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High oil prices harm Russian economy - presidential aide

17:43 | 26/ 04/ 2006



PARIS, April 26 (RIA Novosti) - The growth of world oil prices harms the Russian economy, a presidential aide said Wednesday.

Igor Shuvalov, on a European tour as chairman of an interagency commission on Russia's G8 membership, said current world oil prices were a serious problem for the country.

"The current oil price level is very detrimental to the economy," Shuvalov told a meeting with members of the French Association of Diplomatic Press in Paris. He said Russia, which is awash with petrodollars, was experiencing great difficulties in withdrawing surplus money from the economy.

With crude jumping to more than $70 a barrel last week, Shuvalov said annual inflation in 2006 was likely to come in at around 10% owing to the rise in oil prices. Without the increase, he suggested the rate could have been kept down to 6%.

He said households' expectations of larger government spending in the run-up to parliamentary and presidential elections in 2007 and 2008, a stronger ruble and cheaper U.S. dollar also affected the Russian economy.

Shuvalov said the economy would have been healthier and the government would have found it easier to conduct reforms with the oil price at about $30 per barrel.

"With this price, we would have been able to fulfill our social commitments to the population and keep industry developing at an expected rate," Shuvalov said

very interesting...

China May Take Further Steps to Cool Economy After Rate Rise
April 28 (Bloomberg) -- China, which unexpectedly raised its benchmark lending rate yesterday, may follow with more measures aimed at cooling the world's fastest-growing major economy.

The People's Bank of China may raise borrowing costs again this year, four of seven economists surveyed by Bloomberg News said. The bank may also order lenders to set aside more money as reserves or restrict land use for factories and real estate development, some economists said.

China, which is the world's biggest consumer of steel and copper and the second-largest user of oil, is trying to curtail an investment boom that the World Bank says increases the risk of a sudden slowdown in the economy. At the same time, the government doesn't want to choke off consumer spending, which it's counting on to sustain growth as China curbs its reliance on exports.

``The People's Bank of China will follow the decision with additional moves,'' said David Simmonds, global head of currency research at Royal Bank of Scotland Plc in London. He predicts it will seek to discourage lending growth by increasing the ratio of deposits that commercial banks must set aside.

The central bank raised its one-year lending rate by 0.27 percentage point to 5.85 percent to ``maintain sustainable, rapid and healthy development of the economy.'' It was the first increase since October 2004. The bank also asked the nation's banks to restrict lending.

The central bank left its one-year deposit rate unchanged at 2.25 percent, seeking to encourage consumer spending and avoid gains in its currency, the yuan.

Copper, Oil

Commodity prices tumbled on concern that slower growth in China would curtail demand. Copper, which has doubled in the past year, dropped as much as 3.1 percent. Zinc fell as much as 7.3 percent, its biggest decline since February. Oil, which has climbed 38 percent in the past 12 months, fell 1.3 percent. Gold and silver had their first declines in three days.

European stocks posted their biggest decline since April 11, led by basic-resources producers such as BHP Billiton and Total SA. The Dow Jones Stoxx 600 Index fell 0.6 percent to 337.84.

U.S. stocks rebounded after Federal Reserve Chairman Ben S. Bernanke suggested the central bank may soon pause in its string of interest-rate increases. The Standard & Poor's 500 Index added 3.19, or 0.2 percent, to 1308.60 at 12:50 p.m. in New York after falling as much as 0.8 percent.

The Chinese central bank wasn't expected to raise its benchmark rate because inflation is subdued, said Stephen Green, a Shanghai-based economist at Standard Chartered Bank. Consumer prices climbed 0.8 percent last month from a year earlier. The central bank predicts inflation of 2 percent for the full year.

Reserve Requirement

Instead, economists expected China's central bank to increase the ratio of deposits it requires banks to lodge with it, currently 7.5 percent. Raising that ratio would discourage bank lending, said Simmonds.

New yuan lending in China jumped 70 percent in the first quarter from a year earlier, fueling almost 30 percent growth in investment in factories, roads, mines and real estate. Lending is growing ``too fast,'' the central bank said yesterday.

The lending and deposit rates are government-set guidelines for the nation's commercial banks. At present, banks may charge borrowers 10 percent below the benchmarks or any higher rates at their discretion.

Premier Wen Jiabao may also use measures that directly target investment, such as limits to lending on certain projects and restrictions on land use, economists said.

The government cracked down on lending in April 2004 after growth in fixed-asset investment topped 50 percent in February that year. Investment growth fell by half by February 2005, only to rebound later in the year as restrictions were eased.

Investment Surge

Fixed-asset investment in urban areas surged almost 30 percent in this year's first quarter. Money supply growth has beaten the central bank's 16 percent target for 10 months.

Accelerating lending and investment increase the danger of a sudden slowdown in China, Homi Kharas, chief economist for East Asia and the Pacific at the World Bank, said on April 20. China's economic growth has averaged 10 percent over the past three years.

``There is the risk the investment boom in China turns to bust and that would have a knock-on effect on the rest of the world,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``Higher rates may take off some of the froth from commodities markets which have benefited from the investment boom.''

Hu and Premier Wen face the task of curbing credit and investment growth without hurting consumer spending. In a five- year economic plan announced in October, China's government set as its key goal increasing consumption while moving away from dependence on exports and investment.

Yuan Gains

The rate decision indicates the central bank won't use currency appreciation as a way of cooling its economy, said Qing Wang, a strategist at Bank of America.

``In this light, we believe the pace of appreciation will likely be rather moderate in the coming weeks,'' Qing said in a note to clients.

U.S. lawmakers argue the Chinese yuan is kept artificially weak to give exporters an advantage, contributing to the nation's $201.6 billion trade deficit with China last year. China's currency reserves of $875.1 billion are the world's largest.

The yuan has gained 1.2 percent against the dollar since a 2.1 percent revaluation on July 21 last year, when China abandoned a decade-old peg. The yuan is a denomination of China's currency, the renminbi.

Chinese President Hu Jintao, visiting U.S. President George W. Bush last week, said China will ``continue to make adjustments'' to its currency system, stopping short of promising faster appreciation.

At the same time, China is helping its banks become more profitable. With the deposit rate unchanged, the increase in the lending rate will boost banks' lending margins, said Hong Liang, an economist Goldman Sachs Group Inc. in note to clients.

The rate increase also indicates that the central bank is taking a more active part in guiding China's economy.

``Such an early and decisive policy adjustment will indeed strengthen the credibility of the central bank, and give investors more confidence,'' Liang wrote.



To contact the reporter on this story:
Philip Lagerkranser in Hong Kong or at lagerkranser@bloomberg.net

As I know, inflation in Russia is often or always above 10%...God!