* Higher oil prices mean extra $50 bln for budget
* Govt must work with cbank to keep single digit inflation
* Putin already promising more cash
By Toni Vorobyova
MOSCOW, March 4 (Reuters) - Russia is basking in the glow of high oil prices, tempting politicians to spend more ahead of elections, but only the unpopular move of keeping a tight grip on the budget can cure voters' biggest worry -- high inflation.
This poses a tough challenge for Alexei Kudrin, a 10-year veteran at the helm of the Finance Ministry whose prudent policies helped see Russia through the last economic crisis but won him many enemies amongst politicians who would rather lure voters with low taxes and high spending.
Already, powerful Prime Minister Vladimir Putin has delayed the decision on Russia's long-term economic strategy until after the election, putting off tough decisions on whether to curb the budget deficit or stimulate domestic industry.
Since the start of the year, Russia's Urals oil export blend has averaged $98 a barrel, 30 percent higher than planned in the budget. If that continues for the rest of the year, the state could earn an extra 1.5 trillion roubles ($53 billion).
On the surface, that sounds like good news for the world's biggest producer, where the Economy Ministry estimates that each $10 increase in the price of oil translates into 0.5 percentage points of additional economic growth.
But, in a turnaround from recession-hit 2009, inflation has once again overtaken unemployment as Russians' top concern, worrying nearly two-thirds of the population according to independent pollsters Levada. And for fighting inflation, the mix of high oil prices and upcoming elections, is bad news.
Although inflation is a global problem, prices in Russia are rising faster than in any of its BRIC emerging market peers, and almost twice as fast as in China.
As an oil producer, Russia is less exposed than crude consumers to the direct shocks from energy prices. For it, the inflationary risk from oil comes instead from the extra cash that floods into the economy as it earns more from exports.
"Coordination of fiscal and monetary policy will be critical. To the extent that both policies are pushing in the same direction, they may be able to keep a lid on inflation and stop it from escalating into double digits," said Zeljko Bogetic, lead economist for Russia at the World Bank.
"It will be wrong to relax the fiscal stance and go on a spending spree, but ... there is clearly a risk of this with high oil prices and the elections coming up."
HARD REALITY VS PROMISES
The central bank admits that it would be very tough to keep inflation on target, at no more than 7 percent this year after a severe drought pushed up the 2010 reading to 8.8 percent.
It has turned its full arsenal against inflation, raising interest rates and reserve requirements and loosening its control on the rouble to allow faster currency appreciation.
The full-scale onslaught from the central bank -- even as seasonal trends allow a fall in monthly inflation in February -- could signal that it is aware of the price pressures that may soon emerge from pre-election pledges, said Julia Tsepliaeva, chief economist for Russia and CIS at BNP Paribas.
Kudrin wants to cut borrowing by 500 billion roubles and stash away 700 billion roubles in the sovereign Reserve Fund.
Putin has given his agreement, but at the same time he has already started doling out promises of cash, like the pledge of 4 billion roubles of farm equipment subsidies.
"The contradiction is ... between the national leader's wish to reach all the goals at the same time and the hard reality," economists at the Development Centre think-tank in Moscow's influential Higher School of Economics said in a report.
The reality, argues Kudrin, is that by spending the extra oil cash Russia only strengthens its dependence on 'black gold' -- the very tie it has pledged to break to avoid becoming a hostage of commodity prices during the next global crisis.
"We talk a lot about how we need to get rid of our oil and gas dependency. For now, we are not succeeding," Kudrin told an economic forum in the Siberian city of Krasnoyarsk, lamenting his failure to persuade state monopolies to pay higher taxes or to push through a proposed increase in the pension age.
Oil and gas accounted for 48 percent of 2010 budget revenues of 7.9 trillion roubles -- up from 37 percent 5 years earlier.
Weaning Russia off this dependency by not spending the oil cash would be a painful process and one Putin is unlikely to risk given his popularity ratings have already started to edge lower from near-80 percent to the still respectable low-70s.
"In the past, Kudrin never succeeded in containing the budget and preventing the government from increasing spending at such a time," said Tsepliaeva at BNP Paribas.
"Some waves of populism before elections are unavoidable and extra budget spending ahead of the vote is always inflationary."
(Editing by Toby Chopra)