Russia must control inflation and allow for appreciation of the ruble if it wishes to see its robust economic performance stay on course, the World Bank said in a report released Monday.

The report described the surge in inflation as "the most notable monetary development in 2007," suggesting that recent curbs imposed on staple goods would do little to reverse this trend and could lead to price distortions.

"While it remained under control in the first quarter, inflation kept gaining momentum in the remainder of the year" and is now slightly over 11 percent, the bank said in its survey on the Russian economy.

The surge in capital inflows not being absorbed by the Stabilization Fund is driving money expansion and exerting upward pressure on the ruble, the report said. The strong ruble has in turn been driving up labor costs, "suggesting that wages are growing more rapidly than productivity," according to the report.

GDP growth has been dented by appreciation of the ruble, making exports more expensive abroad and imports less expensive to domestic consumers, it said.

"But if Russia is able to increase productivity and upgrade its infrastructure, then the tradeoff between inflation and competitiveness would slowly go away," Klaus Rohland, director of the World Bank in Russia and CIS, said Monday after the presentation of the report. "Any economic policy decision involves a tradeoff, and the missing link between inflation and export competitiveness of Russia's industrial growth is high productivity."

The report also called on policymakers to manage capital inflow by maintaining a prudent fiscal policy.

While noting that inflows are becoming an important contributor to federal reserves, which currently stand at $450 billion, the report warned policymakers to "avoid exacerbating tensions between fiscal and monetary policies."

Another challenge highlighted by the World Bank was the shrinking and rapidly aging population. By 2025, the population will drop by 12 percent, and one in five people will be aged over 65, the report said.

The situation in Russia is of particular concern because of the twin factors of a low birth-rate and high mortality, said Isak Froumin, the World Bank's human development coordinator in Moscow.

Froumin said salary increases in the country did not meet up with the requirements of an aging population, noting that there was a big gap between the wages of young specialists and "those who toiled their way to retirement."

On a more positive note, Russia earned praise for maintaining an economic policy that allowed the country to weather the global liquidity crisis.

"On the whole, Russia has weathered the credit crunch crisis very well and capital inflow into the economy has increased considerably in October," said Paloma Anos-Casero, a senior economist at the World Bank.

The report also commended government efforts aimed at increasing public investments into priority infrastructure and social sectors, but warned that raising public investments might not be enough to close Russia's infrastructure gap and drive sustained economic growth.