#11 - JRL 7281
Russia Says High Oil Price Drives Ruble, Inflation
--Guy Faulconbridge and Vladimir Todres in Moscow

Aug. 8 (Bloomberg) -- High oil prices are fueling Russian
inflation and making the ruble rise against the dollar, reducing
domestic manufacturers' capacity to compete against imports,
Economy Minister German Gref said.
The country's crude blend, Urals, is trading about $5.30 a
barrel higher than the government expected, he said after a
government meeting in Moscow. Urals traded at $29.28 a barrel in
London today, and has averaged $27.05 a barrel this year.
``It is most likely that the external environment will be
favorable in the second half and therefore our task is to have a
balanced monetary policy so as not to breach our targets for the
strengthening of the ruble and inflation,'' Gref said.
Russia, which pumps more oil than any country except Saudi
Arabia, gets more than half of its export income from oil and gas.
Rising oil prices suck more cash into the country, driving up the
ruble by boosting demand for the currency and quickening inflation
by expanding the money supply. That hurts local companies by
reducing their price advantage over foreign-made goods.
Russia's economy expanded 7.2 percent in the first half and
there was a net inflow of capital into Russia in the same period,
Prime Minister Mikhail Kasyanov told ministers as he opened today's
cabinet meeting, the government press service said in a statement.
The budget will be submitted to the government tomorrow, Gref
said. Kasyanov said the government sees the Duma, the lower house
of the Russian parliament, approving the budget by November.

Inflation, Ruble

Russia's inflation target for this year is between 10 percent
and 12 percent. The country, which has been trying to cut the
inflation rate since it topped 2,600 percent in 1992, hasn't met
its full-year target since 1997.
``The Prime Minister expressed confidence that the country has
all the grounds for preserving inflation at a level not higher than
12 percent in 2003,'' the government press service said in a
statement.
By law, Russian oil and gas producers such as OAO Lukoil and
OAO Gazprom, must sell 30 percent of their proceeds from exports
for rubles. While those sales prop up the national currency against
the U.S. dollar, higher revenue from oil sales also prompts the
central bank to print more rubles so it can buy dollars from
exporters, fueling inflation.
That forces the central bank to print rubles to slow the
appreciation. Printing rubles expands the money base and drives
inflation.
Russia's money supply expanded 20 percent in the first half of
this year, almost twice the 10.4 percent growth for the same period
in 2002.
The ruble rose against the dollar by ``more than 12 percent,''
adjusted for inflation, in the first seven months of this year,
Gref said. The ruble appreciated by 4 percent against a basket of
currencies, he said.
Consumer prices rose 8.7 percent in the first seven months of
2003, after rising 9.8 percent in the same period last year, the
State Statistics Committee said this month.
``I have had questions about devaluation -- unfortunately we
have the opposite problem at the moment,'' Gref said. ``In once
sense it is good from the point of view of the earnings of the
population and consumption, yet without doubt it is a negative
factor for the development of industry.''