OECD sees boom-and-bust risk for Russia as oil gains

http://www.forexyard.com/en/news/OECD-sees-boom-and-bust-risk-for-Russia-as-oil-gains-2010-05-26T084616Z

RUSSIA-OECD/

* Sees Russia 2010 GDP up 5.5 pct vs earlier 4.9 pct
* Avoiding excess capital inflows is key challenge
* Cuts inflation rate fcast to 6.5 pct in 2010 vs 6.9 pct
* Sees budget deficit shrinking to 5.1 pct of GDP

PARIS, (Reuters) - Russia's oil-fuelled economic recovery poses a risk of a new boom-and-bust cycle should oil prices and capital inflows continue to increase, the OECD said on Wednesday.
The Paris-based Organisation for Economic Cooperation and Development raised its growth forecast for Russia to 5.5 percent this year from a November forecast of 4.9 percent, citing a recovery in oil prices since early 2009.

"If oil prices and capital inflows continue to increase, avoiding excesses will be the main policy challenge," the OECD said in its latest Economic Outlook.

According to official data, the economy grew 2.9 percent in the first quarter of 2010, year-on-year [ID:nLAG006285].

The OECD said that the main risk for Russia has shifted from relapsing into a recession to another excessive boom as trade and private capital inflows pick up, as in the run-up to the financial crisis.

Russia saw GDP growth of above 6 percent in the years preceding the crisis, fuelled in part by massive short-term inflows reaching a record high of $82.3 billion in 2007.

However, once the global financial crisis began the funds fled the country leaving the rouble to lose nearly a third of its value within a few months in late 2008 as the country headed for its first recession in a decade. The rouble has recovered from heavy losses since then on the back of strong oil prices but came under renewed pressure this month as prices for Russian Urals crude fell close to the key threshold of $65, below which many positive fundamentals -- such as the current account surplus -- will be erased.
SHRINKING BUDGET DEFICIT

The OECD said that the rise in commodity prices over the past year and higher corporate earnings have improved the outlook for balancing Russia's budget.

It revised its budget deficit forecast for this year to 5.1 percent of the GDP from an earlier 6.0 percent for this year. Next year, the deficit should shrink even more to 2.2 percent, versus previous estimates of 3.0 percent.

Russia's government aims to rid itself of the deficit by 2015, but Finance Minister Alexei Kudrin said this month that if oil prices remained above $70 a barrel, the budget might be balanced earlier [ID:nLDE64H0CC].

The government should save windfall revenue and could withdraw demand-boosting measures, such as the incentives for new car purchases, sooner than earlier planned, the OECD said.

"Strong fiscal consolidation in the upswing would also help take the pressure off monetary policy, which is likely to be faced with a sharper trade-off between managing capital inflows and bringing down inflation as a number of favourable factors for inflation fade," the OECD.

The OECD has cut its earlier inflation rate forecast to 6.5 percent for this year, from the earlier 6.9 percent but would rise to 7.1 percent in 2011.

"The pick-up in domestic demand, coming at the same time as the recovery in global trade volumes and combined with the strong real appreciation of the rouble over the past year, will push import volumes up strongly," the OECD said.

(Editing by Patrick Graham)