Dear Fradkov: Your spending is showing

Renaissance Capital and Troika Dialog, the Moscow-based investment banks that ranked No. 1 and No. 2 in Institutional Investor's 2005 All-Russia Research Team, are normally avid rivals. But their chief economists, Vladimir Pantyushin and Evgeny Gavrilenkov, joined forces recently to warn Russia's leaders of the perils of oil-fueled increases in state spending.

A federal budget projected to expand by more than one third this year and by 22 percent next year threatens to "eat up accumulated financial reserves" and accelerate inflation, which is already running at 12 percent annually, the two economists told Prime Minister Mikhail Fradkov in a letter they co-authored and published on September 30 in Moscow business newspaper Vedomosti. Nine other private sector economists signed the letter.

For the moment, the oil money flooding into Russia is keeping the government's books in the black and the private sector supplied with funds at negative real interest, Gavrilenkov tells II. If oil prices sink, however, today's fiscal party could bring a stagflationary hangover -- especially as the fattest increases are earmarked to support Russia's decrepit military and to increase the number of state bureaucrats.

The economists' declaration grew out of a two-hour brainstorming session with Russian Finance Minister Alexei Kudrin, who has been strenuously protecting the country's $30 billion stabilization fund -- a pot of rainy-day money saved as insurance against cheaper oil -- from a Duma eager to spend it. Gavrilenkov, 50, worked at a government-backed think tank, the Bureau of Economic Analysis, before joining Troika in 2002. Pantyushin, 35, came to Renaissance after earning a Ph.D. in economics from Duke University and working at KPMG and Credit Suisse First Boston.

Gavrilenkov admits that it may sound harsh to extol belt-tightening in a country where nurses still earn about $175 per month. But, he says, fighting price increases ensures the greatest social good. "Opinion polls show inflation is becoming the No. 1 problem for people," the Troika economist notes. "Pay increases could disappear in real terms."