World Bank and Russia

Issue Brief
Vol. 1 - No. 5 - September 29, 1999

Presentation by Michael Carter, Director of the Moscow Office of the World Bank

"Reform in Russia," Carter stressed, "is different than in Eastern European economies that did not travel as far along the socialist path." In Russia, the reform process is not just one of structural adjustment, but of complete and radical transformation, he said. Compounding this process is a psychological component -- Russians experience reform as a loss of empire, which makes the politics of reform more divisive than in other countries, he said.

Carter argued that the challenge of Russia's economic transformation is large and of strategic importance. To illustrate the degree to which the Russian economy is inefficient, he compared Russia -- which is rich in oil, gas, gold, nickel, goal and other natural wealth -- with Finland, a country that has far fewer natural resources but has vastly higher GDP and incomes than in Russia.

Prescriptions for economic reform in Russia are difficult to make because real economic indicators are hard to pin down, Carter said. The reform debate, Carter pointed out, "is governed more by opinion than by fact." Moreover, assessing economic progress or lack thereof is difficult in a country where GDP is more accurately measured by the level of traffic on roads than by official statistics, he said.

While acknowledging that the World Bank is troubled by the apparent lack of large-scale reform in the Russian economy, Carter pointed to several areas of success: substantial trade and price liberalization; the increased cost recovery for utilities; the end of hyperinflation; and privatization.

He highlighted the work of the World Bank in developing production-sharing legislation that would attract foreign investment. A number of World Bank projects have preserved high-tech jobs by converting military to civilian positions, he said. And he stressed that "despite the bad publicity" about Russia's coal industry, the Bank has been influential in reducing subsidies and spurring productivity (which Carter said has increased by 30 percent from 1995 to 1998). He conceded that these positive developments, however, are insufficient for rapid, sustained growth without strong institutions to support a market economy.

The World Bank has committed $11 billion to Russia, of which $6.5 billion has already been disbursed. Carter discussed six areas in which the World Bank is trying to make a difference in Russia:

• Strengthening the rule of law, by moving away from business relationships in which coercion and rent-seeking prevail.
• Improving public sector management, so that the public service works in the national interest and is independent of political pressure. The federal-regional fiscal relationship needs to be better defined. More accountability and transparency in public expenditures would limit unnecessary subsidies to productive enterprises.
• Profound enterprise restructuring that reduces arrears and barter transactions. Assisting enterprises to operate with hard budget constraints that facilitate growth and competition.
• Enhancing conditions for more competition, and demonopolizing the energy and agricultural sectors.
• Helping to strengthen the financial sector so that banks can lend money to commercial enterprises.
• Supporting the social dimension of economic reform. Carter noted that the "early reformers were astonishingly indifferent" to the social implications of economic reform. By contrast, he said, the Primakov government advanced initiatives to strengthen the social safety net.

The World Bank, he said, will be taking a more long-term approach to Russian reform, recognizing that the process of transformation is a generational issue. The World Bank is positioning itself for a long-term and stable relationship with Russia, in which it can engage in debate of structural policies, he stressed. However, he cautioned, the World Bank is not in a position to influence some of the key determinants for the course Russia will take, such as politics. The World Bank can play a huge role in policy debate in Russia, but it "cannot single-handedly lend and build institutions without Russia's political will," he said.

Carter conceded that the World Bank's early projects in Russia attempted to do too much too quickly. By early 1996, he said, the Bank recognized that its investment portfolio in Russia was in "appalling shape" and was "by far the worst portfolio of the World Bank." In fact, he said, the 1996 review of the portfolio determined that only one-third of the projects were effective. Since then, there has been a marked improvement in the performance of the Bank's Russia portfolio, he said.

Asked about whether the World Bank will model its conditionality for lending to Russia on requirements set forth by the International Monetary Fund, Carter responded that the most likely scenario is that "investment lending will continue on a modest scale," but that future disbursements of the three adjustment loans will be influenced by IMF lending to Russia. He said that the main driving force behind the disbursements would be progress in structural reforms.

Probed about his opinion on the current debate over the prudence of the "Washington consensus," Carter said, "I'm extremely distressed by the 'Who Lost Russia?' debate." He said that with hindsight one can always find mistakes, but that finger-pointing oversimplifies an agenda that that is large, complex, and interdependent. He acknowledged that there should have been much tougher fiscal policy in Russia's early years of reform, and that privatization was complicated by the absence of the necessary institutions of a market economy.

Carter argued that continuing a constructive lending relationship with Russia should not be contingent upon the basis of large, unconditional transfers. One participant pointed out that the World Bank program for Russia contains 75 pages of conditionality and asked whether it might be better not to put these requirements on paper so as not to pretend later that Russia met the conditions. Carter retorted that the World Bank is "pleased with the more detailed program," and that holding Russia to an aggressive approach to structural reform on paper helps increase Russia's commitment to its implementation. But he acknowledged that Russia recently rejected the World Bank's $400 million highway construction loan on the grounds that there were too many conditions.

Summary by Elizabeth Reisch