World Bank: Surging capital inflows could spur inflation in Russia

Hefty bank loans and share offerings by Russian companies have led to a huge wave of capital into the country this year, and it potentially brings the danger to lose control over inflation in the nation's oil-fueled economy, the World Bank said Wednesday.

State-controlled oil group JSC Rosneft contributed to the surge, borrowing some US$22 billion (EUR16 billion) to buy oil fields and refineries that were sold in the liquidation of the Yukos oil company. Meanwhile, state-controlled JSC Bank VTB raised US$8 billion (EUR6 billion) in an initial public offering last month.

The first five months of the year could see record capital inflows of US$45 billion (Ђ33 billion), the bank's latest report on Russia report said, citing Central Bank forecasts. That compares with US$42 billion (EUR31 billion) for the whole of 2006, it said.

"Money supply growth is reaching record levels, and less of the monetary expansion is being sterilized by accumulation in the Stabilization Fund than in the past," the report said. "Inflation has remained under control in early 2007, but could well become problematic in the second half of the year."

In the seven years of President Vladimir Putin's leadership, analysts estimate that Russia has earned US$750 billion (EUR550 billion) from sales of oil and gas, amid record world prices.

Russia has created a so-called "stabilization fund" to keep excess oil revenue out of the economy. Money raised from borrowing and IPOs is not absorbed in the same way and can potentially push up inflation.

The government has set an 8 percent inflation target this year, and, with elections approaching, cannot be seen to let it slip.

To stem inflation, the Central Bank, which has weak levers for controlling monetary policy, allows the ruble to appreciate, which in turn harms Russian companies that earn in foreign currencies and have costs in rubles.

John Litwack, the World Bank's chief economist for Russia, said at a news conference Wednesday that it would be a "great achievement" if Russia met the 8 percent inflation target, but predicted instead that consumer prices would rise as much as 9-10 percent this year.

The soaring oil revenues have driven economic growth that averaged 6.2 percent over the past six years, according to World Bank figures. Last month Russia's parliament gave preliminary approval to a budget for the next three years that envisages annual economic growth of about 6 percent.

Litwack said that he expected growth this year could exceed 7 percent.