Foreign Assistance: International Efforts to Aid Russia's Transition Have
Had Mixed Results (Chapter Report, 11/01/2000, GAO/GAO-01-8).
Since the breakup of the Soviet Union in 1991, organizations and donors
have provided Russia with tens of billions of dollars in economic
assistance directed at helping Russia's transition to a market economy
within a democratic state. This transition presents opportunities and
challenges to the Russians and to those that choose to provide economic
assistance. This report focuses on the assistance given to Russia by the
International Monetary Fund, the World Bank's International Bank for
Reconstruction and Development, the European Bank for Reconstruction and
Development, the 1992 Freedom Support Act, and the European Union's
Technical Assistance to the Commonwealth of Independent States program.
GAO found that the success of the assistance programs has been mixed.
While there have been a number of individual successes, such as small
business development, GAO's interview with the financial institutions
revealed that overall program goals are not being met. GAO identified
three obstacles toward attaining program objectives: (1) difficult
conditions in Russia; (2) limitation in how programs were designed and
implemented; and (3) the interdependent nature of Russia's transition
needs. The financial institutions and donors, along with the Russian
government, are reevaluating the design of their programs. GAO also
noted several lessons learned that can improve the success of these
programs.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GAO-01-8
TITLE: Foreign Assistance: International Efforts to Aid Russia's
Transition Have Had Mixed Results
DATE: 11/01/2000
SUBJECT: International organizations
Foreign economic assistance
International cooperation
Macroeconomic analysis
Strategic planning
Economic development
Foreign governments
Foreign loans
IDENTIFIER: European Union
Russia
European Union Technical Assistance to the Commonwealth of
Independent States
Freedom Support Act Program
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GAO-01-8
Report to the Chairman and to the Ranking Minority Member, Committee on
Banking and Financial Services, House of Representatives
November 2000 FOREIGN ASSISTANCE
International Efforts to Aid Russia's Transition Have Had Mixed Results
GAO- 01- 8
Executive Summary 6 Chapter 1
24 Introduction
Chapter 2 39
Donors Have Adopted The International Community Agreed on Fundamentals
Regarding Russia's Economic Transition but Lacked a Different Strategies
Comprehensive Strategy for Assistance 39
and Means for Assistance Programs Have Pursued Similar Objectives With
Providing Assistance Different Instruments and Strategies 42
Coordination of Assistance Has Proved Difficult, With Some Improvements Over
Time 62
Chapter 3 67
Institutions and Russia's Economic Performance Over the Decade Has Been Poor
67
Success of Individual Projects Has Been Mixed 70 Donors Have Had
Success of Assistance Programs Has Been Hindered by Conditions Limited
Success in in Russia and Limitations of Programs 73 Meeting Their
Four Policy Areas Illustrate Challenges and Interdependencies Across
Assistance Objectives 82 Objectives
Changes in Assistance Programs Reflect Commitment to Staying in Russia 99
Chapter 4
105 Conclusions and
Donors Assessing Status of Russia Programs 105 Conclusions 106 Lessons
Learned
Lessons Learned 107 Appendixes Appendix I: Additional Information on
International Monetary Fund Programs in Russia 110
Appendix II: Additional Information on World Bank Assistance to Russia 130
Appendix III: Additional Information on European Bank for Reconstruction and
Development Programs in Russia 150
Appendix IV: Additional Information on the U. S. Freedom Support Act Program
in Russia 163
Appendix V: Additional Information on the European Union's TACIS Programs in
Russia 181
Appendix VI: Time Line of Key Economic and Political Events in the Russian
Federation, 1990- 2000 193 Appendix VII: Additional Information on Economic
Trends 195 Appendix VIII: Comments From the Department of State and USAID
210
Appendix IX: Comments From the Treasury Department 213 Appendix X: Comments
From the International Monetary Fund 215 Appendix XI: Comments From the
World Bank 217 Appendix XII: Comments From the European Bank for
Reconstruction and Development 219 Appendix XIII: Comments From the European
Commission 221 Appendix XIV: GAO Contacts and Staff Acknowledgments 223
Related GAO Products 224 Tables Table 1: Highlights of the IMF's Assistance
Strategy for Russia,
1991- 2000 43 Table 2: Highlights of the World Bank's Assistance Strategy
for Russia, 1991- Present 48 Table 3: Evolution of the EBRD's Strategy for
Russia, 1991- 2000 51 Table 4: Development of the U. S. Assistance Program
for Russia,
1991- Present 55 Table 5: Evolution of TACIS' Strategy for Russia, 1991-
2000 60 Table 6: Funding History of IMF Programs for Russia 113 Table 7:
Status of World Bank Loans for Russia, From Fiscal Year 1993 Through
September 2000 133
Table 8: Foreign Currency Debt Service of the Russian Federation in 1999 205
Figures Figure 1: Disbursements to Russia by Five Institutions and Donors,
1991- September 2000 10
Figure 2: IMF Disbursements and Russian Repayments, 1992- 2000 30
Figure 3: World Bank Approved Lending and Disbursements to Russia, 1992-
2000 31 Figure 4: EBRD Annual Funding for Russia Projects, 1991- 2000 32
Figure 5: U. S. Freedom Support Act Annual Funding for Russia,
1992- 2000 33 Figure 6: TACIS Annual Funding for Russia, 1991- 2000 34
Figure 7: World Bank Approved Adjustment vs. Investment Lending, 1993-
September 2000 50
Figure 8: EBRD Funding for Russia by Sector, 1991- 2000 53 Figure 9: Freedom
Support Act- funded Activities Grouped by U. S.
Objectives, 1992- Present 58 Figure 10: Portions of All Freedom Support Act
Funds Budgeted for Each U. S. Objective, Fiscal Years 1992- 2000 59
Figure 11: TACIS Funding for Russia by Sector, 1991- 98 61 Figure 12: Trends
in Real Output for Russia, the Czech Republic,
Poland, Romania, and Ukraine, 1989- 2000 68 Figure 13: Russian Federal
Government Budget Expenditures and
Financing, 1992- 2000 84 Figure 14: Russia's Monthly Inflation Rate, 1990-
2000 85 Figure 15: Real and Nominal Monthly Exchange Rate Indexes
for Russia, 1994- 2000 86 Figure 16: Trends in Approved World Bank Lending
and
Disbursements to Russia, Fiscal Year 1993 - September 2000 135 Figure 17:
World Bank Lending to Russia, by Type of Instrument,
Fiscal Year 1993 Through September 2000. 136 Figure 18: Status of World Bank
Approved Loans to Russia as of September 2000 137
Figure 19: Russia's World Bank Portfolio Performance, 1994 to June 2000 143
Figure 20: Russia's World Bank Projects and Commitments
Considered to Be at Risk, June 2000 . 144 Figure 21: Annual EBRD Funding for
Russia Projects, 1991- 2000 154 Figure 22: EBRD Lending and Equity
Investment for Signed Projects by Sector in Russia, 1991- 2000 155
Figure 23: Funding Levels for Major U. S. Programs With Russia Since 1992
(Budgeted and Expended, Respectively) 164 Figure 24: Funds Budgeted for
Freedom Support Act Assistance to Russia, Fiscal Years 1992- 2000 (in
$millions) 170 Figure 25: TACIS Commitments and Disbursements for Russia,
1991- 2000 185 Figure 26: TACIS Commitments by Sector, 1991- 1999 186
Figure 27: Index of Russian Production, Consumption, Industrial Output, and
Investment, 1990- 1999, 1990 = 100 196 Figure 28: Average Russian Life
Expectancy at Birth, in Years 198 Figure 29: Share of Russian Population
Below Subsistence Level,
December 1991- June 2000 199 Figure 30: Merchandise Trade of Russia, January
1992- December 1999
(Billions of U. S. dollars) 200 Figure 31: Composition of Russian Exports,
1994- 98 201 Figure 32: Composition of Russian Imports, 1994- 98 202 Figure
33: Russia's Foreign Debt, 1990- 99 (Billions of U. S. dollars) 203 Figure
34: Debt Components of the Russian Government,
End 1999 (Billions of U. S. Dollars) 204 Figure 35: Gross Foreign Investment
in Russia, 1993- 99 (Billions of U. S. dollars) 206
Figure 36: Per Capita Cumulative Foreign Direct Investment in Transition
Economies (1988- 99) 207 Figure 37: Estimate of Capital Flight From Russia,
1994- 98 (Billions
of U. S. dollars) 209
November 1, 2000 The Honorable James A. Leach Chairman The Honorable John J.
LaFalce Ranking Minority Member Committee on Banking and Financial Services
House of Representatives
This report responds to your request that we review the strategies of
international institutions and donors to assist Russia in its economic and
political transition to a market economy.
We are sending copies of the report to the Honorable Madeleine K. Albright,
the Secretary of State; the Honorable Lawrence Summers, the Secretary of the
Treasury; to the heads of the institutions we included in our review (Horst
Köhler, Managing Director, International Monetary Fund; James Wolfensohn,
President, the World Bank; Jean Lemierre, President, the European Bank for
Reconstruction and Development), and to Christopher Patten, Director General
for External Relations, the European Commission, as well as other interested
parties.
If there are questions regarding this report, please contact Harold J.
Johnson at (202) 512- 4128 or Thomas J. McCool at (202) 512- 8678. GAO
contacts and staff acknowledgments are listed in appendix XIV.
Harold J. Johnson, Director International Affairs and Trade
Thomas J. McCool, Managing Director Financial Markets and Community
Investment
Executive Summary Purpose Since the breakup of the Soviet Union in 1991,
multilateral organizations and bilateral donors, including the United
States, have provided the
Russian Federation (Russia) with tens of billions of dollars in economic
assistance directed at helping Russia's transition to a market economy
within a democratic state. The value of this assistance is difficult to
assess, however, since Russia appears to be a long way from having a
competitive, market economy, and its transition experience over the past
decade has been more difficult than was expected. The approaches used to
assist Russia, both in the past and for the future, continue to be debated.
To help focus this debate, the Chairman and Ranking Minority Member of the
Committee on Banking and Financial Services, House of Representatives, asked
GAO to review the strategies of different lending institutions and donors in
providing economic assistance to Russia with a view toward identifying
lessons learned that might be valuable for making
future decisions about assistance policies. Specifically, GAO examined (1)
what types of assistance these institutions and donors have provided, what
their program strategies were, and how the assistance has been coordinated;
(2) how successful the institutions and donors have been in terms of meeting
their assistance objectives and what factors have affected
their success; and (3) what lessons can be learned that may have relevance
for future policy decisions about Russia. The lending institutions GAO
included in this review are the International Monetary Fund, the World
Bank's International Bank for Reconstruction and Development, 1 and the
European Bank for Reconstruction and Development. The other programs are U.
S. bilateral assistance under the 1992 Freedom Support Act 2 and the
European Union's Technical Assistance to the Commonwealth of Independent
States program. From 1992 until September 2000, these five programs have
provided about $36 billion in assistance to Russia, with U. S. bilateral
assistance under the Freedom Support Act of $2.3 billion.
1 GAO examined the lending made to Russia by the International Bank for
Reconstruction and Development because it has provided the vast majority of
the World Bank Group's funding to Russia. Two other parts of the World Bank
Group that have provided funding to Russia are the International Finance
Corporation and the Multilateral Investment Guarantee Agency in Russia.
2 “Freedom” in the name of this act stands for Freedom for
Russia and Emerging Eurasian Democracies and Open Markets (P. L. 102- 511).
Throughout this report, GAO refers to the act as the “Freedom Support
Act.”
To meet its objectives, GAO analyzed a wide range of documents and
interviewed current and former officials from each of the five lending
institutions and donors as well as Russia experts from think tanks,
academic institutions, and nongovernmental organizations. GAO traveled to
Russia and interviewed current and former Russian government officials, in-
country donor representatives and experts, and also project beneficiaries.
GAO obtained access to International Monetary Fund, World Bank, and European
Bank for Reconstruction and Development officials and documents through the
Department of the Treasury and through the
U. S. member of each institution's executive board. Results in Brief The
international community generally agreed on some fundamental principles
concerning Russia's economic transition, but it did not have a
comprehensive strategy regarding the level, timing, and priorities of
assistance and how assistance would be coordinated. The leaders of the major
industrial nations, including the United States, chose early on not to
commit substantial bilateral resources to Russia, leaving the International
Monetary Fund and the World Bank to provide the bulk of financial
assistance. The strategies and means for providing assistance of the
international institutions and donors have reflected their different
missions. For example, the International Monetary Fund has provided loans to
Russia's central government, tied to reforms aimed particularly at
controlling inflation and achieving macroeconomic stability, while the much
more limited U. S. bilateral program has targeted primarily market reforms,
but also democracy and humanitarian needs, largely through
providing technical assistance. Over the transition period, institutions and
donors themselves and the Russian government have created various forums for
coordination of assistance. This coordination has improved in some areas
over time, but it is still a challenge to the institutions and donors and to
the Russian government.
While there have been successes across individual program objectives for the
institutions and donors GAO reviewed, officials have acknowledged that in
many respects, there has been limited progress in reaching their broad
program goals. While the worst fears of the early transition period, such as
anarchy or return to communist rule, have not been realized,
Russia's economic decline has been more severe and its recovery slower than
anticipated. At the individual project level, the success of assistance of
these institutions and donors has been mixed, according to their own
evaluations and the views of officials and analysts GAO interviewed.
Limitations in program success are due to obstacles encountered in Russia,
including the lack of domestic political consensus behind reform and
emergence of powerful vested interests; sometimes poorly designed or
implemented programs; and the scale and complexities of the challenges.
These factors can be interrelated. Assistance efforts in four key policy
areas- macroeconomic stabilization, social safety net protection,
privatization, and banking sector reform- illustrate barriers to success and
how limited reforms in some areas have undermined progress in other areas.
Institutions and donors have modified their strategies and programs in
Russia in different ways over the decade, but remaining engaged in Russia
has been a common goal.
A number of conclusions and lessons learned can be drawn from assistance
efforts in Russia that have implications for looking ahead. The overarching
lesson is that without some degree of consensus and political commitment
within Russia, the impact of assistance programs on political and economic
reforms is limited. The immense challenge of Russia's transition to a
market economy and democratic society was underestimated by the
international community and by Russians, and the transition will clearly
take longer than initially expected. The transition involves developing
effective laws and institutions and restructuring many enterprises. It
requires broad, grassroots support and calls for greater means to cushion
social impacts on vulnerable groups. The Russian government's recent
development of a long- term economic program demonstrates that the
government has the capacity to seriously evaluate and debate the economic
policy choices the country faces and that those choices remain difficult
ones for Russia. International assistance efforts need to be structured for
the possibility of long- term involvement. In written comments on this
report, the organizations GAO reviewed generally agreed with GAO's
conclusions regarding the difficulties of the transition and types of
lessons learned. Several commented that the report was fair and balanced. In
addition, these organizations expanded on a
number of points made in the draft about the complexity of Russia's
transition process and the reasons for the mixed results that institution
and donor assistance programs have achieved.
Background The official end of the Soviet Union in December 1991 presented
the Soviet Union's former Cold War adversaries with opportunities and
challenges. The major organized threat to the West vanished, but thousands
of nuclear warheads and also aging nuclear power plants remained in a region
characterized by political uncertainty and economic turmoil. When Russia
became independent in December 1991, economic conditions were rapidly
worsening after several years of decline. Economic output was falling, and
trade relations between the former republics of the Soviet Union were
collapsing. President Boris Yeltsin enjoyed broad popular support, but his
government was engaged in bitter disputes with the mainly Communistdominated
legislature. Unlike Central Europe, where Communists were largely swept from
important positions of power in 1989, Russia had
experienced only a partial revolution, with many of the same authorities who
had formerly run ministries and enterprises still in charge. Whether basic
needs of the population, such as food, would be met through the winter was
in doubt. Most worrisome to western leaders was the uncertainty about who
would be in charge in Russia and have control over the vast nuclear arsenal
of the former Soviet Union.
The common assumption among western leaders was that Russia's conversion
from a Communist state to a market economy within a democratic state would
bring long- term stability within Russia and between Russia and the West.
This transformation required fundamental changes throughout the Russian
economy, government, and society. Unlike
other transition countries such as Poland and Hungary, Russia had no vestige
of a democracy or competitive market economy and almost nothing in the way
of supporting institutions or economic relationships with western partners.
Many bilateral donors and international institutions implemented programs to
assist Russia's transition process. According to one U. S. government
estimate, the total value of international assistance disbursed to Russia
through September 1998 was $66 billion, 3 excluding food aid loans, trade
credits, and debt rollovers. The five institutions and donors that GAO
reviewed have provided loans, grants, and technical assistance to aid
Russia's economic transition. The International Monetary Fund (IMF) lent
Russia more than $22.2 billion to help stabilize the economy. The World
Bank targeted reforms in various sectors of the economy, disbursing $7. 5
billion in loans. The European Bank for Reconstruction and Development aided
the development of the private sector in Russia, disbursing $2. 2 billion in
loans and investments in Russian firms. Under the 3 Although there are
important limitations to the comparisons, for purposes of context, this
can be compared to the more than $500 billion the German government has
spent since 1989 to support the economic transition in eastern Germany, and
international assistance to Poland of about $36 billion from 1989 through
1994.
Freedom Support Act, the United States has expended $2.3 billion in grants
for technical assistance, exchanges, and other programs to address
humanitarian needs and support economic and democratic reform. The European
Union's Technical Assistance to the Commonwealth of Independent States
program has spent $1.6 billion to provide grantfinanced technical assistance
to support the development of a market economy and a democratic society (see
fig. 1 for an illustration of donor
assistance to Russia, 1991- September 2000).
Figure 1: Disbursements to Russia by Five Institutions and Donors, 1991-
September 2000
9 Billions of dollars
8 7 6 5 4 3 2 1 0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 IMF $22.2B World Bank
$7.5B EBRD $2.2B US- FSA $2.3B EU- TACIS $1.6B
Legend: EU- TACIS= European Union's Technical Assistance to the Commonwealth
of Independent States EBRD= European Bank for Reconstruction and Development
FSA= Freedom Support Act Note 1: These figures have not been adjusted for
inflation. Note 2: Figures for the IMF, World Bank, and EBRD do not include
disbursements for technical assistance programs.
Sources: GAO analysis of information from the IMF, the World Bank, the
European Bank for Reconstruction and Development, the U. S. Department of
State, and the European Union.
Principal Findings Donors Have Adopted
In its early efforts to assist Russia's economic transition, the
international Different Strategies and
community generally agreed on some fundamental principles concerning Means
for Providing
the transition, but it did not have a comprehensive strategy for the
Assistance
assistance it would provide and how its efforts would be coordinated. With
other foreign policy concerns and domestic political constraints, the major
industrial countries chose early on not to commit substantial bilateral
resources to Russia. Instead, primary responsibility for providing
assistance fell to multilateral organizations such as the IMF and the World
Bank. Western leaders, and a key group of Russian officials, shared several
basic assumptions. They believed, for example, that controls on prices and
trade needed to be removed right away and inflation controlled and that
state enterprises should be privatized quickly, with the assumption that the
institutions needed to support the new market economy would develop over
time. Beyond those basic principles, however, many aspects of overall
assistance policy were not laid out, such as interrelationships among
different aspects of transition and how well assistance needs fit the
traditional instruments of the international financial institutions.
Effective coordination of assistance proved difficult.
The institutions and donors GAO reviewed have pursued the similar broad
objectives of helping Russia make the transition to a market- based economy,
but their individual strategies and means for providing assistance have
differed, reflecting their different roles. The primary objective of the
IMF's involvement with Russia has been to achieve macroeconomic
stabilization, largely defined by low inflation. The IMF has provided loans
to Russia's Ministry of Finance and central bank; it has given technical
assistance and engaged in high- level dialogue with Russian officials. IMF
financing has been tied to Russia's meeting certain economic conditions,
often measured by quantitative indicators, such as budget deficit and
revenue targets. Over time, the IMF's strategy in Russia has shifted to
emphasize structural reforms, such as changes in Russia's tax system and
financial sector, to improve the environment for economic growth.
The World Bank has used both lending and nonlending services to pursue its
objectives of supporting Russia's transition to a market economy based on
initiatives in the private sector, protection of poor and vulnerable groups,
and the development and strengthening of Russian institutions.
Implementation of World Bank programs in Russia began slowly. From
1992 through 1995, the World Bank approved $3. 4 billion for investment
projects across several Russian sectors, but by the end of 1995, only $278
million in investment lending had been disbursed. 4 The World Bank's
strategy has shifted during the transition away from financing a variety of
investment projects across Russia toward providing large loans aimed at
federal- level reforms, ranging from policies for specific sectors, such as
coal, to tax and pension policies. The European Bank for Reconstruction
and Development's strategy has focused on financing commercial projects in
Russia's private sector while having a “transition impact,” not
competing with private sources of funding and, at the same time, making a
small profit. Over time, the strategy has become more focused on promoting
restructuring in large companies and developing small- and medium- sized
businesses. The objectives of the U. S. Freedom Support Act bilateral
program have been to promote market reform and democracy and to address
urgent human needs related to Russia's transition to a market economy. The
United States has pursued these objectives through a variety of instruments
including technical assistance, exchanges and training, grants, trade
promotion, and enterprise funds. The U. S. program has generally emphasized
the objective of promoting market reforms, although recent
budgets have placed more relative emphasis on democracy and rule of law
programs. In 1996, the U. S. program began shifting resources from work at
the federal level to a few reform- minded regions. The strategy of the EU's
Technical Assistance program has been to finance the provision of technical
assistance in Russia by consultants and European institutions,
with the objectives of assisting and accelerating the socioeconomic and
democratic reform process. Over time, its strategy has shifted from
providing small, quick projects in close collaboration with the Russian
government to emphasizing larger projects with a greater focus on developing
civil society, removing structural barriers to reform, and carrying out
efforts that more closely link Russia and the European Union.
Initial attempts to coordinate these institutions' and donors' efforts were
impeded by the lack of a clear western strategy. At the same time, it was
not clear to those providing assistance whether the Russian government
wanted coordinated assistance efforts. Early formal coordination bodies,
such as a group set up by the Group of Seven industrialized countries (G-
7), 4 The World Bank disbursed a $600- million adjustment loan for balance-
of- payments support to the Russian government in 1993.
proved cumbersome and were disbanded in 1997. 5 Donor officials told us they
prefer the informal mechanisms that have developed over time to share
information and discuss approaches. In selected sectors, such as health and
banking sector reform, for example, donors have formed informal working
groups. Donor programs sometimes lay the groundwork, through grants and
technical assistance, for World Bank and European Bank for Reconstruction
and Development loans in specific areas, including housing, tax, the
financial sector, and legal reform.
The Russian government is not totally satisfied with the coordination of
this assistance, and officials told GAO that one ministry is not always
aware of donor efforts in other ministries. Representatives of the donor
community in Russia also told GAO that although some improvements have been
made, coordination with the Russian government continues to be a
challenge, often complicated by difficulties in coordinating within the
Russian government. Russia's 1998 financial crisis demonstrated the need for
more formal coordination in banking sector reform and, in the aftermath of
the crisis, the Central Bank of Russia set up a coordinating committee
composed of donor and government representatives. Donor
officials told us that progress to date has been mixed. The Impact of
Assistance While there have been a number of individual successes of
assistance Programs Has Been Mixed,
programs in Russia, officials have acknowledged that progress toward With
Broad Results Limited reaching broad program goals has been limited.
According to a number of
in Many Respects indicators, the performance of the Russian economy over the
past decade
has been poor, with Russia's economic decline among the most severe and its
recovery among the most limited among transition countries in Eastern Europe
and the former Soviet Union. For example, measured economic output in 1995
was about 65 percent of 1991 levels and remained stagnant through 1998
before showing some improvement. Obstacles to economic growth continue to
exist in many areas where the international community has focused its
efforts; these obstacles include the absence of effective competition in
many sectors and the continuing lack of social services to adequately
protect poor and vulnerable groups.
5 The G- 7 consists of the United States, the United Kingdom, Germany,
Japan, France, Italy, and Canada. It has been very involved in the
international community's efforts to assist Russia in its transition to a
market economy.
The success of the individual projects and other elements of the Russia
programs of the institutions and donors GAO reviewed has been mixed,
according to their own evaluations and the views of officials and analysts
GAO interviewed. While the IMF has not comprehensively evaluated its Russia
program, GAO identified a range of views on the success of IMF programs in
Russia. A number of U. S. and Russian government officials as well as
economists and Russia analysts at think tanks have taken issue with aspects
of IMF programs, ranging from the exchange rate policies it supported to
whether the IMF was “too soft” in enforcing the conditions of
its lending program. However, a number of analysts and U. S. and Russian
officials told us that the policy advice and high- level dialogue provided
by the IMF has been of value to Russia's transition in several important
respects. World Bank officials, in their December 1999 Russia strategy
paper, characterized the success of World Bank programs in Russia as
mixed but overall disappointing relative to their expectations. According to
World Bank assessments, the percentage of loans in its Russia portfolio
meeting development and implementation objectives has ranged from 33 percent
to 82 percent over the period, showing improvement in 1996 and 1997, falling
sharply after the 1998 financial crisis, and then improving after post-
crisis loan restructurings. According to World Bank officials, the value
of its large adjustment loans directed at central government reforms remains
to be seen, but some indicators of success have become more apparent in
recent months. The European Bank for Reconstruction and Development has also
rated
the success of its projects in Russia as mixed. According to European Bank
for Reconstruction and Development officials, their efforts have been most
successful in areas of small business development and other projects
entailing work with smaller firms. They acknowledged that the financial
turmoil in 1998 damaged many European Bank for Reconstruction and
Development efforts, especially in the financial sector, and it has had
limited success in promoting restructuring in large Russian firms. Russian
officials and analysts had differing perspectives on European Bank for
Reconstruction and Development efforts in Russia, with some generally
positive but others stating that the Bank's role duplicates lending and
investment functions provided by the private sector. With respect to the U.
S. Freedom Support Act programs in Russia, based on GAO's analysis of
available evaluations, discussions with officials, and prior GAO work, the
programs have had mixed results. GAO's past reviews of U. S. assistance
projects in Russia found that while some met their
objectives and were seen as valuable by Russian recipients, others were
viewed as having limited impact
The general assessment of the European Union's Technical Assistance programs
in Russia is also mixed, based on the EU's own evaluations and on
discussions with European Union and Russian officials and other analysts.
For example, a March 2000 European Union report on its Technical Assistance
program for Russia gave it high marks for education
and training efforts and lower marks for enterprise restructuring and
building the framework for a market economy. Obstacles to Assistance GAO
identified three main interrelated obstacles to assistance programs in
Russia attaining project and program objectives: (1) difficult conditions in
Russia, including the lack of domestic political consensus behind reforms,
the constant change in government officials, and the presence of vested
interests and corruption; (2) limitations in how programs were designed and
implemented; and (3) the vastness of the challenge and the interdependent
nature of Russia's transition needs. GAO found that a common frustration
among the lending institutions and donors, with the IMF an exception to some
degree, has been the difficulty of establishing and maintaining effective
working relationships with Russian government officials. This situation has
been due, in part, to rapid
turnover in officials and a distrust of or disinterest in some donor
programs. It has also been due to a lack of effective consensus between the
executive and legislative branches of the Russian government and among the
broader public regarding a reform agenda. The increasing concentration of
economic power in Russia and the rise of politically powerful interest
groups are widely viewed as impeding progress in
meeting economic reform objectives. For example, powerful vested interests
have been able to block several efforts to reform the tax system. In
addition, according to analysts, donor officials, and documents, corruption
at different levels of government has undermined reform efforts and also
efforts to spur private sector economic activity. Limitations in the design
and implementation of assistance programs also
impeded program effectiveness. Some of these limitations were directly
related to the mandates and traditional roles of the institutions and donors
GAO reviewed. Others stemmed from limited institutional and program
capabilities and decisions about what stategies to pursue and how to
implement them. Beginning in 1992, for example, international institutions
faced pressures to lend money to Russia quickly. A tension thus resulted
between taking time to study conditions and needs in Russia and adequately
design programs, on the one hand, and trying to disburse funds quickly in
order to have a role in the reform process, on the other. In addition,
international institutions, particularly the World Bank, were concerned
about Russia's ability to repay the loans. The international
institutions that were expected to assume the lead in providing assistance
had never before worked in the Soviet Union and lacked staff familiar with
Russia. Similarly, the U. S. government faced substantial pressure to
disburse Freedom Support Act funds quickly beginning in 1993, when funding
for bilateral assistance directed at economic transition increased.
According to officials from the World Bank, the European Bank for
Reconstruction and Development, the United States, and the European Union,
the effectiveness of assistance programs often suffered from being too broad
and inadequately focused. Assistance resources were spread broadly for a
number of reasons, ranging from a belief that wide- ranging involvement was
called for to pressure to respond to different
constituencies, such as U. S. government agencies or European Union member
countries. Donor program and Russian officials and other analysts also cited
not having adequate personnel on the ground in Russia and
unevenness in the quality of consultants as limiting program impact. GAO
found that the success of assistance programs has also been limited by the
interdependencies across Russia's needs and by the relatively small scale of
assistance programs in relation to the extent of Russia's needs. Building a
market economy and democratic society in Russia involves change on an
immense scale and, in many instances, even very successful
donor projects cannot have more than a limited impact. Based on its
assessment of key issues in Russia's transition over the past 8 years and
through discussions with Russia experts, GAO selected four policy areas-
macroeconomic stabilization, social safety net protection,
privatization, and banking sector reform- that illustrate both the range of
challenges faced and the degree to which the amount of progress in one area
has affected reforms in other areas. For example, while inflation was
finally brought under control in late 1995, serious macroeconomic imbalances
remained, which contributed to the financial crisis of 1998. These
imbalances, including the need to finance large government deficits through
paying very high interest rates on government securities, were due
in part to structural problems in the economy, especially the inability of
the government to collect taxes. With respect to macroeconomic policy
choices, while a highly valued ruble may have helped in controlling
inflation during part of the mid- 1990s, it is likely also to have hindered
economic growth through making it more difficult for Russian producers to
compete with imported goods, according to many officials and experts. While
privatization of state- owned enterprises was an essential element of
Russia's transition, the ways in which some of the largest enterprises were
privatized increased the concentration of economic power and made achieving
reforms in areas such as tax collection more difficult.
The international community strongly encouraged Russia's decision to
privatize firms quickly and was significantly involved in the design and
implementation of the voucher privatization program. While the program was
carried out quickly and efficiently, assessments of its ultimate impact are
mixed. The “insider” nature of the privatization process
undermined its economic benefits, according to many officials and analysts.
The loans- forshares
privatization program, carried out in late 1995, is one of the most
controversial aspects of Russia's transition. 6 Through the program, a
handful of financial- industrial groups in Russia became controlling
shareholders in some of the country's most valuable enterprises, in return
for providing about $1 billion in revenues for Russia to meet its budgetary
financing needs for that year. While the international community did not
directly support the loan- for- shares program, it did not strongly object,
according to evidence GAO reviewed. Russia's banking sector was targeted
early on in donor assistance efforts; however, progress in strengthening
Russia's banking sector has been limited. The 1998 financial crisis
decimated Russia's banks and revealed how unsound their financial condition
was. It also illustrated the need for better coordination between the
Russian authorities and the institutions and donors on banking reform
efforts. Views of analysts and officials GAO
met with in Russia on the priority of banking sector restructuring efforts
were mixed. Although there is still little bank lending to small- and
medium- sized businesses, many experts felt that the demand for such loans
was limited and that the lack of bank financing was not the most important
impediment to the growth of such enterprises in Russia. The evolution of
international assistance efforts in Russia reflects institutions' and
donors' continued commitment to remain engaged in
6 The loans- for- shares program was a mechanism the Russian government used
in 1995 to privatize certain government enterprises in order to raise money.
The auctions were not transparent, and the government fell far short of its
revenue targets.
Russia largely because of the country's strategic importance. In some cases,
institutions and donors have responded to similar frustrations in Russia by
changing their programs in different ways, with shifts reflecting
differences in the nature, mandate, and political context of the
institutions. For example, the United States and the World Bank modified
their Russia programs in very different ways. In response to the difficulty
in implementing projects and in an attempt to exert greater leverage, the
World Bank shifted beginning in 1996 from attempting numerous projects
across multiple sectors and Russia's regions to lending to and dealing more
with the central government. In contrast, the United States shifted in 1996-
97 from trying to influence policy changes within the central government to
concentrating its efforts in several regions. Substantial reductions in U.
S. funding limiting the ability to obtain nationwide results, the heightened
importance of demonstrating assistance results, and
growing resistance from the Duma and federal government to enacting
meaningful reform encouraged the U. S. shift to the regions.
Political considerations have also affected program implementation in
Russia. For example, despite concerns regarding poor implementation of the
first program, the IMF executive board approved disbursement of $1. 5
billion in March 1994 to show support for the Russian government. In 1996,
the IMF frequently reviewed the Russia program and modified target
requirements for additional disbursements. According to the IMF, weak
macroeconomic performance was felt to reflect instability related to the
upcoming presidential elections, and the board wanted to show continued
support for the Russian government. Over time, explicit anticorruption
efforts have represented a relatively small share of international
assistance to Russia. However, many programs have indirect anticorruption
elements. For example, funding for democracy and rule of law programs have
represented about 24 percent of U. S.
assistance under the Freedom Support Act. The World Bank first explicitly
addressed corruption in its 1999 country assistance strategy for Russia,
although, according to Bank officials, several aspects of its Russia program
over time have had an anticorruption dimension. The World Bank cited its
coal sector lending as one area in which limiting opportunities for
corruption has had an increasing focus in the Bank's program. The programs
GAO reviewed have implemented specific procedures to increase protection of
their program funds from corruption and theft. These
institutions and donors have reported either that they have not suffered any
theft, or have not suffered major theft, of funds in Russia. GAO did not
independently evaluate the issue of whether there has been theft or
diversion of program funds. Conclusions and
At the end of nearly a decade of involvement in Russia's economic Lessons
Learned transition, institutions and donors have drawn a number of
conclusions about what has and has not worked, and lessons from the
experience (see apps. I- V for donor- specific lessons). The institutions
and donors are generally in the process of reevaluating, with the Russian
government, the
level and design of their assistance programs. Based on GAO's work, the
following conclusions and lessons learned may have relevance for future
assistance efforts.
Conclusions The challenge of Russia's transition was enormous and greater
than generally appreciated by the West. In hindsight, expectations within
Russia and among institutions and donors of achieving quick results were
unrealistic. Some aspects of transition assistance that the international
community identified early on as important proved difficult to provide, for
several
reasons, and have continued to be obstacles to needed reforms. In
particular, the lack of social support to ease the cost of economic
restructuring has increased the impact of the transition on poor and
vulnerable groups, decreased Russian public support for reform, and been a
limiting factor in economic restructuring. Russia's transition path has been
made harder by the concentration of power and income in the hands of a few,
a process that had begun prior
to the transition and that was accelerated by the privatization of the most
valuable sectors of Russian enterprise in 1994 and 1995. The degree to which
the international community, with different policies and levels of
involvement, could have influenced a different path remains the subject of
substantial debate. The question cannot be fully
answered, because what would have happened under alternative policies
remains unknown. However, many officials and analysts have stated that, in
hindsight, they would have made different choices in some cases. These
include the push to privatize the largest firms quickly and the failure of
the international community to strongly object to the loans- for- shares
privatization program in 1995. The donors' and institutions' initial
expectations and hopes that Russians would accept and quickly implement
advice proved unfounded. The transition to a market economy and democratic
society in Russia required grassroots support and the development of
effective
institutions, laws, and enforcement processes. These changes have profound
implications for Russian society and politics and thus required a degree of
political consensus within Russia that did not exist for much of the decade.
Little progress has been made in achieving reforms in areas where there has
not been ownership and support from the Russian government,
including the individuals and institutions with the authority to influence
outcomes. Working to achieve adequate ownership, and even identify when it
exists, has proved difficult for donors.
The unexpectedly strong performance of Russia's economy since the August
1998 financial collapse, due only in part to high export earnings from oil,
has underscored the limitations of how well the Russians and the
international community have understood the evolution and functioning of the
Russian economy, and have caused a reexamination
of some policy choices. The Russian government's recent development of a
long- term economic program demonstrates its capacity to seriously evaluate
and debate the
economic policy choices the country faces. Donors can take some credit for
helping develop this capacity. The program also demonstrates that the policy
choices facing the Russian government remain very hard ones. Lessons Learned
When taken together, these conclusions about past efforts to assist the
transition in Russia have some important implications for future assistance
efforts. Although there are no easy prescriptions for how to best support
reform in Russia, the following lessons can be of value. In light of the
realization that Russia's transition to a market economy
will take longer than anyone initially thought, to have the ability to make
a significant impact, donor programs should be structured for the
possibility of long- term involvement in Russia. For example, donors can
help build grassroots support for the development of institutions in Russia
to underlie a competitive market economy within a democratic society. This
is likely to require involvement over many years.
In light of the fact that Russian political will is so important to the
success of reform efforts, donors may have a bigger impact if they
concentrate their assistance efforts on the areas in which the Russians are
open to making reforms. Working to develop ownership as widely and deeply as
possible within the Russian government and across society is likely to pay
off in terms of assistance having the greatest
benefit.
Because progress on the path to democracy and a market economy is not a
smooth one, donors need to maintain flexibility in their programs to the
extent possible, so that they can respond to changing conditions and windows
of opportunity.
Agency Comments GAO received written comments on a draft of this report from
the Department of State and the U. S. Agency for International Development,
the Department of the Treasury, the European Bank for Reconstruction and
Development, the International Monetary Fund, the World Bank, and the
European Commission. These comments and GAO's response are reprinted in
appendixes VIII- XIII. All of these organizations also provided technical
comments that GAO discussed with relevant officials and incorporated in
the text of the report, where appropriate. In their written comments, these
organizations generally agreed with GAO's conclusions regarding the
difficulties of the transition and lessons learned. Several commented that
the report was fair and balanced. In addition, these organizations expanded
on a number of points made in the
draft about the complexity of Russia's transition process and the reasons
for the mixed results that institution and donor assistance programs have
achieved.
The State Department and the U. S. Agency for International Development
commented that the mixed results are closely tied to the fact that Russia's
transition to a market economy and democratic political system is
incomplete. They stated that much of the progress made to date is due to the
efforts of Russian organizations and individuals, some of which can be
credited in part to U. S. involvement through its assistance efforts. The
World Bank noted that there is a sense of disappointment regarding the
amount of progress made compared with the high hopes it had at the beginning
of the 1990s, but this disappointment is due, in part, to unrealistic
initial expectations. At the same time, the World Bank believes
that the significant changes that have occurred have put Russia on an
irreversible path toward a modern market economy. The European Bank for
Reconstruction and Development commented that
the challenge of transition in Russia has been greater than generally
expected, but it continues to be committed to providing financing to Russia.
It also stressed that it takes the issue of “additionality,” or
not duplicating other financing sources, seriously. The IMF agreed that the
transition process has been extremely complex and more so than most
anticipated at the outset. For this reason, the influence of the
international community on economic reform was somewhat limited.
Nevertheless, the IMF believes it has had a modest, positive impact in
various areas. The Treasury agreed that the impact of international
assistance programs is
reduced when domestic political support for reform is limited and that this
lack of domestic support has significantly hindered a number of reforms in
Russia. The Treasury also endorsed the conclusion that economic and
democratic transition in Russia is a long- term process that requires
concerted and flexible involvement by the international community over a
number of years.
The European Commission stated that it generally agreed with the report's
conclusions regarding the challenges of the transition process in Russia. It
disagreed, however, with GAO's characterization of the general assessment of
the European Union's technical assistance program in Russia, and stated that
that assessment was not substantiated by GAO's appraisal of the
program's own February 2000 evaluation. GAO's characterization of the
success of the program reflects the views of a number of officials and
analysts that some of the problems exhibited by the European Union's
assistance program have been particularly pronounced, although some had
praise for the program's efforts and accomplishments in several areas. The
language in the report draft has been slightly modified to clarify different
views of the program.
Chapt er 1
Introduction Since 1991, the international community has faced an uncertain
political and economic environment first in the Soviet Union and then in the
Russian Federation (Russia). Russia's transformation to a market economy
within a democratic state required fundamental changes throughout the
Russian economy, government, and society. The transformation process has
presented both opportunities and challenges to the Russians and to the
institutions and donors that chose to provide economic assistance. From 1991
through September 2000, the assistance from the five institutions and
donors in our review amounted to nearly $35. 8 billion for programs in
Russia. The Political and
The official end of the Soviet Union in December 1991 was the culmination
Economic
of several years of growing economic and political instability. The collapse
presented the Soviet Union's former Cold War adversaries with Environment in
Which
opportunities and challenges. The major organized threat to the West
Institutions and vanished, but thousands of nuclear warheads and also aging
nuclear power
Donors Have Provided plants remained in a region characterized by political
uncertainty and
economic turmoil. In addition, the international community faced the
Assistance challenge of trying to support economic and democratic reform in
a country that had for many years closely guarded information about its
economy and political institutions. While Russia experienced difficult
economic times throughout most of the 1990s, the financial crisis that
occurred in 1998 spurred the international community to reevaluate both
the Russian economy and the role of economic assistance. The Collapse of the
Soviet
The final years of the Soviet Union were marked by political turmoil and
Union
economic chaos. When Mikhail Gorbachev was named to head the Communist Party
of the Soviet Union in 1985, he inherited a stagnant political system and a
slowly declining economy. Recognizing the need for change, Gorbachev
launched a series of reforms designed to bring more openness to the
political system and to restructure the economy. However, the partial
dismantling of systems of control within the existing Soviet state led to
further economic decline. At the same time, the increasing political
openness was evolving from guarded criticism to calls for rebellion against
the system. In a series of unprecedented elections in 1989 and 1990, many
high- ranking Soviet officials were swept from power as the general public
overwhelmingly voted for reformers, nationalists, and anti- Communists.
By the beginning of 1991, the economic crisis in the Soviet Union had
reached an acute phase. Spontaneously, firms began to privatize, and
exports to Central Europe, Russia's primary market, collapsed, as Central
European countries went through their own economic transitions. In addition,
to maintain increasingly costly imports of food and consumer goods, the
Soviet government undertook substantial borrowing from the West.
In August 1991, after a failed coup attempt by Communist hard- liners, Boris
Yeltsin, recently elected President of the Russian republic, was thrust into
a position of political prominence. He openly called for Russia's
independence and, in conjunction with leaders of other Soviet republics,
thwarted the efforts of an increasingly weakened Gorbachev to maintain a
sense of unity within the rapidly dissolving Soviet Union. On Christmas Day
1991, Gorbachev officially declared the Soviet Union dissolved- replaced by
12 independent states. 1 By the beginning of 1992, a newly independent
Russia was in the midst of a severe economic recession. Some analysts openly
questioned whether Russia would be able to feed its population
through the winter. In response, Yeltsin appointed a new team of reformers,
committed to furthering a rapid transition from a state- run, centrally
planned economy to a private market system. They turned to western donors
and lending institutions for financial and technical help.
Western Assistance in An The first joint official reaction of western
governments to Soviet requests Uncertain Environment for assistance with
economic transition came during the July 1990 Houston
Economic Summit of the Group of Seven countries (G- 7). 2 Although the West
had spent decades carefully analyzing the Soviet Union, western economists
knew very little about how it actually functioned. The G- 7 countries
commissioned a detailed study of the Soviet economy in an attempt to inform
assistance efforts. 3 Donors had begun providing economic assistance to the
Soviet Union in late 1990- largely in the form of
loans or trade credits. Some limited technical assistance and financing 1
Estonia, Latvia, and Lithuania had already declared independence by this
time. 2 The G- 7 is an informal group of seven leading industrialized
nations including the United States, the United Kingdom, Germany, Japan,
France, Italy, and Canada. Representatives from these countries meet
periodically to discuss economic and political issues of common concern.
3 The report, “A Study of the Soviet Economy,” known as the
“joint study” was done by the International Monetary Fund, the
World Bank, the European Bank for Reconstruction and Development, and the
Organization for Economic Cooperation and Development and was issued in
February 1991.
from the European Union (EU), the European Bank for Reconstruction and
Development, the International Monetary Fund, and the World Bank began in
1991, but efforts were hampered by the Soviet Union's political upheaval. U.
S. assistance prior to the Soviet breakup primarily consisted of guarantees
for Soviet loans to buy U. S. agricultural goods. In late 1991, the
United States provided some grant food aid, as famine conditions threatened.
European governments also provided some support. The largest amount of
bilateral assistance through 1991 was from Germany, much of which came under
a program to build housing in Russia for Soviet troops who were withdrawing
from the former East Germany.
The political context of this assistance was complex. The overriding
political goal in the West was to promote national security by maintaining
stability in Russia. Western leaders were particularly concerned that
instability in Russia called into question who controlled access to nuclear
weapons. Leaders in Europe were also concerned that poor economic conditions
in Russia, combined with political turmoil, could lead to large
refugee flows and raised questions about Russia's ability to safely operate
and maintain its nuclear power plants. These concerns created political
pressure for institutions and donors to implement programs to assist Russia
as soon as possible.
Russia Faced Significant The common assumption among western leaders was
that the conversion
Challenges of Russia from a Communist state to a market economy within a
democratic state would bring long- term stability within Russia and between
Russia and the West. This transformation required fundamental changes
throughout the Russian economy, government, and society. Unlike
other transition countries such as Poland and Hungary, Russia had no vestige
of a democracy or competitive market economy and almost nothing in the way
of supporting institutions, or economic relationships with western partners.
Thus, Communist- era institutions that controlled the
economy had to adapt to very different roles of oversight, mediation, and
regulation. Moreover, a government bureaucracy that had been responsible to
the Communist Party now had to reorient itself to respond to the will of the
people; work with an elected legislature; and determine relationships among
the federal, regional, and local governments. At a broader level, mindsets
developed over 70 years of Communist rule were required to adapt to a new
system based on self- initiative and competition. Although
new government institutions were in place and elections had occurred, the
supporting framework for a democratic society did not exist. With almost no
independent media, few public interest groups, weak political parties, and
little legacy of pursuing grievances with the government, Russian society
lacked the basic foundations of civil society. The 1998 Financial Crisis
While Russia had experienced severe economic decline and a series of Caused
a Reevaluation of economic and political crises during the 1990s, its
financial collapse of
Assistance Programs August 1998 spurred a serious reevaluation within the
international community about how far the Russian economy had come and the
role of economic assistance.
In late 1997, Russia's economic and financial environment was deteriorating
due, in part, to reduced investor confidence in emerging markets in the wake
of a financial crisis in Asia and, also, to lower oil prices that reduced
Russia's export prices. Domestically, the Russian government was financing
its deficit by issuing government securities. As investor confidence
deteriorated in 1998, these had to be issued at very high interest rates.
Russian banks had invested heavily in these securities, whose prices were
falling rapidly, and also entered into large sales of dollars in forward
exchange contracts, which made them vulnerable to ruble devaluation. 4
Russia received a multilateral support package in July 1998, designed to try
to restore investor confidence and to give the Russian government an
opportunity to work out its financial difficulties, but this effort was not
successful. The Central Bank of Russia used the financing to support the
exchange rate while investors were taking their money out of Russia. 5 Faced
with dwindling international reserves, in mid- August the Russian government
announced a series of emergency measures, essentially placing the Russian
government in default, which further reduced investor
4 A forward exchange contract is an agreement between two parties to
exchange one currency for another at a forward or future date. In the case
of Russia, foreign investors who had wished to hedge (to reduce risk by
taking a position that offsets existing or anticipated exposure to a change
in market prices) against possible ruble (the ruble is Russia's currency)
devaluation had bought dollar forward exchange contracts from Russian banks.
5 International, or foreign exchange, reserves are the stock of liquid
assets denominated in foreign currencies held by the central bank.
confidence and increased the outflow of capital. 6 These actions led to a
collapse in the domestic banking sector and, as a result, there was a severe
contraction in Russia's output and trade. The crisis had serious social
consequences, effectively depriving many Russians of their savings and
undermining any trust in financial institutions. Five Major Lending Many
bilateral and multilateral international donors implemented Institutions and
programs to help Russia's transition process. According to one estimate from
the Central Intelligence Agency, the total value of disbursed Donors
international assistance to Russia from 1989 to September 1998, without food
aid loans, trade credits, and debt rollovers, came to $66 billion. We looked
at five major institutions and donors that provided assistance to Russia
since its independence in late 1991: the IMF, the World Bank, the EBRD, U.
S. bilateral support provided under the 1992 Freedom Support Act, 7 and the
European Union's Technical Assistance to the Commonwealth of Independent
States (TACIS) program. From 1991 through September 2000, these institutions
disbursed nearly $35.8 billion for programs in Russia: $31. 3 billion, or 88
percent, have been loans from the IMF, the World Bank, 8 and the EBRD. 9
Much of the remaining $30. 2 billion in
assistance came from the German government, which contributed several
billion dollars for the relocation of Russian troops from eastern Germany.
Other major donors we did not review include France, Italy, Japan, the
Organization for Economic Cooperation and Development, and the United
Kingdom who all contributed substantially less grant assistance than the
United States or the EU.
6 These measures included declaring a de facto default on government debt, a
de facto ruble devaluation, and a 90- day moratorium on commercial debt
payments for the banking sector. 7 “Freedom” in the name of this
act stands for Freedom for Russia and Emerging Eurasian Democracies and Open
Markets. Throughout this report, we refer to it as the “Freedom
Support Act.”
8 The International Bank for Reconstruction and Development is the only
World Bank Group member included in this review. In addition, the
International Finance Corporation of the World Bank has provided $458
million in financing for 46 projects in Russia, and has a disbursed and
outstanding portfolio in Russia of $256 million. The Multilateral Investment
Guarantee Agency has a total gross exposure of $269 million for 10 contracts
of guarantee in Russia. Throughout this report, references to World Bank
lending refer to lending by the International Bank for Reconstruction and
Development. 9 Figures for the IMF, World Bank, and EBRD do not include
their spending for technical
assistance.
The levels of economic assistance to Russia can be compared to other recent
transition assistance programs. For example, the German government has spent
over $500 billion since 1989 to support the transition from Communism to a
market economy in eastern Germany. International assistance to Poland from
1989 through 1994 alone was about $36 billion.
The IMF The IMF helps countries stabilize their economies and work out
balanceof- payments problems. 10 Its role in Russia was to provide loans and
advice
to the Russian government to help bring inflation under control, stabilize
its economy, and address structural issues, such as bank and industrial
restructuring, tax policies, and trade policies. As of August 31, 2000, the
IMF had disbursed more than $22 billion in loans for Russia, of which more
than $8 billion had been repaid (see fig. 2). For the past 2 years, Russia
has paid more to the IMF than it has received. Russia has not missed a
scheduled repayment of its IMF debt. 10 A country's balance- of- payments
accounts summarize its dealings with the outside world. A balance- of-
payments problem occurs when its normal receipts from external transactions
(e. g., export earnings, grants, loans, foreign direct investment and other
financial inflows) are less than its payments (e. g., imports, interest and
amortization). This external deficit may be financed by drawing down the
country's international reserves and/ or seeking exceptional financing, for
example, IMF loans and debt relief.
Figure 2: IMF Disbursements and Russian Repayments, 1992- 2000
7 Billions of dollars
6 5 4 3 2 1 0
1992 1993 1994 1995 1996 1997 1998 1999 2000 Disbursements Repayments
Source: IM F.
The World Bank The World Bank's overall mission is to alleviate poverty and
improve living standards in the developing world. In Russia, it provided
loans and advice to the Russian government in a variety of economic sectors,
with the
general goal of promoting economic reform, alleviating poverty, and
developing and strengthening institutions. Since 1992, the World Bank has
approved more than $12.1 billion, and disbursed more than $7.5 billion, in
loans for 46 projects in Russia. (see fig. 3). 11 11 Commitments later
canceled amounted to $2. 4 billion, including $1. 1 billion from the recent
cancellation of the third structural adjustment loan.
Figure 3: World Bank Approved Lending and Disbursements to Russia, 1992-
2000
3.5 Billions of dollars
3.0 2.5 2.0 1.5 1.0 0.5 0.0
1992 1993 1994 1995 1996 1997 1998 1999 2000 Calendar year
Approved lending Disbursed
Source: World Bank.
The EBRD The EBRD is a regional multilateral bank specifically created in
1990 to foster economic transition and support the development of the
private sector in the countries of Central Europe and the former Soviet
Union. In Russia, it lent money primarily to the private sector, invested in
companies, and provided technical assistance to encourage development of the
private
sector and enhance the transition to a market economy. Since 1991, the EBRD
has signed $4. 4 billion worth of projects for Russia. As of August 31,
2000, the EBRD had disbursed $2.2 billion of these funds (see fig. 4).
Figure 4: EBRD Annual Funding for Russia Projects, 1991- 2000
1.0 Billions of dollars
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Signed Disbursed
Source: EBRD.
The U. S. Program The United States has used a variety of programs to assist
Russia and the other countries of the former Soviet Union. The programs
include (1) the Cooperative Threat Reduction program to dismantle nuclear
weapons and increase security over the remaining stockpile of weapons of
mass destruction, (2) food aid, and (3) provision of assistance under the
Freedom Support Act 12 (see app. IV for a summary of assistance for Russia
from these programs). 13 Enacted in 1992, the Freedom Support Act is the
primary vehicle for U. S. assistance to market reform and democracy building
in the countries of the former Soviet Union. The United States has pursued
three general goals in Russia with its Freedom Support Act assistance: (1)
promote market reform, (2) support the creation of a
12 22 U. S. C. 5801 et seq. 13 Several U. S. departments and agencies have
also implemented commercial, scientific, and cooperative programs with
Russia under a wide variety of authorizations since 1992.
democratic state, and (3) help alleviate the social costs of the transition
process. Freedom Support Act programs have been implemented primarily
through the provision of technical assistance. Since 1992, the United States
has appropriated $2.7 billion in Freedom Support Act funds for Russia and
disbursed $2.3 billion (see fig. 5).
Figure 5: U. S. Freedom Support Act Annual Funding for Russia, 1992- 2000 14
1.2 Billions of dollars
1.0 0.8 0.6 0.4 0.2 0.0
1992 1993 1994 1995 1996 1997 1998 1999 2000 Budgeted Disbursed
Note: U. S. disbursement data for 2000 is not available. Source: State
Department.
The EU's TACIS Program In 1991, the European Union created the TACIS program
to provide grantfinanced technical assistance to support the process of
transition to market economies and democratic societies in the former Soviet
Union. Since then, TACIS efforts in Russia have focused on several sectors
including human resource development, enterprise restructuring, agriculture,
and
14 Congress appropriates Freedom Support Act funds for the former Soviet
Union in a lump sum. The State Department then creates budgets for
individual countries.
energy. Since 1991, TACIS has committed $2.7 billion and disbursed $1. 6
billion for programs in Russia (see fig. 6).
Figure 6: TACIS Annual Funding for Russia, 1991- 2000
Billions of dollars 350.0
300.0 250.0 200.0 150.0 100.0
50. 0 0.0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Committed Disbursed
Source: European Commission.
Objectives, Scope, and To help inform the continuing debate about
international assistance to Methodology
Russia, the Chairman and the Ranking Member of the House Banking and
Financial Services Committee asked us to review the strategies of different
donors and lending institutions in providing economic assistance to Russia
with a view toward identifying lessons learned from this experience.
Specifically, we examined (1) what types of assistance lending institutions
and donors have provided, what their program strategies were, and how this
assistance has been coordinated, (2) how successful the institutions and
donors have been in terms of meeting their assistance objectives and
what factors have affected their success, and (3) what lessons can be
learned that may have relevance for future policy decisions about Russia.
We examined programs implemented by the IMF, the World Bank's International
Bank for Reconstruction and Development, the EBRD, the U. S. under the
Freedom Support Act, and TACIS because they represented
a significant portion of assistance funds disbursed for Russia to date.
These institutions and the U. S. also offered several types of assistance,
including technical assistance and loans, and represented a mixture of
international financial institutions and bilateral organizations. We looked
at the programs these institutions and the U. S. implemented in Russia from
1992 through September 2000. We obtained access to IMF, World Bank, and
EBRD officials and documents through the U. S. Department of the Treasury
and through the staff of the U. S. member of each institution's executive
board. We were granted access only to documents from these institutions that
were also provided to their executive boards. Some of the key strategy
documents we reviewed included:
IMF staff papers and program review documents, the Russian government's
Letters of Intent and Memoranda of Economic Policies; 15 World Bank country
assistance strategies; EBRD country strategies and transition reports; State
Department annual reports and U. S. Agency for International Development
annual country strategies; and
TACIS indicative and action programs for Russia. 16 We also reviewed a
variety of public and internal documents related to specific aspects of the
operations and implementation of programs by all five donors and lending
institutions. To help understand the strategies used, actions taken, and
lessons learned by the five donors in our review, we identified four key
policy areas that have affected the course of the Russian reform process. We
made our
selection based on discussions with several experts and our assessment of
key issues in the process of Russia's transition to a market economy over
the past 8 years. The four areas are:
15 Letters of Intent and Memoranda of Economic Policies are documents
prepared by IMF member countries that describe the policies that a country
intends to implement in the context of its request for financial support
from the IMF. 16 Indicative programs are TACIS multiyear plans that lay out
basic objectives and strategies. Action programs are prepared annually and
spell out the specific projects that will be implemented to support the
objectives in the indicative program.
Macroeconomic stabilization. Throughout the 1990s, lending institutions and
donors tried to help the Russian government bring inflation under control,
develop an effective monetary policy, and reduce the budget deficit.
Social safety net protection. Many analysts in the early 1990s believed that
Russia needed to maintain a suitable social safety net to mitigate social
hardships during the transition process and to facilitate the restructuring
of inefficient enterprises.
Privatization. Donors played an important role in supporting the
implementation of Russia's rapid, mass voucher privatization program in
1992- 94. Although not supported by the donors, the “loans- for-
shares” privatization conducted by the Russian government in late 1995
was a critical event in the transition process. Banking sector reform. All
five donors in our review provided assistance
to support the development of a viable private banking sector in Russia only
to see most of the banking sector wiped out in the 1998 financial crisis.
Provision and Coordination
To determine the level of assistance provided, the strategies used, and the
of Assistance
coordination of assistance among donors and with the Russian government, we
reviewed documents obtained from all five institutions and donors and
supplemented our analysis with discussions with officials
from these institutions. We also met with officials from the Russian
government, private think tanks, and universities. We assessed coordination
by examining the extent to which donors exchanged information, worked
together to develop common goals and objectives,
avoided duplication, and implemented projects that complemented each other's
efforts.
Factors Affecting Success To determine the factors that affected the success
of donors in meeting their broad objectives, we identified the donors'
overarching objectives from documents and discussions. We analyzed the
relative success in meeting donors' overarching objectives by comparing the
general objectives with current conditions in Russia. Our review of the
success of individual projects is based on the donors' own evaluations and
discussions
with officials from the donors, the Russian government, and other analysts.
We also relied on the results of our past work for assessing selected
portions of the U. S. bilateral programs. We did not independently verify
the findings presented in others' reports or assess the effectiveness of
individual programs as part of this review. With the exception of our own
past work, our comments on project success represent a synthesis of others'
views. To determine the factors that affected success, we synthesized the
information we obtained from evaluation reports, other documentation, and
discussions with officials.
Lessons Learned To develop lessons learned, we reviewed documents we
obtained from the lending institutions and donors to identify lessons they
had formally identified. We supplemented this review with discussions with
program officials, Russian officials, and representatives from think tanks,
universities, and nongovernmental organizations. As part of our work on all
three objectives, we did our work in Washington, D. C.; Boston,
Massachusetts; London, United Kingdom; Brussels, Belgium; and Moscow,
Novgorod, and Samara, Russia. During these visits we met with senior
officials from the lending institutions and donors in our review, including
the IMF's Director of the European II Department, the former heads of the
Russia program from 1992 through the present, and the current IMF Resident
Representative in Moscow; the World Bank's current and former vice
presidents for Europe and
Central Asia, the country director for Russia, current and former managing
directors, and Bank staff responsible for developing and overseeing projects
in several different sectors; the President of the EBRD, the First Vice
President, two deputy vice presidents, the current Russia Country Director,
and other staff;
the current Coordinator for U. S. assistance to the former Soviet Union,
former Coordinators, the current and former U. S. Agency for International
Development mission directors, former National Security Council staff
responsible for developing Russia policy, former Central
Intelligence Agency staff, former senior Treasury officials, the current and
former directors of the Russian desk at the Department of the Treasury, and
the U. S. Executive Directors at the IMF, World Bank, and
EBRD; and the head of the TACIS office in Moscow, the Russia Administrator
in Brussels, the head of the TACIS evaluation unit, the former EU
Ambassador to Russia, and officials from the U. S. Mission to the EU and the
European Parliament.
We also met with several current and former Russian government officials,
including officials from the Ministries of Finance, Economy, and Tax;
sector heads of Russia's Gref Commission; 17 a former Acting Prime Minister;
the Chairman of the Banking Committee of the Duma; Russian executive
directors of the World Bank, the IMF, and the EBRD; regional officials from
Novgorod and Samara; and several project beneficiaries.
Finally, we met with analysts from a number of universities, think tanks,
private firms, and international organizations, including in part the
Brookings Institution, the Heritage Foundation, the Carnegie Endowment for
International Peace, PlanEcon, Inc., the London School for Economics, the
Center for European Policy Studies, Harvard University, the University
of Maryland, and the University of Pittsburgh. We conducted our work from
September 1999 through September 2000 in accordance with generally accepted
government auditing standards. We received written comments on a draft of
this report from the Department of State and USAID, the Department of the
Treasury, the EBRD, the European Commission, the IMF, and the World Bank.
These comments and our evaluation of them are reprinted in appendixes VIII-
XIII. These organizations generally agreed with the conclusions of the
report
regarding the challenges of the transition. In addition, the organizations
expanded on a number of points made in the draft about the complexity of
Russia's transition process and the reasons for the mixed results that
economic programs have had. The European Commission disagreed with our
characterization of the general assessment of the TACIS program in Russia.
Our characterization reflects the views of a number of officials and
analysts, and the report language has been modified slightly to clarify
differing views. All of the organizations also provided technical comments
that we discussed with relevant officials and incorporated in the text of
the
report, where appropriate. 17 The Gref Commission was established by then-
Acting President Putin in February 2000 to develop a comprehensive 10- year
economic strategy for the country, which was adopted in July.
Donors Have Adopted Different Strategies and
Chapt er 2
Means for Providing Assistance In its early efforts to assist Russia's
economic transition, the international community generally agreed on some
fundamental principles concerning the transition, but it did not have a
comprehensive strategy for the assistance it would provide and how its
efforts would be coordinated. The overarching goal of the programs we
reviewed has been to help Russia make the transition to a market- based
economy. Donors have pursued similar objectives in their economic assistance
efforts in Russia, but their strategies and means for providing the
assistance have differed. The
majority of the assistance has been provided through loans, while other
funding has been given through technical assistance and grants. Over the
decade, the institutions and donors themselves and the Russian government
have instituted various forums for the coordination of donor assistance.
This coordination has improved in some areas over time, but it is still a
challenge to the institutions and donors and the Russian
government. The International
The international community's early efforts to assist Russia's economic
Community Agreed on transition were characterized by general agreement on
some fundamental principles concerning the transition, but international
leaders did not lay Fundamentals
out a comprehensive strategy regarding what types of assistance would be
Regarding Russia's
provided and how the assistance would be coordinated. Economic Transition In
their summary of the joint study of the Soviet economy issued in but Lacked
a
December 1990, the international financial institutions recommended a
Comprehensive
program of comprehensive reforms. These reforms included decontrol of
prices, privatization of enterprises, and liberalization of trade and
Strategy for Assistance
investment, consistent with what have been termed “Washington
Consensus” principles. 1 The study also recommended creation of a
social safety net to cushion the impact of transition on vulnerable groups
and
individuals. According to officials involved in writing the study, because
it was carried out during a time of uncertainty about the future political 1
The “Washington Consensus” is a term that economist John
Williamson introduced in articles beginning in 1990. Williamson's original
definition involved ten different aspects of economic policy toward
developing countries. The term, however, has become associated more
generally with the view that economic development is best served by a
commitment to free markets, private property, and individual incentives, and
with calls for specific measures such as freeing prices, removing trade
barriers, and privatizing enterprises. The consensus grew out of the
observation of the experience of several Latin American countries during the
1980s, and the term results from its link to the U. S. government and the
international financial institutions headquartered in Washington.
organization of the Soviet Union, its authors were limited in their ability
to analyze questions regarding how the Russian economy would be operating
independently from other republics. They did not know, for example, how
legislative and executive powers would be divided between different levels
of government and what specific kinds of financial support the government
would need.
During this time, some experts within the academic and policy community
argued against elements of rapid economic transition, but they were in a
minority. On the need to remove price controls and barriers to international
trade, there was little debate, but some scholars and analysts were
skeptical of the consequences of rapidly privatizing state enterprises. They
argued that a viable private sector required the existence of new laws and
institutions, such as banks and courts, and questioned the assumption that
these laws and institutions would come about relatively quickly in response
to demand from new business owners. 2 Some analysts also pointed out that
the way in which social services were provided under the communist system
could result in severe social hardship and also limit the ability of firms
to restructure and become more efficient. However, by mid- 1991, western
support for rapid economic transition in Russia was strengthened by early
evidence from the transition experience of Central European
countries. Poland, for example, had implemented a major stabilization
program in 1989 that became the foundation for its later economic recovery
and restructuring. Many aspects of the reforms already implemented or
underway in Poland, including tightening fiscal and monetary policy,
liberalizing prices, and privatizing enterprises, were prescribed for
Russia. 3
Soviet Union's Collapse and The speed of the breakup of the Soviet Union at
the end of 1991 caught the Western Response
international community by surprise, according to many officials and
analysts we interviewed. Western response to this “window of
opportunity” has been the subject of considerable controversy. It was
a period of
2 The joint study, while it advocated immediate privatization of small
firms, stated that the privatization of larger firms would take longer and
that the large firms should be commercialized and operated as joint stock
companies while they continued under public sector ownership. 3 In fact, the
lessons from the transition experience of Central European countries have
become complicated over time. While Poland pursued stabilization, it also
moved slowly in efforts to privatize its economy and reform its banking
system, which some analysts maintain worked to its advantage.
fundamental ambivalence about the appropriate level and types of U. S. and
international assistance. One of the first official acts of G- 7 leaders
following an October 1991 speech by Yeltsin asking for western assistance
and cooperation was to send a delegation of deputy finance ministers to
Moscow to secure claims to the Soviet foreign debt. 4 In January 1992, the
United States convened a conference of foreign ministers and representatives
of international institutions to coordinate assistance. Its focus was
primarily on humanitarian assistance and not economic transition policies.
In April 1992, President George Bush and German Chancellor Helmut Kohl
announced a G- 7 assistance package for Russia of $24 billion. The
components of the package-$ 4. 5 billion from the World Bank, the IMF, and
the EBRD, $6 billion for a fund to support the value of Russia's currency,
$2.5 billion for debt relief, and $11 billion in bilateral assistance-
primarily credits to buy food- turned out to include potential transfers
that
had already been promised and others that were not forthcoming. The package
depended, at least in part, on agreement on a set of reforms between Russia
and the IMF, which Russia formally joined that June. In their Munich summit
in July of 1992, G- 7 leaders issued an economic
declaration calling for cooperation between Russia and the IMF. From the
perspective of hindsight, many analysts and officials have observed that the
early western response to the newly independent Russia did not constitute a
strategy for action. Russia was encouraged to work with the IMF and World
Bank and meet their criteria for assistance, but there was little direction
regarding how different aspects of assistance would relate to and support
each other. Donors and other analysts have attributed this to several
causes. Leaders in the United States and Germany
were at the time focused on other concerns. The United States, for example,
engaged in a war with Iraq in 1991, and in 1992 President Bush was looking
toward reelection in November. Germany was in the midst of an extremely
costly undertaking to bring about the economic unification of the former
East Germany with the West. Also, some western leaders were
initially ambivalent about the ability of the Yeltsin government to provide
effective leadership, according to some analysts we interviewed, and also
whether the situation in Russia was too chaotic, for example, for additional
financial support to have made a difference.
4 This action resulted in Russia's agreeing to jointly assume responsibility
for all Soviet debts owed to western creditors in return for obtaining
control over all Soviet overseas assets.
The ultimate effect of the relatively slow western response in providing
assistance for Russia's economic transition, and the expectations of
assistance in 1992 that went beyond what was provided, has also been widely
debated. One argument of potential effect, made by a number of analysts and
current and former officials, is that the lack of visible support from the
international community may have undermined Russian
reformers at a key point in 1992. For example, whatever actual use might
have been made of the funds, Acting Russian Prime Minister Yegor Gaidar, a
key reformer under President Yeltsin, had announced they would be
forthcoming, staking personal political credibility in Russia on the
expectations. Some officials and analysts believe that the lack of support
from the international community undermined Gaidar's credibility and
contributed to his removal from office by the end of 1992. Assistance for
Russia and the other countries of the former Soviet Union figured
prominently in the agenda of G- 7 matters at the Tokyo Summit in July 1993.
During the summit, the G- 7 called for the creation of several programs for
Russia, including efforts to accelerate the pace of economic
restructuring, promote the development of small- and medium- sized
enterprises, and improve the coordination of donor assistance. This detail
on specific aspects of assistance was unusual and not repeated at later
summits. Since 1993, the G- 7 has periodically provided general, political
guidance for donor assistance efforts but has not offered detailed plans or
prioritization. After Russia began attending portions of the G- 7 summits in
1994, the summits themselves became a forum for directly lobbying
Russian leaders on the need for reform in specific areas. In April 2000, a
draft strategy for G- 7 economic support for Russia, that laid out broad
goals and roles of different international institutions and donors, was
circulated by some members but not adopted.
Assistance Programs The institutions and donors in our review have pursued
similar broad
Have Pursued Similar objectives in their economic assistance efforts in
Russia, while their instruments and strategies for providing the assistance
have differed. The
Objectives With common, broad goal of assistance efforts has been to help
Russia make the
Different Instruments transition to a market- based economy. IMF, World
Bank, and EBRD funds and Strategies have been provided as loans to Russia,
which need to be repaid. The U. S.
Freedom Support Act and TACIS programs have provided mostly technical
assistance and grants. The operations of the EBRD, activities carried out
under the U. S. Freedom Support Act, and TACIS are generally project based,
while the IMF works with member governments to develop economic reform goals
and monitor progress and provides financing to
member central governments and central banks. The World Bank program has
been a mix of project lending and adjustment lending tied to specific reform
goals. The IMF Has Concentrated As shown in table 1, the evolution of the
IMF's involvement with Russia can
on Macroeconomic Stability be broken down into five periods (see app. I for
more information on the
in Russia IMF's programs).
Table 1: Highlights of the IMF's Assistance Strategy for Russia, 1991- 2000
Time period Highlights of the strategy
Early involvement (1991) October moratorium on Russia debt payments calls
for IMF program. The IMF provided technical, but not financial, assistance
to the Soviet Union. Relationship continued de facto with Russia after
Soviet Union disbanded.
Efforts to control inflation (1992- 95) 1992- 1994 Russia becomes an IMF
member (June 1992). $1 billion disbursed in first agreement (August 1992),
with limited macroeconomic conditions. $1. 5 billion disbursed under new
facility the IMF created for transition economies (June
1993). Program went off track (September 1993). New program agreed to
despite concerns over weak Russian performance (March 1994); $1.5 billion
disbursed; program failed to meet objectives.
1995 Russia signs agreement for $6. 8 billion under first standard IMF
program (April); monthly monitoring of performance instituted.
The IMF concurs with Russia's adoption of a managed exchange rate system
(exchange rate band) as basis for monetary program. Inflation is brought
under control for the first time. Russia appears to meet all of the program
requirements; however, 1999 audits show that it missed 2 targets.
Continued emphasis on controlling inflation: The IMF and Russia agree to a
3- year arrangement that contains more structural increased stress on
structural reforms: reform requirements (March 1996). (Mid- 1996- mid- 1998)
Russia's performance in meeting requirements in 1996 was weak; tax
collection requirements continually not met. Continuing government budget
deficits financed largely with securities issuance and IMF/ World Bank
funds. The IMF continued to make disbursements, in part, because the IMF
felt Russia's weak performance reflected instability related to the upcoming
presidential elections. 1997 began with increased growth; Asian financial
crisis affected investor confidence
toward the end of the year. Agreement for 1998 program requirements not
reached until June.
Financial crisis A worsening financial crisis leads to interim IMF package
of $11. 2 billion (July); initial (July- September 1998): disbursement of
$4. 8 billion. No further disbursements are made under this program.
(Continued From Previous Page)
Time period Highlights of the strategy
Post- crisis era Russia and the IMF agree to a new $4. 5 billion arrangement
(July). One disbursement (1999- 2000) of $640 million made. Scheduled
December program review not completed; failure to meet structural
requirements cited; no further disbursements made. Russian economy grows due
to increased demand for domestic production and higher oil prices. The IMF
continues its involvement, including through technical assistance.
Source: GAO analysis of IMF documents and discussions with IMF officials.
The primary objective of the IMF's involvement with Russia has been to
achieve macroeconomic stabilization, largely defined by low inflation, and
increase economic output to facilitate Russia's economic transition. The
IMF's involvement with Russia began before Russia was an IMF member through
the provision of technical, but not financial, assistance. Once
Russia joined the IMF in June 1992, it was entitled to obtain financing for
balance- of- payments problems through various IMF facilities. The IMF has
used a number of interrelated instruments in its dealings with Russia:
financing provided to the Ministry of Finance and the Central Bank of
Russia, technical assistance and high- level dialogue with Russian
officials, and conditionality such as quantitative criteria to monitor
macroeconomic performance and benchmarks for structural reform. 5
Conditionality is generally defined as the economic policies that IMF
members intend to follow as a condition for the use of IMF resources.
The IMF's strategy for achieving macroeconomic stability in Russia has
consistently focused on reducing and then controlling inflation. The IMF
programs with Russia from 1992 to 1995 contained primarily macroeconomic
conditions with limited structural reform requirements. As economic
conditions in Russia changed, the IMF modified its strategy and used
different mechanisms to deal with inflation, while increasing its emphasis
on the importance of structural reforms to facilitate economic growth. In
1992, Russia received its first IMF disbursement under a 5- month program
with limited conditionality. In 1993, the IMF created a
new facility, called the Systemic Transformation Facility, 6 because it
recognized that some transition countries, including Russia, were not ready
for the full conditionality requirements under its regular facilities.
Although 5 Structural reforms relate to policies across the economy,
including, for example, tax and banking sector policies.
Russia's performance in meeting the 1993 macroeconomic targets was poor, it
did receive its second IMF disbursement in 1994. Despite Russia's continuing
weak performance in meeting conditions, in 1995 the IMF
determined Russia was ready for a Stand- by Arrangement- a traditional
short- term program with more extensive conditionality requirements- with
monthly monitoring. This was based on the IMF's assessment that the chances
of implementing the agreed- upon program were better than they had been in
the past due, in part, to an improved political situation. 7 While
Russia's performance in meeting the conditions of this program was mixed, 8
Russia did succeed in bringing inflation under control in 1995 in part due
to the government's adoption of an exchange rate band. 9 In 1996, Russia and
the IMF agreed to a 3- year program under an IMF
facility- called an Extended Fund Facility- designed to emphasize structural
reforms because of the IMF belief that although Russia had made progress in
stabilization, structural reform was also required. 10 The conditions Russia
was to meet were agreed to annually. The program focused on several
structural areas including banking sector reform, privatization and
restructuring of large enterprises, and the energy sector. Throughout this
program, Russia's performance was mixed, resulting in the IMF ‘s
delaying or reducing disbursements on several occasions. However, the IMF
frequently modified targets in the leadup to Russia's presidential elections
in June 1996. According to the IMF, these target modifications 6 The
Systemic Transformation Facility is a temporary means of providing financial
assistance to members facing balance- of- payments difficulties arising from
shocks to their economy due to a shift from a centrally planned economy to a
market- based economy.
7 The Stand- by Arrangement provides short- term assistance for problems of
a temporary nature, usually 1 to 2 years, provided the IMF member observes
the conditions in the supporting arrangement.
8 Although the IMF initially believed that Russia had met all of its
targets, a 1999 PriceWaterhouseCoopers audit showed that Russia missed 2 of
its targets. In addition, Russia met the budget deficit targets by
accumulating massive wage and pension arrears
because budget outlays, not obligations, were used to define the deficit.
Beginning in 1997, expenditure arrears were incorporated in definition of
the deficit.
9 A mechanism in which the Central Bank of Russia undertook supporting
measures and policies that attempted to maintain the exchange rate within a
preannounced upper and lower range. 10 The Extended Fund Facility provides
longer- term (generally for a 3- year period) balanceof- payments assistance
aimed at overcoming balance- of- payments difficulties resulting from
macroeconomic and structural problems.
were made because of unexpected events, especially the large capital outflow
in advance of the presidential elections that made those targets
unattainable. Also, in late 1996, the IMF made revenue collection a program
priority in an effort to reduce the budget deficit; however, Russia
generally missed these targets.
Although in 1997 Russia began to experience economic growth for the first
time in 6 years, the Asian financial crisis led to massive capital outflows
at the end of the year due to a loss of investor confidence. Russia
responded by raising interest rates and selling more domestic government
securities, called GKOs, in order to reduce capital outflows. The IMF
advised Russia to continue raising interest rates further, but against IMF
advice, the government expended substantial foreign exchange to support the
ruble, before finally raising interest rates sufficiently to stabilize the
situation. In the leadup to Russia's financial crisis, in July 1998, the
IMF's strategy was
to try to increase investor confidence by providing Russia with a large,
$11.2- billion emergency financing package, containing strengthened program
conditions. 11 Only one disbursement was made under this program, and it was
reduced from $5.6 billion to $4. 8 billion due to the unwillingness of
Russia's legislature to pass pieces of legislation that were
conditions of the program. The investor community's restored confidence was
short- lived and massive capital outflows followed. The Russian government
announced that it would (1) widen the exchange rate band, (2) implement a
90- day moratorium on commercial and banking sector external debt repayment,
and (3) announce restructuring of the government's ruble- denominated
securities (GKOs). Although the Russian government immediately implemented
the 90- day moratorium on external commercial debt repayment for the banking
sector, it did not initially
announce a clear plan to restructure government securities. This delay added
to market uncertainty. At the same time, despite intervention in the
currency market by the Central Bank of Russia, 12 the ruble continued to
depreciate within the exchange rate band until the Russian government
allowed it to float, resulting in a sharp ruble devaluation. Russia formally
terminated this IMF program in March 1999.
11 An overall assistance package of $22 billion announced at that time also
included potential financing from the World Bank and Japan. 12 The central
bank intervened by purchasing rubles using U. S. dollar reserves in order to
decrease the supply of rubles in the economy, thereby raising its value
against the U. S. dollar.
In the aftermath of the crisis, the IMF's strategy has been to continue to
support the Russian government through policy dialogue and technical
assistance, with little financing provided. The IMF and Russia agreed to a
new $4. 5- billion Stand- by Arrangement in July 1999 in order to focus on
fiscal improvements and structural reforms in the difficult, post- crisis
economic environment. Russia received the first $640 million disbursement;
however, no additional disbursements have been made. Although Russia had met
the macroeconomic conditions of the program, the IMF withheld further
disbursements due to poor performance in meeting structural requirements.
The IMF has continued to engage in policy dialogue, program discussions, and
its usual surveillance activities for members with Russia. It has also
provided technical assistance,
particularly on banking sector reform, in the 1999- 2000 period. The World
Bank Has The evolution of the World Bank's program of assistance to Russia
can be Targeted Private Sector
broken down into five stages, as depicted in table 2: Development and Social
Protection
Table 2: Highlights of the World Bank's Assistance Strategy for Russia,
1991- Present Time period Highlights of the strategy
The initial years $30 million trust fund established for the former Soviet
Union republics (Aug. 1991) (1991- 92):
and work program for Russia issued (Feb. 1992). Establishing the Russia
program
Resident mission set up (fall 1991). Russia became a World Bank member (June
1992). First $600- million rehabilitation loan approved (Aug. 1992).
The early years G- 7 pressure to develop and implement projects quickly.
(1993- 94):
Early debate on adjustment vs. investment lending. Seeking areas for rapid
buildup of the portfolio
Approved about $2.3 billion for 9 investment loans in several sectors.
Start- up delays in project implementation resulted in slow disbursements.
The transition years Project implementation is fraught with difficulties;
only $278.4 million of $3.4 billion in
(1995- 96): approved investment lending had been disbursed (as of Dec.
1995).
Addressing project effectiveness World Bank President's Moscow visit makes
project effectiveness a priority (1995).
and reassessing the strategy High- level review of projects to identify and
address implementation problems (1996).
World Bank views post- 1996 election period as opportunity for comprehensive
structural reforms and moves toward adjustment lending
The later years Country director named, and authority decentralized to the
Moscow office (1997).
(1997- 98): World Bank/ government dialogue rises to a higher level.
Shifting the strategic focus to Emphasis shifts from investment projects at
the regional and local level to adjustment
Federal structural reform lending at the federal level.
Financial crisis adversely impacts World Bank projects (Aug. 1998). Post-
financial crisis Russia becomes the weakest country in World Bank portfolio
due to the financial (1999- present):
crisis, but intensive efforts significantly improve project performance.
Focusing on long- term efforts
Strategy focuses on addressing systemic weaknesses that financial crisis
highlighted. More modest funding levels.
Source: GAO analysis of World Bank documents and discussions with World Bank
officials.
The World Bank's involvement in Russia began before Russia became a member
of the World Bank in June 1992. In 1991, the executive board established a
$30- million trust fund to provide technical assistance grants to the
republics of the Soviet Union. Following Russia's independence at the end of
1991, the World Bank was under pressure to deliver a program of assistance
as soon as possible. On August 6, 1992, the first World Bank loan to Russia
was approved, a $600- million rehabilitation loan that was
essentially for balance- of- payments support. However, the loan did not
become effective for another 5 months. This loan was tied to the IMF's
initial lending program for Russia to support macroeconomic stabilization.
Although World Bank officials supported the World Bank's involvement in
Russia's economic transition, the best strategy for engagement was not
obvious, according to Bank officials. According to these officials, there
was a tension between the World Bank's having a development impact in Russia
and the financial risks that it could prudently assume. The World Bank's
expertise regarding the Russian economy and institutions was limited, and
there was very little institutional capacity within the Russian government
to implement World Bank- financed projects. In addition, there was
substantial debate about the proper mix, composition, and funding level of
projects. Former senior World Bank officials characterized the situation
during this period, both in Russia and with respect to developing the Bank's
program, as chaotic.
From 1992 through 1995, the World Bank approved $4.6 billion for 20 projects
across several sectors, including energy, agriculture, and infrastructure.
Although social protection was an explicit focus of the World Bank's initial
strategy for Russia, the social sector accounted for a small fraction of
actual projects. (See app. II for a listing and status of all World Bank
loans to Russia.) The projects were to be implemented largely
at the regional and local level. This broad scope of early Bank efforts in
Russia was driven, in part, by the belief that, given Russia's size, the
World Bank needed broad involvement to have a meaningful impact on the
reform process. It was also dictated to a large extent by the World Bank's
limited access to high- level officials in Russia and thus the need to move
into areas
where the doors for World Bank involvement were open. At first, World Bank
officials were reluctant to make adjustment loans beyond the initial
rehabilitation loans, because they did not think that there was sufficient
consensus in Russia to carry out and sustain reforms, and thus they believed
that substantial adjustment lending would constitute too great a financial
risk for the Bank. However, by 1994, serious problems with disbursing funds
and implementing investment projects emerged and became increasing apparent
through 1995. While the Bank undertook intensive efforts during 1995 and
1996 to improve project implementation, and the performance of the Bank's
Russia portfolio improved, it also began to reexamine its strategy for
lending to Russia. Largely to seek greater leverage for reform, the Bank
moved, beginning in 1996, to a strategy that emphasized adjustment lending
rather than investment lending. According to Bank officials, the Bank also
believed at that time that, with the 1996 presidential elections past,
political conditions for comprehensive structural reform were favorable. The
Bank committed to a series of large, quick- disbursing adjustment loans, in
some cases to be disbursed in multiple tranches, including (1) $1.3 billion
for restructuring the coal sector
between 1996 and 1998, (2) $800 million for adjustment of social protection
programs in 1997, and (3) $2. 9 billion to promote national- level reform on
structural issues between 1997 and 1999. In some cases, these loans were
structured to be disbursed in several tranches. As a result, as seen in
figure
7, the World Bank's Russia portfolio significantly shifted toward adjustment
lending. The Bank's overall portfolio performance ratings in Russia
continued to improve until the August 1998 financial crisis, when many of
the World Bank projects, particularly those involving regional loans, were
rendered at risk. Potential World Bank financing through 1999 of $6 billion
was part of a bailout package of more than $22- billion announced in July
1998. However, World Bank disbursements were far less than this amount, with
$1.5 billion committed for a third structural adjustment loan, of which $400
million was eventually disbursed. The financial crisis resulted in intensive
efforts to address problem loans, including substantial
restructuring and canceling of projects, and portfolio performance improved
significantly by late 1999. According to World Bank officials, as they
revisit the World Bank's assistance strategy for Russia, they anticipate a
long- term focus and modest levels of funding in the next few years. Figure
7: World Bank Approved Adjustment vs. Investment Lending, 1993-
September 2000
1.8 Dollars in billions
1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
1992 1993 1994 1995 1996 1997 1998 1999 2000 Calendar year
Adjustment Investment
Source: World Bank.
The EBRD Has Focused on The EBRD's overall objectives in Russia have been to
foster economic Russia's Private Sector transition and promote private
sector initiatives. It has used a variety of Development
instruments including direct project lending, financing through
intermediaries, equity investments, and use of technical cooperation funds.
Direct project lending is done at market interest rates. Financing through
intermediaries, generally called “on- lending,” is used to
promote the
development of Russian financial institutions. The EBRD's equity investments
are done through buying noncontrolling minority stakes in local firms.
Technical cooperation funds generally are provided by bilateral donors to
the EBRD to support project proposal review and preparation.
Table 3 shows the evolution of the EBRD's strategy for Russia (see app. III
for more information on the EBRD's programs).
Table 3: Evolution of the EBRD's Strategy for Russia, 1991- 2000 Time period
Highlights of the strategy
Technical assistance targeted for privatization, training, and advice on
reform Early EBRD efforts for Russia focused on legislation. technical
assistance: 1991- 93
Initial plans for financing projects lacked focus; spread across 11 sectors.
Poor business climate in Russia limited sound financing opportunities.
Rapid growth in program; nearly $1 billion in new projects during 1996
alone. Program development and growth: July 1993-
Dropped emphasis on technical assistance, focused on fewer sectors, and
tried to early 1998 develop more realistic goals. Focused on (1) financial
sector, in part to promote development of small- and medium- sized
enterprises; and (2) energy sector. Conscious effort to cluster projects in
reform- minded regions. Relied on financial intermediaries for project
implementation to encourage institution building.
EBRD suffered heavy losses, primarily in the banking sector, due to the
crisis. Financial collapse and recovery: mid- 1998 to Very few projects
approved in immediate aftermath; entire country portfolio closely the
present
scrutinized. Cautious reengagement in Russia by mid- 1999, with EBRD
positioning self by mid2000 for possible major return to Russian market.
Focus of operations continue to be small- and medium- sized enterprise
development, financial sector enhancement, targeted support for larger
firms, infrastructure and work with a small number of priority regions.
More direct promotion of lender and shareholder rights, business standards
and creditor, shareholder and contractual rights.
Source: GAO analysis of EBRD documents and discussions with EBRD officials.
When the EBRD began its operations in April 1991 in the Soviet Union, there
were very few viable business opportunities. As a result, the EBRD mainly
provided technical assistance for training business people, supporting local
privatization efforts in selected cities, and advising the
government on drafting reform legislation. After Russia became a member in
March 1992, much of the EBRD's early attention focused on providing
technical assistance, most significantly in the area of privatization;
trying to find financing partners; and identifying potential projects. Early
EBRD plans lacked focus. For example, in 1992, the EBRD initially planned to
spread its operations in Russia across 11 economic sectors, including
privatization and enterprise promotion, financial sector development,
military conversion and agriculture in an effort to support development of
entrepreneurs and the legal, market, financial, and public infrastructures.
However, the EBRD's resources proved to be relatively small compared to
these objectives. By the end of 1993, the EBRD had approved 10 deals worth
$362 million, with about two- thirds of these funds going to the oil and gas
sector.
By late 1993, as it began to identify and invest in a growing number of
projects, the EBRD's changed its overall approach to assistance to Russia.
The EBRD dropped its emphasis on technical assistance; developed more
realistic goals to avoid making promises to the Russians that could not be
fulfilled; and narrowed its primary focus to emphasize (1) strengthening
the financial sector, especially in its support of small- and medium- sized
enterprise development and (2) providing targeted support for the
restructuring efforts of large firms, especially in the oil and gas sector.
As
seen in figure 8, more than half of EBRD financing to date has gone to the
finance and energy sectors.
Figure 8: EBRD Funding for Russia by Sector, 1991- 2000
Others 16%
Finance Manufacturing
36% 7%
Food 9%
Transport 12%
Energy 20%
Note: “Others” include mining, property, and public
administration. Source: GAO analysis of EBRD data.
EBRD operations in the mid- 1990s were characterized by rapid growth. From
signing two projects in Russia worth $7. 5 million in 1992, the EBRD signed
25 projects worth nearly $1 billion in 1996. The EBRD also made a conscious
effort to cluster its projects in regions that were more reform minded. The
use of financial intermediaries also increased over this period. Many of the
EBRD's biggest programs in Russia, such as the Russia Small Business Fund,
were actually implemented by Russian institutions. The EBRD believed that
the use of intermediaries created opportunities for Russian institutions to
learn how to operate in a market economy. This institution building aspect
was an explicit part of the EBRD's strategy. However, the growing reliance
on financial intermediaries, especially in the banking sector, meant
depending on Russian institutions to implement the programs that were
supposed to achieve the EBRD's overall objectives in Russia.
The August 1998 financial crisis was much worse than the EBRD and other
institutions had anticipated and essentially destroyed the value of most of
the assets on the balance sheets of most Russian banks. Because of the
EBRD's emphasis on projects in the financial sector, the collapse damaged
the EBRD's portfolio. Many of the EBRD's equity investments in Russian
financial institutions became worthless, and the viability of several other
projects was damaged. By the end of 1998, the EBRD had taken provisions of
over $600 million, largely due to projects in the banking sector.
In the aftermath of the crisis, new EBRD operations in Russia almost came to
a halt. 13 In the 6 months after the crash, the EBRD tried to salvage the
projects it could and close out those that could not be saved. It signed
only
three new projects, worth $15 million. By mid- 1999, as the Russian economy
began to stabilize, the EBRD started to cautiously reengage in Russia. The
EBRD exercised greater scrutiny of potential Russian business partners, with
efforts supporting the development of Russia's small- and
medium- sized enterprise sector taking highest priority. In early 2000, the
EBRD was positioning itself for the possibility of a major return to the
Russian market. The goals of the EBRD's core business in Russia reflected a
continuation of earlier trends, with a growing focus on small- and medium-
sized enterprise development, financial sector enhancement, infrastructure,
targeted support for large firms, greater reliance on equity as an
instrument, and active promotion of lender and shareholder rights in an
effort to combat corruption and promote sound business practices. The
EBRD's October 2000 country strategy for Russia called for targeting its
investment priorities in these areas.
The U. S. Program Has The primary objectives under the U. S. program,
authorized by the 1992
Focused on Market Reform Freedom Support Act, in Russia have been to promote
market reform and and Democracy democracy and to address urgent human needs
related to Russia's transition to a market- based economy. From 1991 to the
present, the
relative emphasis on these objectives has shifted. While the Coordinator's
Office at the Department of State oversees and coordinates U. S. assistance
efforts, USAID has been the primary U. S. government agency involved in
implementing Freedom Support Act programs. Table 4 shows the development of
U. S. assistance programs for Russia (see app. IV for more information about
Freedom Support Act programs).
13 According to EBRD officials, the lack of new projects in Russia during
this period was due to (1) a decrease in demand for EBRD financing stemming
from the depressed economic conditions in Russia and (2) a decision by the
EBRD to halt new operations in the banking sector.
Table 4: Development of the U. S. Assistance Program for Russia, 1991-
Present Time period Strategy Highlights of the program
December 1991 - United States outlined program to help Russia's transition.
U. S. objectives 1991- 92 Humanitarian paralleled those later articulated in
the Freedom Support Act. assistance
First Coordinator of FSU assistance designated. predominates
February 1992 - U. S. launched Operation PROVIDE HOPE to airlift emergency
food and medical shipments to FSU. October 1992, President signed Freedom
Support Act. During 1992 and 1993, State Department prohibited USAID's
development of country strategies or country budgets becau