The International Monetary Fund on Friday criticized the government's plan to spend oil revenues on welfare, urging it to focus on measures to combat inflation and improve the investment climate.

"Russia is significantly speeding up the pace at which it spends its oil revenues," said Poul Thomsen, who led the annual IMF delegation to Moscow.

"The preliminary budget discussed with us will entail further relaxation in 2006," he added.

"At best, if this policy continues, Russia will miss an opportunity to advance its modernization," he said at a sullen news conference. At worse, it will be forced to undertake painful austerity policies down the road, he said.

Thomsen was speaking a day after the government voted to spend an extra 349 billion rubles ($12.3 billion) this year on social services. Of that, 111 billion rubles is to come from the stabilization fund, a pot of windfall oil revenues, which finance minister Alexei Kudrin had earmarked for early debt repayment.

Hikes in pensions and bureaucrats' salaries will not help the economy to grow in the long term, said Thomsen.

The IMF suggested the government should only draw upon the stabilization fund to advance structural reforms, in particular reforms that improve the investment climate, such as restructuring state-owned utilities such as Unified Energy Systems.

"Most of the reforms that are a priority for the government are well behind schedule," said Thomsen.

Thomsen's criticism matches the views of several liberal economists within the government -- led by Finance Minister Alexei Kudrin -- who are growing embittered about fiscal incontinence and reform constipation.

Next year, the government will struggle to balance the budget at the price of $31 per barrel, Thomsen said, referring to oil prices.

It balanced its budget last year when oil was trading at just $23 per barrel, he added.

Urals blend oil was trading at just over $50 per barrel Thursday. A surge in spending followed by a fall in prices for crude "would swing the budget balance into deficit," said Vladimir Pantyushin, chief economist at Renaissance Capital.

Social spending presents a dilemma for all societies, said Yevsei Gurvich, head of independent think tank Economic Expert Group.

On the one hand the gap between pensions and wages is growing, Gurvich said. But on the other, boosting spending will lead to inflation and the erosion of the average consumer's purchasing power, he said.

The IMF said that several years of strong economic growth but little investment leave Russia facing a situation where producers cannot keep up with demand, leading to rationing of goods through higher prices.

"Bringing [2005 inflation] down to 10.5 or 11 percent would be an achievement," he said, saying the government's forecast of 8.5 percent would be "challenging."

Consumer prices rose by 6.5 percent in the first four months of the year.

Thomsen said the Central Bank's attempts to slow down inflation and ruble appreciation are contradictory. He urged the government to concentrate on slowing down inflation, letting the ruble appreciate.

On Thursday, Central Bank governor Sergei Ignatyev said letting the value of the ruble increase would lead to "a decline in economic growth."

But Renaissance Capital's Pantyushin said that while moderate ruble appreciation since early 2003 might have increased competitive pressures on Russian manufacturers in the short term, it had also presented them with more purchasing power abroad to invest in long-term profitability.

"I have talked to many kinds of companies -- brewers, tractor makers, milk and juice producers -- who have been buying up equipment abroad in the last two years," he said.

The IMF forecasts that gross domestic product will grow by 5.5 percent this year, a more pessimistic assessment than the 5.8 percent forecast from the Economic Development and Trade Ministry.