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UPDATE 1-Russia's economy ministry proposes extra state spending to offset rate hikes

·2 min read

(Adds quotes, detail)

By Darya Korsunskaya

MOSCOW, Aug 5 (Reuters) - Russia should consider increasing state spending to help offset the impact of the central bank's monetary policy tightening that poses downside economic risks, Economy Minister Maxim Reshetnikov said on Thursday.

The central bank raised its key rate by a hefty 100 basis points to 6.5% last month, making borrowing more expensive for the fourth time so far this year in an attempt to rein in stubbornly high inflation.

"It is very important not to have monetary policy tightening boosted by fiscal policy tightening," Reshetnikov told reporters.

The economy ministry is now in talks with the finance ministry to channel extra proceeds from taxes to state spending, but not to cut the state borrowing plan, Reshetnikov said.

The economy ministry's proposal echoes suggestions by Russia's state development bank VEB which said last month that rising proceeds from oil and gas exports gave Russia room to increase regular state spending.

Analysts have warned that tighter monetary policy coupled with the effects of the COVID-19 pandemic could pose economic headwinds.

There were already signs that the economic recovery was losing momentum in July, Reshetnikov said.

After shrinking by 3% in 2020, the sharpest contraction in 11 years, the economy had by June recovered to levels recorded in the fourth quarter of 2019.

But Russia's oil production has not recovered to pre-crisis levels due to the global OPEC+ supply agreement, air travel remains subdued compared to before the pandemic, and the services sector has also not fully rebounded, Reshetnikov said.

He added that his ministry proposed setting a limit on spending by the National Wealth Fund (NFW) of 1.6 trillion roubles ($21.9 billion) in 2022-2024.

The economy ministry also proposed using extra NFW money on large state projects that rely heavily on imports, such as Ust Luga port. The finance ministry, which manages NFW spending, did not disagree, Reshetnikov said.

($1 = 73.0700 roubles) (Reporting by Darya Korsunskaya; Writing by Andrey Ostroukh; Editing by Toby Chopra, Kirsten Donovan)