Moscow, 8 May: Vladimir Putin's government will have to "tighten the financial screws" to curb inflation, according to leading Russian economic experts asked by RIA.

"Tightening the financial and monetary policy would be the most sensible thing to do. The time has come to tighten the financial and credit screws," Yevgeniy Yasin, head of research at the Higher School of Economics, told RIA, noting that the problem of inflation-2008 was, above all, a result of growing budget spending last year.

On Thursday [8 May], the State Duma confirmed Vladimir Putin as prime minister of the Russian Federation. Putin was nominated by Russian President Dmitriy Medvedev.

Addressing MPs, the nominee prime minister set the task of bringing inflation back to single digit figures in the next few years, noting that socially deprived sections of the population suffered from growing consumer prices most.

But Putin did not talk of tightening the monetary policy - on the contrary, he promised, by the beginning of 2009, to increase the minimum wage to the subsistence level and, as a matter of priority, to provide funding for health care and education, as well as provide state support for the agroindustrial sector and reduce the tax burden as far as possible.

All this might lead not just to the incomes of citizens and enterprises growing but, as a consequence, to the money supply on the market growing, which is a factor of inflation.

Old problems to new premier

The cabinet of the ex-prime minister of Russia, Viktor Zubkov, who was in office for almost eight months, has failed to control rising consumer prices within the outlined limits - neither customs and tariff regulation measures nor the agreement on freezing essential foodstuff prices helped. During the first four months (January-April) of 2008 inflation already reached 6.3 per cent of the 10 per cent forecast for the whole year; and this happened despite the fact that the Ministry of Economic Development and Trade and the Finance Ministry had revised their forecast upwards several times from the original 8.5 per cent.

Despite the fact that there was a special group in Zubkov's government for combating inflation, led by Deputy Prime Minister and Finance Minister Aleksey Kudrin, at the last sitting before his resignation the prime minister admitted that the cabinet had failed to solve the problem.

"Inflation is an extremely serious problem. One cannot talk down inflation. Very serious economic laws are at play here and, most importantly, with time inflation begins to depend not just on monetary factors but also on expectations and then it is more difficult to curb it by monetary means," Oleg Vyugin, ex-head of the Federal Service for Financial Markets and now head of the board of directors of MDM-Bank, told RIA.

He said that, despite growing food prices in the world, the "roots" of Russian inflation are monetary and, hence, it can be treated by the same medicine - by increasing interest rates and moving to a floating rouble in the immediate rather than mid-term future, as the Central Bank planned before.

"From the economic point of view, it seems, this is inevitable. If the [rouble] rate is floating, interest rates will begin to work," Vyugin pointed out.

In his opinion, under the new prime minister the monetary authorities might take more serious moves to target inflation. In February, the Central Bank for the first time in many years increased the discount rate from 10.00 per cent to 10.25 per cent, and at the end of April it raised it by another 0.25 per cent.

The next move might be the Central Bank giving up currency interventions used to regulate the rouble rate.

"During the election period the monetary authorities found themselves in a difficult situation from the point of view of adopting radical measures since they may have provoked certain instability. Now the new government has an opportunity to behave differently," Vyugin said.

Aleksey Ulyukayev, first deputy head of the Central Bank, has also repeatedly talked of moving towards targeting inflation. In a recent interview with one of Russian newspapers, he outlined mechanisms for combating inflation - interests rates, rate policy and increasing reserve requirements.

A source close to the Central Bank has told RIA that the regulator has already drawn up draft main directions for the monetary-credit policy in 2009, which envisage the monetary policy to be tightened. They are still to be finalized and approved by the State Duma together with the next budget.

"The Central Bank's actions, and of late it has been raising rates, show that it intends to tighten the monetary-credit policy," the source said.

Social economy

Meanwhile, the policy of Putin-president was known for growing budget spending, including to deal with social problems, national projects and financial "support" for numerous state corporations.

Improving the living standards of the people of Russia and reducing the gap between the rich and the poor was one of the main tasks set by Putin in February in his long-term programme of Russia's development until 2020 and confirmed on Thursday [8 May] in the State Duma. It is obvious that the transition of the economy to innovative ways requires state support for a whole number of sectors.

"Inflation is not a very difficult problem unless one engages in populism and relies on spending state money," according to Yasin. In society there is a belief that money which the state now has should be definitely spent on reorganization and modernization, he said with regret.

"But one should not 'flood' the economy with money. One should work with business and make sure that the latter is not afraid to work," Yasin said assuming that free business would find its own optimum ways for development.

He believes that a tighter monetary policy will create a certain efficiency barrier for business since, before a businessman borrows money from a bank, he will have to calculate the profitability of his enterprise and his ability to repay the credit.

"At present this barrier is very low, and everyone is trying to borrow as much money as possible. But one should be able to calculate and work efficiently," Yasin said.