Medvedev says Russia won't break fiscal rule to shore up economy

By Darya Korsunskaya and Maya Dyakina

MOSCOW (Reuters) - Russia will resist spending more oil and gas revenues than its fiscal rule allows but will consider more stimulus as falling commodity prices risk pushing the economy into recession, Prime Minister Dmitry Medvedev said.

Medvedev, in an annual speech to the lower house of parliament on Wednesday, gave no details of possible stimulus measures.

Since President Vladimir Putin returned to the Kremlin last year, the government has adopted a new fiscal rule that bases spending plans on the long-term average oil price and caps the budget deficit at 1 percent of GDP.

"This rule is very important in the period when in other countries ... there is recession and ultimately it may happen to us at a time when there is a risk of commodity prices falling," Medvedev said.

Future opportunities to increase budget revenues would be very limited, he said.

His comments came after President Vladimir Putin threatened to sack senior officials over a failure to carry out his orders on social spending.

The government forecasts its budget deficit will widen slightly this year to 0.6 percent of gross domestic product.

The new fiscal rule does not rule out other measures designed to improve Russia's investment climate and boost the flow of credit into the economy.

The government is also considering speeding up sales of state assets to raise funds, including the possible sale of a 19.5 percent stake in state oil major Rosneft.

However, Medvedev said Russia would not sell state assets on the cheap, only when deals look profitable enough.

He also said that Russia would achieve its goal of attracting up to $70 billion in foreign investments annually by 2018. Foreign direct investments into the Russian economy fell to $51.4 billion in 2012.

Medvedev's warning about the risk of an impending recession echoed a statement from the economy ministry last week and helped drag Russian equities and the rouble to multi-month lows.

Treasury bonds yields have stayed near two-month lows on expectations the central bank will cut interest rates to support the economy. However, Moscow may need to tap debt markets more this year due to a shortfall in non-oil revenues, and that could cause a spike in borrowing costs, analysts say.

Russia recently slashed its economic growth estimate for this year by a third to 2.4 percent, half the Kremlin's annual target rate of 5 percent and sparking a debate over whether the economy needs stimulus.

RATE CUTS

Economic growth slowed to 1 percent in the first quarter.

Slower growth has raised expectations the central bank will soon cut interest rates although increased inflationary pressures and a pick-up in the economy in March could prompt it to keep them on hold at its next policy meeting in May.

Investment, however, which economists consider to be a major reason for Russia's slowing economic growth in recent months, fell by 0.8 percent last month, while analysts had expected moderate growth.

"We estimate March's economic performance as generally positive, taking into account the new Russian 'normality' of relatively low economic growth rates. The CBR is likely to keep rates on hold in the coming months," Julia Tsepliaeva, economist at BNP Paribas said in a note. She expects rate cuts in July.

Most of the central bank's main interest rates have been on hold since December. Many analysts expect a rate cut in June, when Putin-appointed Elvira Nabiullina becomes the head of the bank, and possibly before then.

Central Bank Chairman Sergei Ignatyev has said that a cut in interest rates cannot be ruled out if inflation falls. However, inflation rose to 7.1-7.2 percent in April, from 7.0 percent seen in March.

Russia's Finance Ministry met strong demand at two auctions of treasury bonds on Wednesday, for nine-year and four-year paper, worth 30 billion roubles in total.

Raiffaisenbank said a reduction in budget revenues due to slower economic growth this year may result in higher borrowing needs. The Finance Ministry plans to borrow 1.2 trillion roubles ($37.87 billion) on the local bond market in 2013. However, in the first quarter the ministry placed only 60 percent of the planned volume for the period.

"The Finance Ministry should try to place OFZ bonds according to the plan this year. But in reality it will not happen and closer to the year-end the ministry will have to change the strategy, which would lead to a rise in the premium (to the market)," Raiffaisenbank analysts said in a note.

($1 = 31.6880 Russian roubles)

(Reporting by Darya Korsunskaya, Katya Golubkova; Writing by Maya Dyakina; Editing by Megan Davies, Lidia Kelly and Susan Fenton)

Source: http://news.yahoo.com/russian-pm-medvedev-defends-record-putin-warning-132028571--business.html

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