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Government May Use Higher Oil Price Estimate for 2011

The government will base its 2011 budget on an oil price forecast of $75 per barrel, up more than a quarter from initial plans, a government source said Wednesday, indicating fiscal hawks might be losing a battle to keep a lid on spending.

The forecast, which sees the economy growing 3.4 percent next year and inflation at 5 percent to 6 percent, is expected to receive final approval at a government meeting Thursday.

The source said the government reached a consensus on key parameters for next year's budget, after a long-running debate on the issue.

The consensus seems to give the upper hand to the growth-focused Economic Development Ministry over the fiscally prudent Finance Ministry. The Economic Development Ministry would benefit from a higher oil price forecast because that would enable a higher forecast for revenues, which would allow higher spending. The Finance Ministry had argued that the oil price forecast should not exceed $70.

Finance Minister Alexei Kudrin has said a higher oil price forecast should translate into a deficit below the 4 percent of gross domestic product originally penciled in for 2011, which was based on an oil price of $59 a barrel.

"It [the plan] was repeatedly discussed in the government, and … I think the Finance Ministry knows it and has seen it," the source said.

Rising oil prices have been a huge boon for Russia, smoothing the economy's slow recovery from its first recession in a decade. Urals oil export blend traded above $70 a barrel Wednesday, up from the $58 level on which this year's budget was planned.

But for Kudrin, the higher oil price means a fresh battle to keep a lid on spending and, if oil falls short of the $75 price forecast next year, it would reduce the forecast budget deficits.

"This seems to be the second time that the Finance Ministry has given up its positions," said Ilya Ilin, an analyst at Nomos Bank, referring to the Finance Ministry's difficulties in getting its way over tackling the deficit.

In April, Kudrin said he was "disappointed" when Prime Minister Vladimir Putin said Russia would press on with a hike in employer social security contributions, which the Finance Ministry had suggested could be delayed.

Putin, however, has also heralded a fall in inflation to post-Soviet Union lows as a major achievement for Moscow and thereby may still back restrained spending.

"We can move more actively on the path of solving our financial problems. First of all, reduce the budget deficit," Putin told officials Wednesday.

"Thus we will be able to use the means of the Reserve Fund more economically, in any case partly preserve it."

The latest forecast sees slightly lower economic and industrial output growth, as well as more benign inflation than forecast by the Economic Development Ministry in April.

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