* Industrial output contraction smallest in 6 months
* Green shoots also seen in banking sector
* Interfax reports external borrowing may be $20 bln/yr
By Toni Vorobyova and Yelena Fabrichnaya
MOSCOW, July 15 (Reuters) - Russia's recession-struck economy is showing the first signs of steadying, but the budget spending needed to restart growth may mean doubling external borrowing plans, officials and media said on Wednesday.
Industrial production contracted at its slowest year-on-year pace in six months in June and growth of bad loans in the banking sector also eased.
"We can talk about some moderation of the pace of the contraction," Economy Minister Elvira Nabiullina said.
To get Russia out of its first recession in a decade, the government has kept spending high despite falling tax revenues, allowing the budget to slip into a deficit of some 3 trillion roubles ($92.31 billion), or 7.4 percent of gross domestic product (GDP) this year.
But with deficits expected to continue for at least two more years after this one, Russia is looking for other ways to get cash and plans to resume Eurobond issuance from 2010.
Interfax news agency quoted government sources as saying Russia is considering borrowing over $20 billion a year on international markets in 2010-2012, twice as much as officials have previously indicated.
Deputy Finance Minister Dmitry Pankin dismissed the report, saying the borrowing plans are still being finalised.
"These figures are raw. They are changing every day. Very difficult to say anything about them, even about the scale," Pankin, who oversees debt policy and rainy day oil funds at the ministry, told reporters.
NOT AFRAID OF THE ROUBLE
The need for cash makes it hard for Russia to cut taxes.
"In our view during the crisis we cannot lower the VAT rates," Deputy Economy Minister Andrei Klepach said at a roundtable discussion with the Organisation for Economic Cooperation and Development. He added that scrapping the oil export duty was also not an option, even in the medium term.
The OECD -- whose forecasts for the Russian economy are more optimistic than those of the government -- called on Wednesday for Moscow to get rid of the oil export duty and pointed to scope for cuts in the corporate tax rate.
It also said in a survey that the central bank should not be afraid to cut interest rates and let the rouble weaken to reflect fundamentals. It urged the bank to speed up plans to move to inflation-targeting, rather than controlling the exchange rate.
Russia spent a third of its reserves, or some $200 billion, defending the currency from a sharp collapse in late 2008-early 2009, and the central bank resumed dollar sales in July as a retreat in oil sent the rouble to 3-1/2 month lows.
"Of course under these conditions the rouble weakened," said First Deputy Chairman of the central bank Gennady Melikyan. "I see nothing frightening if the rouble is not at (current levels of) 31-32 per dollar but at 35."
A weaker rouble would be a boon for Russia's exporters, but could serve to rekindle inflationary pressures, thus limiting the scope for future central bank interest rate cuts.
The currency firmed slightly versus a euro-dollar basket on Wednesday, while Russian stock markets gained, perhaps taking some heart from the better-than-expected industrial output data. But analysts remained cautious.
"The development (in the data) adds to positive sentiments towards the Russian markets and the rouble," Unicredit analyst Vladimir Osakovsy said in a note.
However, the data was flattered by comparison with "exceptionally weak" June 2008 figures, and "there are high risks that the recovery in auto production might prove temporary as several auto producers have been downsizing production and closing plants in July for 2-3 months," he added.
(Editing by Ruth Pitchford)