* Fitch raised outlook to stable
* Wage arrears fall, industrial output rises in Dec
* Fitch sees implementation of fiscal tightening as a risk
* Finance minister sees big fight to reign in spending
(Adds industrial output data, deficit forecast, banks)
MOSCOW, Jan 22 - Russia reaped the benefits of an oil-fuelled recovery on Friday with a rating outlook upgrade from Fitch, but challenges remain -- not least the prospect of a tough political fight to reign in budget spending post-crisis.
Fitch became the second ratings agency in a month to raise Russia's sovereign rating outlook to "stable" from "negative", citing an economic recovery, lower inflation, higher oil prices, and a smaller than expected budget deficit. The brightening picture for Russia -- slowly climbing out of its first recession in a decade -- was added to by news of wage arrears falling to their lowest in over a year, while industrial output grew in December.
But Fitch said risks remain, notably ones "related to GDP growth, the implementation of fiscal tightening and oil prices".
Alexei Kudrin, a fiscal hawk who has led the finance ministry for a decade, stressed the need to slash the budget deficit to 1 percent of gross domestic product after 2012 -- assuming oil prices of $60 a barrel -- from 5.9 percent in 2009. "We do not have the scope to increase spending," Kudrin told a government-organised conference on economic modernisation.
"In the next 10 years, our spending in real terms will likely remain at current levels. It will not increase, and there is a risk that it could reduce."
This year, the deficit could be reduced to around 5 percent of GDP, the central bank's first deputy chairman Alexei Ulyukayev forecast on Friday.
Fitch welcomed Russia's planned downward trajectory for its budget deficit, saying it "should help contain the impact of the recession on Russia's sovereign balance sheet".
It also revised to "stable" the outlooks of 13 Russian banks, reflecting the changed view on the country.
Russia's markets, however, showed little reaction to the upgrade, which came as no surprise after a similar move by Standard & Poor's ratings agency in December.
"The decision is in line with expectations as the budget deficit for 2009 was less than the government had forecast. The expectations for this year tend to be favourable too," said Yaroslav Lissovolik, analyst at Deutsche Bank.
SERIOUS FIGHT AHEAD
Slashing the budget deficit and keeping a lid on expenditure in coming years will not be easy after spending increased 2.3 times in the previous decade.
"I think for the government -- and our government is diverse -- there is a big problem in curbing the (spending) appetites which still exist," Kudrin said.
Kudrin has fought hard to reign in budget spending and is credited with creating the oil wealth funds which helped Russia weather the latest recession with less damage than it sustained during the 1998 crisis.
But the close ally of Prime Minister Vladimir Putin often faces tough criticism from parliamentarians, who advocate higher spending to boost living standards. The economy ministry, whose brief is long-term economic development, is also often publicly at odds with finance ministry's tight purse stance.
Spending appetites came to the fore last year, when the oil price doubled to $80 a barrel, Kudrin said.
That tested the government's crisis-fuelled resolve to reform the economy and lessen the dependence on energy -- a driver of growth in the previous decade, which turned into a curse during the crisis as oil and commodity prices collapsed.
"The mood that the next decade will be the same....returned in a flash. It returned not just to the government, but first of all to all the lobbyists...and of course this does not correspond to reality," Kudrin said, adding that oil prices are unlikely to average as much as $70 in the next 10 years.
"The fight will be serious. It will not be easy, especially for the finance ministry...That will answer the question on whether we will be able to create stability in the economy."