sector to its knees and leave consumers without the easy loans they are getting today.

The statement noted that some IMF directors thought Russia would benefit more from an approach that took "the uncertain global environment" into account and did not pursue particularly strict tightening measures.

The majority view, however, favoured "an ambitious fiscal consolidation path to reduce overheating pressures and vulnerabilities," the IMF statement said.

Russia's economy expanded by a healthy 3.9 percent in the second quarter and is on pace to match the IMF's forecast of 4.0-percent annual growth for this year and 2013.

Yet that cheer is being tempered by expectations of a second-half surge in prices that comes in large part from new utility tariffs needed after Putin's election so he can meet his costly election promises to boost social spending.

The headline inflation rate was estimated to have reached 5.7 percent at the end of July after dropping to a post-Soviet low of 3.8 percent last year.

The IMF cautioned that its "staff's measure of core inflation -- a good proxy of trend inflation -- remains high at around six percent."

It urged Putin's team "to seize this opportunity" and finally introduce more predictable business rules and judicial independence now that Russia was joining the World Trade Organization after 18 years of often acrimonious talks.

Moscow's ability to learn from its mistakes by paying up its sovereign debt and limiting foreign-denominated borrowings recently prompted Citi Research to call Russia the "potential saviour of Europe."

That report noted that the eurozone economy was expected to shrink one percent this year while state debt across the region would hit a dangerously high 95 percent of GDP.

The IMF also warned that Russia's strength was its Achilles heel in a dangerous global climate that made policy decisions tough for any state.

The IMF said Russia's current policies could see inflation hit 6.5 percent by the end of the year and warned that sustained growth would come only when business was streamlined and Putin succeeded in "scaling back state involvement in the economy."

Source: http://news.yahoo.com/imf-urges-russia-cool-booming-demand-143309341.html

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