What the World Bank Has Done for Russia: An Evaluation

Gianni Zanini presented the findings of the recent Country Assistance Evaluation (CAE) on the Russian Federation, prepared for the World Bank Operations Evaluation Department (OED). The moderator was Anders Åslund.

Phases of Bank Activity

The Bank's primary objective in Russia was to ease the transition from central planning to a market economy, minimizing human and geopolitical costs. In a first phase, from 1990 to 1991, Bank representatives, along with the IMF, OECD and EBRD, worked with Soviet officials to determine possible fields of involvement in Russia's transition. In June 1992, Russia gained membership in the Bank, and between 1992 and 1995, the Bank's loan commitment to Russia swelled from nothing to over $4.6 billion. The period between mid-1995 and February 1996 was one of consolidation, during which the Bank learned that roughly 65 per cent of its commitments in Russia suffered from "serious implementation problems," requiring "intensified supervision" and restructuring. Bank "projects were rushed, and were not tailored to the institutional conditions" of Russia during the mid-1990s. In this time, the Bank made only $27 million in new commitments to Russia.

From March 1996 to the end of 1997, the Bank experienced a renewed pressure to lend after the IMF approved a $10.1 billion Extended Financing Facility (EFF). New Bank commitments over the next two years totaled $5.3 billion. Prior to the July 1996 presidential elections, the Bank approved $1.4 billion for investment projects and $0.5 billion for a Coal Sectoral Adjustment Loan (SECAL). From March to December 1997, after Prime Minister Chernomyrdin had appointed reform-minded deputies, the Bank approved loans for $3.4 billion. At the end of 1997, as reforms slowed, the Bank increased the size of the SALs and the Coal SECAL under increased international pressure. When the Bank's major shareholders requested that it contribute roughly $6 billion in April 1998, in light of the impending financial crisis, the Bank responded by speeding its $1.5 billion SAL III. The third SAL was delivered with more robust implementation criteria, more rigorous project preparation standards, and a greater attention to policy dialogue between Russian authorities and the Bank.

As of June 2001, Mr. Zanini summarized, the Bank had approved 55 loans to Russia worth $12.6 billion. From 1993 to 2001, the Bank's lending to Russia averaged more than $1 billion a year, a commitment representing 0.4 per cent of current GDP and 10 per cent of the government's capital expenditures. Only $7.8 billion was dispersed, however, while $2.6 billion was cancelled. In the past year, the Bank approved $352 million in new loans, with a planned annual lending of $600 million over the next two years.

The composition of Bank lending fundamentally shifted between the first and second half of the 1990s, and the evaluators chose to divide their analysis into two periods, before and after 1998. In the early 1990s, the World Bank committed $6.5 billion to investment operations, largely in the oil and gas industries of the energy sector. After June 1996, however, $6 billion in loans-ninety per cent of the Bank's new commitments to Russia-was dedicated to adjustments operations and accompanying technical assistance loans.

Sector Evaluations
Despite the Bank's significant investment in Russia, Mr. Zanini characterized its work at the project level as poor, noting that, with the exception of sustainability, Russia's project performance was well below that of other evaluated projects. Of the 15 evaluated projects, 7 were rated as satisfactory, while only 28 percent of the Bank's Russia commitments received satisfactory ratings. Excluding the two groups of 1997 adjustment loans for which the Bank disputes the OED's unsatisfactory rating, the percentage of satisfactory commitments remained low, at roughly 57 percent. A satisfactory rating depended on relevance, efficacy, and efficiency.

Advice
The Bank's non-lending services, particularly its advice, Mr. Zanini explained, seemed absent during several critical points in the mid-1990s. The Bank's primary analysis was presented in the joint study undertaken in 1990 (OECD and others 1991), which stressed the immediate need for macroeconomic stabilization and price liberalization, and recommended delaying more lengthy and painful efforts like privatization and legal reform. Although the Bank report suggested a "pattern…[different from] the one Russia followed," the Bank's diagnostic services were highly regarded by many independent sources. Beginning in 1995, however, the "Bank chose to give secondary priority to analysis," and failed to distribute its findings to "a wider audience." Mr. Zanini did not offer a reason for this shift, but elaborated that from 1997 to 2000, at the height of Russia's adjustment period, the Bank produced formal sector reports only on energy and the environment, education, poverty, and inequality. Its studies of other sectors were published only as working or research papers. "The knowledge about other sectors existed among staff," Mr. Zanini found, yet "very few government officials and advisors had a grasp of the Bank's current views on reform."

The OED report evaluated the Bank's Policy Dialogue program more positively. While the dialogues provided technical advice, their advisory role was restricted to the coal industry until 1996, limiting their overall usefulness. In 1996, however, the dialogues were expanded to the entire economy and have displayed "evidence of a positive impact" since 1999.
 

Private Sector
The OED found that the Bank rightly aimed at facilitating privatization in its analytical work, policy advice, and loan assistance programs. Its policy dialogue and lending, however, placed "insufficient emphasis on corporate and public governance and bureaucratic harassment issues," which complicated the investment climate. Thus while rapid progress was made in divesting the state of its holdings, little was done to ensure transparency of ownership and the broad distribution of shares in the newly formed private corporations.

Financial Sector
Despite the attempts of the World Bank and other institutions to assist the fledgling Russian financial sector with new lending services, including $500 million in loans for information systems hardware and the extension of credit lines, only "modest accomplishments" could be seen in 1998, when the financial crisis rendered most banks insolvent. The banking system did not adopt international accounting standards and was thus unable to attract international investment. The 1998 crisis, however, enhanced the authorities' interest in receiving advice and technical assistance through bank supervision loans, and led to the restructuring of Bank funded projects. Prospects for the near future seem to have improved. Since 1998, the FIDP (Financial Institution Development Project) has focused on bank supervision in Russia, abandoning the previously flawed accreditation of Russian banks.

Public Sector
Public sector management received too little attention before 1998. The Bank limited its analytical work to regulatory tax and budget problems, neglecting more sensitive issues, such as governance, public management, and government expenditures, because of resistance from the Ministry of Finance. The resulting knowledge gap "had a negative impact on the Bank's capacity to advise" in the public sector. The first SALs targeted problems in tax regulation, budget management, and intergovernmental finance, but due to "poor implementation," and insufficient knowledge, were limited in their success. Since 1999, however, the Bank has substantially improved its focus on the public sector, approving $211 million in 2001 and $350 million in 2002 for projects to regulate treasury operations and tax administration.

Social Programs
While the Bank's social protection programs achieved modest successes, they failed in the two fields deemed most important: pension reform and modernization of the labor code. The Bank dramatically modified its objectives for pension reform after its first loan for that purpose proved unsustainable. The new objectives, focused more narrowly on pension administration, were sustainable and improved the functioning of the existing pension system, but failed to reform it. The 1997 Social Protection Adjustment Loan (SPAL) similarly targeted pension reform and labor laws by eliminating pension arrears, strengthening the child allowance, and improving unemployment benefits, but again failed to reform them.

Energy Sector
The Bank supported primarily emergency activities and reform programs in the energy sector, lending a total of $2.6 billion with mixed results. The loans to the coal industry were successful, with subsidies eliminated entirely, and most inefficient mines closed. The private sector now accounted for ninety per cent of total coal production.

Considerable progress was also made in the electric and natural gas industries. In electricity, pricing had improved since 1997, cash collection since 2000, and there was a "new resolve to demonopolize since mid-2001." Bank recommendations concerning fundamental restructuring, however, have remained low on the government's priority list.

Conclusions
The OED report judged Bank objectives in facilitating Russian economic reform as relevant, while their efficacy had been only "modest." The Bank gave genuine support to the new institutions created to aid rapid mass privatization, though these institutions functioned only to a limited extent. Particular successes included the introduction of competitive bidding for public procurement, and an increase in oil production. Public sector management, however, had failed to improve significantly, as had the bulk of private sector development-both explicit Bank goals. The final outcome rating for Bank activity in Russia before 1998 was rated unsatisfactory, with modest institutional development.

Mr. Zanini criticized the overoptimistic assessments given by the Bank before 1998 under to lending pressures from leading shareholders, as well as the Bank's emphasis on investment and quick-disbursing loans, especially in 1996 and 1997. By lending the excessive amount of $1.4 billion in June 1997 under lenient conditions, followed by another $1.6 billion just six months later for which disbursement again depended only on preparatory criteria, the Bank sent Russian authorities the unintended message that geopolitical needs would continue to outweigh financial concerns.

For the period between 1998 and 2001, however, Bank activity was judged satisfactory. The relevance and design of bank activity improved significantly. The Bank's impact on institutional development was substantial, and would probably prove sustainable. The Bank improved its policy dialogue on structural reform to help the Russian government to chart its current economic program. New legislation was adopted that has already contributed to growth. Although Russia remains vulnerable to external shocks, its economic position is good, with stronger banks and broader enterprise ownership.

In the future, Mr. Zanini concluded, the Bank would need to revitalize its analytical and technical services, while improving project selection and development. Broad country ownership was critical for successful assistance, and Mr. Zanini recommended that the Bank focus its future activities in the public sector. While the Bank did not dispute the recommendations made by the OED for the future, it disagreed with the unsatisfactory ratings for activity prior to 1998. The Bank argued that its approach had been one based on flexibility, and that the packages of 1997 loans proved necessary for the Bank to gain influence over the government's reform agenda. Russian authorities largely sided with the Bank, though agreeing with all of the OED report's sector analyses, and viewed the outcome of bank assistance as generally successful.

Discussion
Dmitri Beskurnikov of the Russian Embassy responded that the fundamental problem with the Bank's work in Russia was that its loans were granted too early. The World Bank was one of several institutions fighting to give loans to Russia, even when the government had no program of reform and thus no possibility to use the loans meaningfully. As a result, countries such as Moldova and Kyrgyzstan became excessively indebted. Yet, the Bank had a positive impact in Russia, and it would hardly have had as great an effect if it had not offered substantial financing. The Bank's advice carried more weight after Russia's financial crash in 1998, not because the Bank had changed, but because Russia had.

Anders Åslund agreed with Beskurnikov that one of the World Bank's weaknesses was its inflexibility in the timing of loans and their disbursement in 1996 and 1997. The Bank committed large sums of money because of ambitious reform plans, which were averted, and subsequently "added to the collapse" instead of supporting reform. The amount of money loaned did not seem important to the Bank's success rate in Russia. Åslund disagreed, however, with the analysis that the Bank should have assisted in the creation broader ownership or consensus during Russia's reform, because this reform was a great revolution in which no consensus was feasible. The World Bank completed two critical tasks in Russia: it established a market economy and it privatized Russia.

Keith Crane added that the World Bank would not have been able to play the role in Russia that it did, had it not offered significant financing. Timing was vital, and what the Bank had succeeded in doing early on was far more important than what it did now.

Zanini agreed that the World Bank pushed too much money at the wrong time in Russia, especially in 1996 and 1997 with the external and internal pressure on the Bank to lend. The Bank could have achieved all that it ultimately did achieve with much less money, by funneling that money instead into technical advice.