High oil price sparks inflation in Russia

The two biggest economic issues facing Russia heading into the winter are rising inflation and spiralling global oil prices, which make up two thirds of the country's export earnings.

Crude prices rising towards $US 100 per barrel should be good news for Russia, the world's second largest oil exporter, as Russian oil exporters cash in on global demand.

Even a boom has its downside, however, and for Russia, one problem, with the capital inflow being generated, is the need to manage the inflationary pressure they create.

The Russian government now says 2007 inflation will be somewhere around 11%, up from its initial 8% forecast. With crude jumping from $US 70 to within sight of $US 100 in just 12 weeks the pressure will remain.

“The problem of managing such massive capital inflow is a very challenging task. It's not an easy task at all,” said Aleksey Mironov, Senior Director at Fitch Ratings.

As exporters look to cash in on global demand, domestic fuel prices are also rising, and this feeds through to almost every other sector of the economy, making inflation ever more difficult to manage.

“There is more pressure on local gasoline prices as a result of the international commodity rising in price. The latest news from the government regarding inflation was 10.5% at worst, but as a bank we are looking at 11% this year,”  said  Tatyana Kapustina, analyst at Aton Moscow, expressing her concerns .

With crude at its current price, some analysts are suggesting there is too much of a good thing and that a fall in price is in the interests of the Russian economy.

“High oil prices certainly contribute to inflationary pressures. I think there is a range of oil prices that is comfortable for the Russian economy, beyond which Russia would experience excessive pressures with regard to inflation and rouble strength. I would say that this comfort  zone of oil prices for the Russian economy would currently be $US 60-70 per barrel,” commented Yaroslav Lissovolik, Chief Economist at Deutsche Bank UFG.