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19 Oct, 2007 06:06

Inflation to hit double digits: Russian Finance Minister

Inflation will burst through the government's target this year and could be as high as 10%. While retailers are under pressure to freeze prices, the government's already adjusted tariffs and quotas.

Russia had been aiming for an inflation rate of 8% this year, but on Thursday the Finance Minister was forced to admit that 10% is now more realistic.

The government itself has contributed to the problem. It led a campaign to close down outdoor markets over the summer – pushing Russian consumers into supermarkets instead, where prices are higher.

But the major inflationary driver is one the government can’t control.

“When oil prices are high and petrodollars are flowing into the country, the government has to choose between inflation and rouble appreciation. It was planned that oil would be around 50- 60 dollars and it’s actually in the mid-80s. There's just so much money coming in,” explains Sergey Guriev, rector of the Higher School of Economics.

The Russian Central Bank is trying to keep inflation and the rouble in check. But it is a tough balance and many economists say the government will now have to let the rouble rise – despite the pressure this would put on the country's exporters.

Another option – freezing prices for an extended period – would squeeze company profits, and have serious consequences for the economy and the government.

“They're in a Catch-22 situation. They need rising FDI, but if they choose to control inflation by squeezing the rate of return on investment, they won't get it.  So the reality is, the only way out of this is to let the rouble appreciate very strongly, and live with the consequences in the short term,” says Chris Weafer, Chief Strategist from Russia’s Uralsib financial corporation.

However the government chooses to tackle the inflation issue, investor sentiment will be a big consideration. In this regard, attracting cash for infrastructure projects – from both foreign and domestic companies – is a top priority for the government as it works to diversify the economy.