WRAPUP 1-Russia, emerging from crisis, looks to private sector

* 80 pct of modernisation spend sought from private sector

* Parliament deputies want more budget spending

* Lending, confidence recovering but slowly

(Wraps comments by Kudrin, Ignatyev, data)

By Toni Vorobyova

MOSCOW, July 7 (BestGrowthStock) – Russia’s Finance Minister called
on Wednesday for more private sector investment, arguing that
heavy state spending will only hurt the economic recovery in the
long run through higher inflation and a stronger rouble.

But there were signs Alexei Kudrin will struggle to win over
politicians in the Duma lower house, whom he was addressing.

“In the place of the President, I would have torn off your
ears, together with the head,” Communist Party leader Gennady
Zyuganov told Kudrin, calling for higher budget spending.

Russia has returned to growth after its worst recession in
15 years. But the recovery is a slow one, and while consumer
confidence data published on Wednesday hit a 21-month high, it
remained below its pre-crisis range. [ID:nLDE6660LQ]
Modernisation is a key goal of President Dmitry Medvedev,
who wants to encourage high technology sectors in a country
whose dependency on oil and gas, accounting for 60 percent of
budget revenues, was a key reason for it being the worst
performer in the G20 during the latest economic crisis.

“The government’s task is to create conditions for private
investment. We will not modernise with budget funds. Those funds
can be used only to support innovation projects, to give the
economy a leg up,” Kudrin told the Duma. [ID:nLDE6650W6]

“The main volume, 80 percent of all investment in the
country on modernisation, will be private investment. Now our
concern is to create the conditions for private investment.”

Bank lending — key to domestic investment — started to
pick up in the second quarter, Central Bank Chairman Sergei
Ignatyev told the Duma, but here too the pace is slow.

“Lending activity was restrained by high credit risks and
the comparatively low level of demand for loans from borrowers
at the available level of interest rates,” he said.

Russia is seeking to double foreign direct investment over
the next 3-4 years and also encourage greater involvement from
domestic companies. [ID:nLDE65G195]

But active measures to encourage investors — especially
foreign ones — remain few, while years of state-dominated
Soviet rule have created the mindset that the government should
be the economy’s chief bank-roller.

Kudrin, a 10-year veteran at the helm of the Finance
Ministry known for his fiscal prudence, said that it was
imperative to keep a lid on spending in order to halve the
budget deficit to under 3 percent by 2013.

“If we support demand with big (stimulus) packages it can
support growth in the near term, within a year, but in 2-3 years
it will, to the contrary, reduce economic growth,” Kudrin said.

“It can create inflation, appreciation of the exchange rate,
state borrowing and thus a reduction of corporate borrowing. So
our task is to reduce the deficit in the next few years.”

For now inflation remains tame [ID:nLDE666135], while global
risk aversion has put a lid on the rouble. [ID:nLDE6660BL]

Central bank chairman Sergei Ignatyev said on Wednesday that
Russia is ready to act if necessary on big inflows of capital,
but will stop short of reintroducing controls on capital

He added that the move towards a more flexible rouble
exchange rate was already making it harder for speculators to
put on one-way bets for rouble appreciation. [ID:nLDE6660R3]

— For a FACTBOX on modernisation see ID:nLDE65I00V]
(Additional reporting by Yelena Fabrichnaya and Oksana Kobzeva;
Editing by Ruth Pitchford)

WRAPUP 1-Russia, emerging from crisis, looks to private sector