    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
    K�hler, 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 because it wanted to
    develop regional approach for assistance to former Soviet Union states.

    Economic and democratic assistance was generally spread across several
    sectors in deliberate effort to try different approaches and find out which
    ones were most successful.

    January 1993 - New administration brought evolutionary change in approach to
    providing 1993- 95 Focus on market assistance to Russia. reform

    April 1993 - U. S. pledged to provide $1. 6 billion in assistance for
    Russia. July 1993 - U. S. portion of assistance package announced at Tokyo
    Summit totaled a new $1. 5 billion for Russia.

    Humanitarian assistance continued, but primary emphasis now on working with
    Russian Federation to develop and implement national reforms. September 1993
    - $1. 6 billion fiscal year 1993 supplemental appropriation signed for FSU
    assistance.

    January 1994 -Coordinator published first assistance strategy for entire
    former Soviet Union. May 1994 -Coordinator published first assistance
    strategy for Russia. Budgets for Russia dropped from $1. 0 billion in fiscal
    year 1994 to $359 million in 1995 to $219 million in 1996, reflecting waning
    congressional support.

    Fiscal year 1996 assistance review and budget reduction forced near
    elimination of new budget 1996 to

    Democratic reform authority to three USAID sectors. Present becomes a
    priority

    1996 - development of Partnership for Freedom to increase impact of U. S.
    assistance at grassroots of Russian society, launched at the beginning of
    fiscal year 1997. Assistance to Russian federal government would diminish as
    projects at national level ended, and new funding focused mainly on
    grassroots efforts at regional, local, or individual level. U. S. assistance
    is now focused on efforts to promote (1) investment- led economic growth,
    (2) people- to- people linkages, and (3) development of civil society. The
    Regional Initiative was also launched in 1997 to demonstrate what
    concentrated assistance in reform- oriented regions could do to improve
    lives of individual Russians.

    1998 - Assistance dollars budgeted to democratic reform exceed dollars for
    market reform. Legend: FSU = former Soviet Union Source: GAO analysis of
    State Department and USAID documents and discussions with State Department
    and USAID officials.

    Although some of the assistance that went to Russia in the early 1990s
    financed projects to support economic and democratic reforms, the main focus
    was on humanitarian assistance. The Departments of State and

    Defense collaborated on an airlift of medical, food, and other supplies to
    needy populations throughout Russia, called Operation PROVIDE HOPE, that has
    continued to the present. The economic and democratic assistance

    between 1992 and 1994 was generally spread across several sectors in a
    deliberate effort to try different approaches and find out which ones were
    most successful. 14 During the pre- 1993 period, the emphasis across the
    entire program was on speedy delivery and minimal effect on the U. S.

    budget. With the change of U. S. administrations in early 1993, the approach
    to providing assistance to Russia evolved. Although humanitarian assistance
    has continued, the primary emphasis beginning in 1993 has been on working
    with the Russian government to develop and implement national reforms. In
    1993, the Clinton administration sought to greatly increase the size of the
    U. S. program, expecting that U. S. help in key areas would jumpstart

    the reform process and assist in bringing about needed structural changes.
    In response to the assistance programs announced at the Vancouver and Tokyo
    summits in 1993, Congress appropriated the money necessary to implement
    these programs in September 1993, approving over $2. 5 billion in the
    Foreign Operations, Export Financing, and Related Programs Appropriation
    Act, 1994, for assistance to Russia and the other

    former Soviet Union states. 15 Although the general thrust of the program
    had shifted to emphasize economic reform, the U. S. program maintained the
    broad and disparate nature of the early 1990s. Projects were developed to
    support reforms in several sectors, including privatization, housing,
    agriculture, and energy. A

    wide variety of U. S. departments and agencies were implementing programs in
    Russia. In the past, we reported that 23 departments and independent
    agencies were carrying out programs in the former Soviet Union states. The
    sheer magnitude of this program made coordination

    difficult and complicated efforts to focus U. S. activities in a few key
    areas. 16 14 USAID's grant assistance to help with the implementation of
    mass privatization is an exception. In that instance, the United States
    devoted relatively significant resources in a deliberate effort to influence
    a major aspect of the reform process. See chapter 3 for more information. 15
    P. L. 103- 87. Approximately $1. 6 billion of the funds provided by this
    measure was included as a fiscal year 1993 supplemental appropriation that
    was attached to the fiscal year 1994 foreign operations appropriation. 16
    Former Soviet Union: Information on U. S. Bilateral Program Funding (GAO-
    NSIAD 9637, Dec. 15, 1995)

    During this period, the U. S. program focused on the need for quick
    implementation of assistance projects. Also, the United States moved away
    from having a single program for the entire former Soviet Union and started

    to develop formal country strategies. In mid- 1993, the Coordinator of the
    U. S. program began writing the country strategy for Russia that was
    published in 1994. Country budgets for assistance were also developed.

    Congressional support for assistance to Russia began to wane in 1994.
    Dramatic funding reductions were driven by two main factors. First, the
    relatively large appropriation for Russia in 1993 was presented to Congress
    as a onetime event to support what was likely to be a relatively short
    transition period. Indeed, the 1995 U. S. strategy for Russia supported this
    idea by stating that there would be no need for new funding for assistance
    after 1998. Second, Congress began to raise bipartisan concerns about the

    effectiveness of assistance to Russia and started earmarking significant
    portions of the Freedom Support Act appropriations for other former Soviet
    Union states, most notably Ukraine. In early 1996, the Coordinator
    reevaluated the U. S. program for Russia, because of significant decreases
    in funding, heightened concerns about program effectiveness, and a growing
    sense of unease about the state of transition in Russia. This review led to
    a significant shift in U. S. strategy. In mid- 1996, the Coordinator
    announced a new U. S. approach, called the “Partnership for
    Freedom.” Assistance to the Russian federal government diminished, and
    new funding focused mainly on grassroots efforts at the regional, local, or
    individual level. The new approach began in fiscal year 1997 and has
    continued to the present, focusing on efforts to promote (1) investment- led
    economic growth, (2) people- to- people linkages, and (3) the development of
    civil society. In addition, the recipients of U. S. assistance changed from
    organizations working largely at the federal level to those in regions that
    demonstrated more reform- minded policies. Under this aspect of the program,
    known as the “Regional Initiative,” the United States targeted
    its assistance toward three Russian regions, whose local

    governments were deemed to be among the most reform minded and hospitable to
    investment. Moving to the regions was part of an approach to increase the
    bottom- up pressure for reform in Russia.

    Figure 9 shows Freedom Support Act funds budgeted to Russia from 1992
    through 2000. Although the total amount budgeted for promoting democracy
    from 1996 to the present does not exceed the total for promoting market
    reform, the amount for promoting democracy has increased relatively and in
    fiscal year 1999 exceeded the budget for

    i promoting market reform. Figure 10 shows the proportion of Freedom 2000.

    n i ( mi l o l n o s fd o a l l ) rs Support Act funds budgeted to each
    objective from 1992 through Figure 9: Freedom Support Act- funded Activities
    Grouped by U. S. Objectives, 1992- Present In millions of dollars

    800 700 600 500 400 300 200 100

    0 1992 1993- 1995 1996- Present

    Promote market reform $17.58 $988. 22 $413. 93 Promote democracy and rule of
    law $8. 05 $340.19 $282. 94 Address urgent human needs

    $44.86 $231. 31 $113. 82 related to transition Nonproliferation/ security-
    related

    $16.14 $114. 03 $104. 35 items

    Source: U. S. Department of State and GAO analysis.

    Figure 10: Portions of All Freedom Support Act Funds Budgeted for Each U. S.
    Objective, Fiscal Years 1992- 2000

    Promote Market Reform 52%

    Promote Democracy and Rule of Law

    24% Address Urgent Human

    Needs Related to Nonproliferation/

    Transition Security- related Items

    15% 9%

    Source: U. S. Department of State and GAO analysis.

    The European Union Has The principal objective of the TACIS program in
    Russia has been to

    Provided Technical accelerate the socio- economic and democratic reform
    process. The

    Assistance Aimed at program relies primarily on technical assistance
    provided though policy Russia's Socio- economic advisers; training and
    advice to Russia's private sector; funding studies and Democratic Reform

    including preinvestment plans, market research, and feasibility studies; and
    linking Russian and EU institutions. Process

    Drawing generalizations about strategy with such a broad and diverse program
    is difficult. Since 1991, TACIS has implemented more than 500 projects in
    Russia and as of August 2000 had about 100 projects underway. Although the
    TACIS strategy for Russia has evolved over time, some central

    tenants have remained. TACIS is still largely a technical assistance program
    that has delivered help to roughly the same sectors since 1991. Table 5
    shows the evolution of the TACIS strategy for Russia (see app. V for more
    information about TACIS programs).

    Table 5: Evolution of TACIS' Strategy for Russia, 1991- 2000 Time period
    Highlights of the strategy

    Main focus on economic reform, little in democratic assistance. Early
    efforts focused on quick impact: 1991- 94 Projects tended to be small and
    focus on quick impact.

    Special attention to training Russians in market economics. Many projects
    implemented at local level.

    Challenges of reform prove greater than expected. Greater emphasis on
    attaining systemic Shift to larger projects and more frequent use of federal
    level partners. change: 1995- 98

    Sectors largely unchanged; primary focus continues to be on economic reform.
    TACIS efforts more closely linked to broader EU political goals in Russia.

    Crisis reinforces assumption that transition would be a decades long
    process. Post- crisis reflection leads to modified

    Greater focus on supporting development of (1) institutions for market
    reform, (2) rule approach: 1991- present of law, and (3) civil society. More
    attention to supporting change at the grass- roots level. Project selection
    begins to reflect greater emphasis on mutual benefits for EU and Russia.

    Source: GAO analysis of TACIS documents and discussions with EU officials.

    TACIS projects during the early years of the transition focused on having a
    quick impact, with special attention devoted to training Russians in market
    economics. Many of the early projects were small, emphasizing speed and
    meeting specific Russian needs, often involving study tours, conferences, or
    writing reports. There was also an emphasis on training as many people as
    possible in a variety of areas including banking, finance, and economics.

    From the beginning of the program, TACIS frequently implemented projects at
    the regional and local levels.

    During the mid- 1990s, support for economic reform and for democracy were
    the dual goals of the TACIS program in Russia. However, TACIS implementation
    continued to focus mainly on economic reform, with a greater emphasis on
    attaining systemic change at the federal level. TACIS shifted its focus from
    the regional to the federal level in an attempt to have greater influence on
    systemic reforms. TACIS implemented larger projects, but projects with
    federal institutions generally had activities in pilot regions. TACIS
    continued to operate in essentially the same sectors as it always had,
    adding environment to the initial areas of enterprise restructuring, human
    resource development, agriculture, energy,

    transportation, and telecommunications (see fig. 11).

    Figure 11: TACIS Funding for Russia by Sector, 1991- 98

    Telecom 2% Other

    Environment 7%

    3% Energy Transportation

    28% 8%

    Agriculture 11%

    Human Resources Development Enterprise Support

    20% 21% Source: European Commission.

    The Russian financial crisis in late 1998 reinforced TACIS' earlier
    assumption that Russia's transition to a market economy would be a decades-
    long process. TACIS officials told us that it was clear the transition had
    not gone as well as initially expected, in part because (1) the
    institutional underpinnings for a market economy and democratic society were
    lacking and (2) the necessary political consensus within Russia on

    how to proceed was not developed. As a result, project selection began to
    include more grassroots efforts related to improving civil society and
    developing small- and medium- sized enterprises. The increased focus on the
    institutions necessary for a market economy and democratic society also led
    the European Union to add a third objective to the program: support for the
    development of the rule of law. By 2000, the TACIS annual

    program made democracy building the central focus for the first time. TACIS
    also placed greater emphasis on institution building, working at the
    grassroots level, and developing of more linkages- known as
    “twinning”- between Russian and EU institutions. TACIS projects
    were also increasingly being linked to the broader EU- Russian political
    goal of increasing Russia's integration within Europe. In practice, this
    meant development of projects like improving transportation links, upgrading

    border controls, and addressing environmental concerns in northwest Russia.

    Coordination of In the years leading up to and the early years after the
    breakup of the Soviet Assistance Has Proved Union, formal efforts to
    coordinate donor assistance programs had limited

    success. Over time, informal coordination mechanisms developed within
    Difficult, With Some the donor community. The donors believe these
    mechanisms are working

    Improvements Over relatively well, in terms of sharing information and
    reducing redundancies

    Time at the project level. The coordination between the Russian government
    and the international community is still problematic but has improved over
    time, especially in the aftermath of the 1998 financial crisis.

    Early Coordination Efforts The initial attempts at coordinating the efforts
    of those interested in Had Limited Success

    providing Russia with advice and assistance were impeded by lack of a clear
    western strategy during the breakup of the Soviet Union and difficulties in
    working with the Russian government. The Russian government appeared
    uninterested in coordinating donor assistance,

    according to officials we interviewed. Also, according to Russian and some
    donor officials, donors had difficulties in coordinating their own
    activities, particularly their technical assistance. Russian officials told
    us that problems occurred in the early 1990s with duplication and lack of
    communication among donors. U. S.- sponsored donor conferences in 1992

    raised this issue but accomplished little. In June 1993, the World Bank led
    an attempt to set up a consultative group to discuss priorities for
    structural reform and technical assistance needs. This effort was not
    successful. The reason given by many donor and institution officials who
    were involved at that time was that the Russian government did not want
    Russia to be treated like a third world country. Also, in 1993, the G- 7
    mandated the implementation of a formal coordination mechanism called the
    Support Implementation Group. The

    main efforts of the group were to work with the Russians to remove
    impediments to supplying assistance in the field, such as the Russian
    government's continued attempts to tax international assistance, and to
    accumulate a database of assistance projects in Russia. The group also tried
    to formalize the donor coordination process by creating a series of sector-
    based working groups. However, the group's efforts to formalize coordination
    proved to be cumbersome. Officials from all five institutions and donors in
    our review told us the group actually impeded the informal coordination
    process that evolved among the donors over time. Several told us that the
    data the group collected were not useful and meetings were

    not productive. As a result, the Support Implementation Group was

    disbanded in 1997. The Russian government has taken over the group's
    database, but it is unclear whether the data have been used. Early
    coordination challenges were not limited to relations among donors. In some
    instances, donors like the United States experienced early difficulties in
    coordinating their programs internally. In February 1995, we reported on the
    ineffective coordination of the U. S. bilateral program for the former
    Soviet Union. 17 We found that there were frequent, sometimes bitter,
    disputes among U. S. agencies over how the program should be structured and
    implemented and that other agencies and departments

    resisted, hindered, or overruled the State Department Coordinator's efforts.
    18 After our report was published, the Coordinator's role was expanded. In
    December 1995, we reported that interagency coordination, while still marked
    by periodic disputes, had improved, as had the Coordinator's ability to
    oversee and coordinate the program. 19 Informal Donor

    Donor officials in Moscow told us they prefer the informal coordination
    Coordination Mechanisms

    process that has evolved over time. According to donor officials in Russia,
    Have Evolved

    they interact frequently on an as- needed basis. They told us they did not
    believe formal coordination mechanisms like the Support Implementation Group
    were necessary. Donor officials in cities outside Moscow echoed similar
    themes. In our meetings in Russia, we found little evidence of serious
    overlap in current programs and a general agreement on overarching goals and
    relative roles.

    In some sectors, donors have established informal working groups to
    coordinate efforts in a specific sector. For example, in the health sector,
    several donors provide assistance for tuberculosis/ acquired immune

    17 Former Soviet Union: U. S. Bilateral Program Lacks Effective Coordination
    (GAO/ NSIAD- 95- 10, Feb. 7, 1995). 18 The Gore- Chernomyrdin Commission is
    one example of the complications the Coordinator faced. Originally
    established as a high- level mechanism for resolving U. S. Russian problems
    in energy, space, and science, the Commission evolved into a multiagency
    effort to advance common U. S. and Russian interests in a number of other
    areas including commerce, environment, and defense diversification. Although
    the Commission had no direct coordination role, it did develop policies that
    had an impact on U. S. bilateral assistance.

    19 Former Soviet Union: An Update on Coordination of U. S. Assistance and
    Economic Cooperation Programs (GAO/ NSIAD- 96- 16, Dec. 15, 1995).

    deficiency syndrome (TB/ AIDS) control, including the World Health
    Organization; the European Union; the Open Society Institute; USAID, and
    other bilateral donors such as Canada, Germany, Japan, the United Kingdom,
    and Sweden. According to World Bank staff, in designing a World Bank- funded
    TB/ AIDS project, they took into account the experience of other donors
    working in various locations in Russia, and other donor representatives have
    participated in Bank project preparation missions.

    World Bank staff told us that the degree of coordination on the TB/ AIDS
    project has reduced the possibility of duplication of efforts across donors.
    According to World Bank staff, better coordination among the 5 ministries

    and about 40 regions participating in the project has also been achieved.
    Donor working groups have also been established in some cases to address
    specific needs or concerns. For example, in 1996, in order to facilitate
    information sharing and promote cooperation among donors that provide grants
    in Russia, a group of western donors initiated a Moscow donors' forum. The
    forum is an informal coalition of representatives of about 25

    private and public international organizations including, among others, the
    Eurasia Foundation, which is funded, in large part, by USAID. Participating
    donors are active in supporting the development of non- governmental
    organizations in Russia

    Donors also sometimes work together on the same project. USAID and TACIS
    officials often help lay the groundwork, through grants and technical
    assistance, for World Bank and EBRD loans in specific areas. For example, in
    the housing sector, USAID funded $10 million in technical assistance in
    preparation for a $400 million loan by the World Bank in 1995.

    The World Bank has also teamed with USAID and the U. S. Treasury in the tax
    administration area. In addition, the World Bank manages grants from the
    Japanese government to finance startups for numerous World Bank operations
    including, for example, a $2 million grant to support the preparation of a
    legal reform project. There have been areas, too, where the World Bank has
    put programs in place when other donors, such as USAID, have phased down
    their activities. For example, in 1996, the Bank committed $58 million for
    the legal reform project when USAID expected

    most of its larger law programs to end or taper off. During discussions with
    current and former State Department Coordinators, USAID mission directors,
    and other U. S. officials, we found that the current state of coordination
    within the U. S. program has improved

    since our previous work. State Department, Treasury Department, and USAID
    officials told us that they had developed good relations and

    mechanisms for resolving differences of opinions about potential approaches.
    In particular, U. S. officials highlighted the improvement in the
    relationship between USAID and the Coordinator's Office at State as being
    critical to improving the overall coordination of the U. S. program.

    Coordination Is Still Some Russian government officials told us, however,
    that there is room for

    Challenging for Donors and improvement in donor coordination efforts. Some
    government officials

    the Russian Government stated that, in some cases, donors have had competing
    models in mind

    when working with them to set up new programs or institutions. For example,
    questions have arisen over whether Russia's capital markets would be
    structured more closely to that of the United States or of Germany. Some
    Russian officials we spoke with said donors did not necessarily consider
    what was best for Russia in providing their advice.

    Russian government officials also commented that because assistance efforts
    affect more than one ministry in the Russian government, one ministry is not
    always aware of what assistance donors may be providing to another ministry.
    The tax area was mentioned as one in which this problem has occurred. Donor
    officials told us that coordination with the Russian government continues to
    be a challenge, although they noted some improvement has been made. One
    problem many donor officials mentioned was that their counterparts in
    ministries changed frequently. In many instances, donors would set up a
    program with a counterpart but, in a short time, that counterpart would
    depart, and it was possible that his or her replacement would not be
    interested in the program. Another problem is that no central location
    exists in the Russian government that has oversight over the entire breadth
    of assistance efforts. Over the years, the Russian government has

    tried to establish some procedures for dealing with lenders and donors, but
    constant changes in the format and personalities involved have limited the
    effectiveness of these efforts. For example, in 1995, the Russian government
    established the Federal Center for Project Finance to assist the government
    with the overall coordination of projects funded by the international
    financial institutions or other external sources. The government also
    created the Interministerial Commission for Cooperation

    with the International Financial and Economic Institutions and the G- 7 to
    coordinate donors' technical assistance and the international financial
    institutions' lending programs. With the Federal Center for Project Finance
    serving as the secretariat, the Interministerial Commission is chaired by
    the deputy Prime Minister and comprised completely of high- level Russian
    government ministry officials.

    Russian government and donor officials told us that the 1998 financial
    crisis demonstrated the need for more formal coordination, particularly on
    banking sector issues. In the aftermath of the crisis, the international
    financial institutions worked with the Russian government to set up a
    highlevel interagency coordinating committee, which is comprised of donor
    and institution representatives and is chaired by a Russian central bank

    official. The full committee has six working groups that provide advice and
    assistance on areas such as bank supervision, bank restructuring, and bank
    accounting. Progress to date appears to be mixed- officials we spoke with
    thought more had been accomplished at the working group level, rather than
    through the full committee.

    Institutions and Donors Have Had Limited

    Chapt er 3

    Success in Meeting Their Objectives According to a number of indicators,
    Russian economic performance over the past decade has been poor. While there
    have been successes across individual program objectives of the institutions
    and donors we reviewed, officials have acknowledged that in many respects,
    there has been limited progress toward reaching their broad program goals.
    This is due to obstacles encountered in Russia, problems with design and

    implementation of the programs, and difficulties involving the scale of the
    challenge. Assistance efforts in four key 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. Russia's
    Economic

    According to a number of broad indicators, the Russian economy fared
    Performance Over the

    badly during the 1990s. Although declines in output during the initial
    transition period were expected and were in fact experienced across most
    Decade Has Been Poor transition countries in Eastern Europe and the former
    Soviet Union, Russia's economic decline was among the most severe and its
    recovery among the most limited. By 1995, the measured output of the Russian
    economy had fallen to about 65 percent of its 1991 level and then remained
    stagnant through 1998, with some improvement in 1999 and 2000. (Fig. 12

    illustrates Russian gross domestic product (GDP) trends relative to those of
    several other transition countries.)

    Figure 12: Trends in Real Output for Russia, the Czech Republic, Poland,
    Romania, and Ukraine, 1989- 2000 Index, 1990= 100 160 140 120 100

    80 60 40 20

    0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

    Russian Federation Romania Poland Czech Republic Ukraine

    Source: GAO analysis of data from the World Bank and PlanEcon, Inc. Average
    labor productivity in Russia fell from about 30 percent of the U. S. average
    in 1991 to about 19 percent in 1998. Trends in social indicators show the
    personal impact of the decline, with average life expectancy declining from
    69 years in 1991 to 64 years in 1994, and then rising somewhat but remaining
    below pretransition levels. The problems in overall economic performance,
    and the hardships of many Russian citizens, have been linked to a number of
    conditions in the economy and society. These include, in part,

    chronic macroeconomic instability, the absence of effective competition in
    many economic sectors, problems with the structure of the tax system and tax
    collection, the lack of an efficient financial system, the existence of
    widespread organized crime and corruption, and the presence of a system of
    social services that fails to protect the poor

    and discourages economic restructuring.

    Many of these weaknesses represent areas in which the international
    community has been actively engaged. While there have been a number of
    successes across individual program objectives (see the following sections),
    individual institutions and donors have acknowledged that in many respects
    there has been limited progress toward achieving broad program goals. For
    example, a 1999 USAID assessment stated, “Economic reform has not yet
    succeeded and no one should anticipate rapid progress.” 1 Also, a
    recent TACIS report concluded, “Beyond the successful implementation
    of projects, the impact on the regulatory and policy framework has on the
    whole been limited.” 2

    At the broadest, strategic level, assessing the impact of western
    involvement in Russia's economic transition over the past decade is
    extraordinarily complex. Clearly, the worst fears of the initial transition
    period have not been realized: anarchy has not prevailed; the nuclear
    arsenals of the Soviet Union are under control; there has not been a return

    to Communist rule; and in April 2000, Russia experienced a peaceful and
    democratic presidential transition.

    The degree to which overall transition objectives have been achieved in
    Russia must be viewed in the context of the enormity of the challenge.
    Russia entered its transition burdened with economic and political legacies
    from decades of central planning geared disproportionately toward military
    output. Specialization of production and trade patterns had only a limited

    economic basis, many state- owned enterprises were burdened with obsolete
    capital, and, perhaps most important, many basic institutions ranging from
    banks to courts either did not exist or were poorly suited to supporting a
    market economy. Recent comparisons of the transition experiences of a number
    of European countries have concluded that the severity and length of
    economic decline may be linked to external incentives such as the potential
    for membership in the European Union, which has not been a realistic goal
    for Russia. By many indicators, Russia's challenge was huge.

    1 USAID Russia Country Strategy 1999- 2003, April 5, 1999. 2 TACIS Russian
    Federation Indicative Strategy Paper 2000- 2003 (draft) (Brussels: Dec.
    1999).

    Success of Individual The success of individual projects in Russia
    implemented by the five

    Projects Has Been institutions and donors in our review has been mixed,
    according to their own evaluations and the views of officials and analysts
    we interviewed.

    Mixed While some Russian officials were highly critical of international
    assistance efforts, others told us that assistance programs have had a
    reasonable level of success, given the obstacles they have faced.

    IMF Programs Assessing the success of IMF programs is especially hard, given
    the IMF's broad objective of stabilizing the macroeconomy and the difficulty
    of isolating the impact of its program from other factors. The IMF has not
    comprehensively evaluated its own Russia program. There is a wide variety of
    views on the relative success of IMF programs in Russia. While Russia was
    finally able to bring inflation under control by late 1995, substantial
    imbalances remained in terms of the government's overall fiscal policies,

    which were highlighted by the 1998 financial crisis. A number of analysts
    and officials we interviewed have taken issue with aspects of IMF policies
    and programs in Russia over the period and believe that the value of the
    IMF's assistance could have been greater. 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 respects. The IMF's technical assistance to several government
    ministries and the Central Bank of Russia is believed to have improved, for
    example, Russia's economic statistics, its ability to conduct fiscal and
    monetary policy, and its supervision of Russian banks.

    World Bank Programs World Bank officials, in their December 1999 country
    assistance strategy, characterized the success of the World Bank's efforts
    in Russia as mixed but overall disappointing relative to their expectations.
    According to the World Bank's periodic rating of loans in its Russia
    portfolio, the percentage of ongoing loans meeting both development and
    implementation objectives has ranged from 33 percent to 82 percent, showing
    improvement in 1996 and 1997 and then falling sharply after the 1998
    financial crisis. Russia

    lending has at times had the poorest performance in the World Bank's
    portfolio, for countries with significant borrowing. The rating reported in
    June 2000- 73 percent satisfactory projects- reflects a strong improvement
    following several post- crisis loan restructurings, and Bank staff told us
    that the portfolio has shown further signs of improvement since then.
    According to World Bank documents and officials, the World

    Bank achieved limited success with a number of investment loans it made

    across several areas during 1993- 95, ranging from agriculture to tax
    administration. World Bank officials point to greater success in the Bank's
    targeted structural adjustment lending, such as the productivity gains under
    the 1996 and 1997 coal sector adjustment loans and improved dialogue on
    social issues under the 1997 social protection adjustment loan.

    World Bank officials stated that the jury remains out on the successes of
    the Bank's adjustment lending in Russia. While citing gains in the quality
    of the World Bank's dialogue with the Russian government on structural

    policies, the December 1999 country assistance strategy concluded with
    respect to adjustment lending that “the Bank's efforts have not borne
    fruit to date on a scale commensurate with the increase in Bank
    exposure.”

    According to World Bank officials, the value of the World Bank's adjustment
    lending program has become more apparent during the 9 months since the
    assistance strategy was written, based on the World Bank's ability to engage
    in high- level policy discussions with successive Russian governments.

    EBRD Programs The EBRD also rates the success of its efforts in Russia as
    mixed. By the end of 1999, the EBRD's project evaluation department had
    conducted evaluations of 31 completed EBRD projects in Russia. They rated 29

    percent as highly successful or successful, 36 percent as partially
    successful, and 35 percent as unsuccessful based on the project's success in
    meeting a variety of goals, including transition impact, environmental
    impact and the project's financial performance. Compared to the EBRD's
    average across its entire portfolio, projects completed to date in Russia
    were significantly more likely to fail and less likely to succeed. 3 In
    February 2000, the EBRD reported that overall, its operations had had a
    positive

    influence on Russia's transition to a market economy. EBRD officials told us
    they believe they have been particularly successful in areas of small
    business development and other projects entailing work with smaller firms.
    They also acknowledged that the financial turmoil in 1998 damaged many EBRD
    efforts, particularly in the financial sector, and that the EBRD has

    had limited success in promoting economic restructuring in large Russian
    firms. 3 As of the end of 1999, 54 percent of EBRD projects have been rated
    successful or higher,

    and only 18 percent have been rated unsuccessful.

    Russian officials had differing perspectives on the EBRD. Some believed it
    had generally done good work in Russia and had made important contributions
    to the transition efforts. Others thought the EBRD was not efficient and had
    had little impact in Russia. They criticized the EBRD for not being careful
    enough when selecting its partners, losing a lot of money in 1998, and
    acting overly cautious with new projects since then. Many

    private analysts were generally positive about the success of EBRD projects,
    with some noting significant improvement over time. However, several stated
    that the EBRD's role duplicates lending and investment functions that can be
    provided by the private sector and is therefore of limited value.

    U. S. Freedom Support Act According to U. S. officials, the broad nature of
    the U. S. program

    Programs complicates efforts to generalize about its effectiveness. Although
    no comprehensive evaluation of the entire U. S. program exists, our analysis
    of available evaluations, discussions with officials, and the results of our
    own

    prior work found that the United States has had varied results with Freedom
    Support Act projects in Russia. For example, our past review of nine
    projects showed mixed results in meeting project objectives: two projects-
    coal industry restructuring and housing sector reform- met or exceeded their
    objectives; five projects- voucher privatization, military officer
    resettlement, small business development, district heating, and

    agribusiness partnerships- met some but not other objectives; and two
    projects- health care and commercial real estate- met few or none of their
    objectives. 4 Our review of democracy projects in Russia found that

    these projects were seen as valuable by Russian recipients but had mixed
    impacts. 5 USAID evaluations and State Department reports likewise noted
    mixed results in meeting objectives. One USAID Mission Director said that
    several projects that had funding stopped in 1996 had done no harm but
    little good. Several U. S. officials stated that, however effective and

    successful an individual project, U. S. assistance as a whole helps Russia
    only at the margin. The most valuable part of U. S. assistance, according to
    some Russian and U. S. officials, has been an ongoing transfer of knowledge
    and exposure to western approaches.

    4 Foreign Assistance: Assessment of Selected USAID Projects in Russia (GAO/
    NSIAD- 95156, Aug. 3, 1995). 5 Promoting Democracy: Progress Report on U. S.
    Democratic Development Assistance to Russia (GAO/ NSIAD- 96- 40, Feb. 29,
    1996).

    TACIS Programs The general assessment of TACIS projects in Russia is mixed,
    based on the EU's own evaluations and our discussions with EU officials.
    Russian and private officials we spoke with expressed sometimes serious
    concerns about the effectiveness of TACIS projects. Over the years, the
    European Commission's evaluations of the program have varied in their
    assessment

    of the program's success and impact. In 1994, the Commission reported that
    the program was generally meeting its objectives but was implementing effort
    to speed the disbursement of funds, improve the

    quality of projects, and sharpen the focus of the program. In 1997, it
    reported that TACIS had achieved a moderate degree of success in
    effectiveness and achievement of its objectives. A February 2000 report on
    the entire TACIS program for Russia found a mixed record of impact: high
    marks for education and training efforts and lower marks for enterprise
    restructuring and building the framework for a market economy. 6 EU
    officials told us they believed that TACIS projects were generally

    effective in meeting their objectives, although they acknowledged
    substantial constraints. They believed the program was especially effective
    at supporting the development of higher education. Russian officials we
    spoke to, as well as several analysts, focused on several problems with the
    TACIS program. Although some noted success in particular areas of
    assistance, such as education and a TACIS project that introduced foster
    parenting to Samara, these officials generally expressed concerns about

    the program's efficiency, impact, and timeliness. Success of Assistance
    Based on the documents we obtained from the programs in our review as
    Programs Has Been well as discussions with institution and donor officials
    officials, representatives of the Russian government, and private analysts,
    we Hindered by identified three main interrelated obstacles to attaining
    project and Conditions in Russia

    program objectives: (1) difficult conditions in Russia, including the lack
    of and Limitations of domestic political consensus behind reform, changing
    government officials, and widespread corruption; (2) limitations in the
    design and

    Programs implementation of donor programs; and (3) the vastness of the scale
    of the

    efforts and the interdependent nature of the needs. 6 European Commission
    Evaluation Unit, “Evaluation of TACIS Country Programme in Russian
    Federation” (Brussels: European Commission, Feb. 2000).

    Institutions and Donors Russia proved to be a challenging environment for
    assistance efforts in Faced Substantial Barriers several related respects,
    including a lack of political and economic stability, in Implementing
    Programs

    a lack of commitment in critical areas of the government to reforms in
    Russia

    institutions sought, limited institutional capacity, the rise of powerful
    economic interest groups with political influence, and corruption at some
    levels of government.

    Political and Economic During the 1990s, Russia experienced a series of
    political and economic

    Instability crises and distractions that diverted the energies and attention
    of the

    Russian government away from the transition, often leading to stagnation.
    These crises began with the struggles between the government and the Russian
    legislature, culminating in bloodshed in September 1993; the wars in
    Chechnya during 1994- 95 and 1999- 2000; and the efforts to attain President
    Yeltsin's reelection in 1996. (See app. VI for a timeline of major political
    events.) Although Yeltsin retained the presidency through 1999,

    that stability was undermined by serious health crises, periodic rumors of
    impeachment, and several changes in Prime Minister and other key ministers
    toward the end of Yeltsin's tenure. Lack of Commitment to Reforms In
    documents we reviewed and discussions with officials, a frequently cited

    obstacle to success was the lack of Russian interest in or commitment to
    program objectives. Often, this lack of commitment was from high- level
    officials. In other cases, it was from institutions and donors' working-
    level counterparts. Lack of high- level interest was a serious problem
    during the early years of the World Bank's activity in Russia, when World
    Bank access to senior Russian officials was limited. Achieving dialogue on
    social sector programs was particularly difficult, according to World Bank
    officials. It was not until 1995, according to senior World Bank officials,
    that they began serious discussions with high- level Russians on the
    direction of the World Bank's program. According to World Bank staff and
    documents,

    commitments to World Bank lending projects were made in a number of areas,
    with little follow- through on reforms. Although dialogue with senior
    officials improved, commitment to carrying out program objectives continued
    to be problematic, as evidenced by the limited achievements in 1997 and 1998
    of the World Bank's large structural adjustment loans.

    Lack of commitment to agreed reforms was also a problem in the technical
    assistance programs of USAID and TACIS. For example, USAID concluded that
    its efforts to support reforms in the agricultural sector generally failed,
    in large part because the Russians were not interested in implementing key
    provisions to provide for the private ownership of land or the elimination
    of

    government- owned or monopolized distribution chains. EU officials cited
    their frustration in efforts to combat the spread of drug- resistant
    tuberculosis, when Russian officials, after agreeing to the program, refused
    to try new approaches to fight the disease. In extreme cases, according to
    officials we met with, Russian counterparts would agree to programs simply
    to direct the training, equipment, or support to political supporters and
    not follow through on reforms. Officials from several institutions told us
    that knowing when they have had adequate Russian commitment to program goals
    and conditions has been difficult, due both to changing

    views of officials they were dealing with and changes in which individuals
    were in positions of authority. Closely related to limited commitment has
    been the lack of effective consensus within and between the executive and
    legislative branches and also regional governments. For most of the decade,
    the Duma was controlled by parties or groups that often opposed the reform
    policies of the administration. For example, after the Duma elections of
    1993 and

    1995, a combination of nationalists, Communists, and their supporters
    controlled about half of the legislative body. This coalition has been able
    to block a number of government efforts to pass legislation in the areas of
    tax reform, land code requirements, and bankruptcy provisions. In response
    to this opposition, the administration often sought to enact change through

    issuing decrees. Although these decrees allowed certain measures related to
    banking, bankruptcy, and tax reform to become law, they did not ensure the
    measures would be implemented or enforced. 7

    7 This approach proved controversial, even within donor organizations. For
    example, a USAID contractor provided extensive assistance to the Russian
    government's efforts to draft decrees. However, in 1996 we reported that the
    U. S. Ambassador to Russia and the USAID Office of Democracy opposed the use
    of decrees to achieve legal reform objectives because, in their view,
    decrees did not support the democratization process. See Foreign Assistance:
    Harvard Institute for International Development's Work in Russia and Ukraine
    (GAO/ NSIAD- 97- 27, Nov. 27, 1996).

    Limited Institutional Capacity The lack of institutions to regulate market
    economic activities and provide the basis for a functioning democracy proved
    to be a significant challenge to reforms. Officials of the programs we
    reviewed told us that, in general, the lack of these institutions created a
    barrier to project success across the board. At the same time, it proved
    very difficult to help Russia to create new, viable institutions. In some
    cases, reform efforts were passed into law by the Duma, but little changed
    because the federal agencies responsible for implementation and enforcement
    lacked the capabilities to follow through. For example, the United States
    and other donors provided

    assistance to support the creation of a Russian Federal Securities
    Commission. In 1996, we reported that it was unclear whether the Commission
    had the necessary resources to fulfill its responsibilities. 8 Later that
    year, the political status of the Commission was downgraded by presidential
    decree, then partially restored, and in 1999, the head of the Commission
    resigned to protest the government's lack of support for the Commission.

    In addition, limited technical capability to implement projects has plagued
    assistance efforts across the board in Russia. For example, the World Bank
    attempted to establish familiarity with World Bank lending operations and

    develop the government's capacity to implement projects with its 1992
    rehabilitation loan. According to World Bank officials, although the Bank
    rated the project as satisfactory in terms of meeting its specific
    objectives, the Russian government's capacity remained far short of what was
    needed to implement Bank lending programs. Moreover, inadequate capability
    on the part of the recipient to monitor either the financial or conditional
    aspects of the World Bank lending activity became apparent by 1994.

    8 See Foreign Assistance: Harvard Institute for International Development's
    Work in Russia and Ukraine.

    Rise of Powerful Interest Groups The increasing concentration of economic
    power in Russia and the rise of politically powerful vested interests are
    widely viewed as impeding progress in meeting economic reform objectives.
    According to a number of analysts, incomplete liberalization of price and
    trade policies early in the transition created opportunities for individuals
    to acquire substantial

    wealth, and later measures, such as the privatization of the largest firms,
    led to further concentration of economic resources. Individuals were able to
    translate their wealth into political power- which they used to block
    reforms contrary to their financial interests. A primary example is the area
    of tax reform. A recent article by two IMF staff says that reforming the tax
    system and strengthening tax administration have often been opposed by
    vested interests in transition countries. Vested interests have found that
    many governments in former Soviet Union countries are willing to grant tax

    exemptions and even tolerate tax evasion, especially if given financial
    inducements. 9

    According to analysts, program officials, and documents, corruption within
    the government, particularly at the local level, has seriously undermined
    reforms, along with efforts to spur private sector activity. Uneven
    enforcement of requirements for licensing businesses and uneven tax
    collection are prime examples of the problems. Corruption has been of
    particular concern to the EBRD, because of its private- sector focus. EBRD

    officials told us that in some cases projects could not go forward because
    donors believed they could not trust their Russian partners. Corruption and
    crime also forced many Russian firms to focus on survival. Several small
    business owners we met with in the Russian city of Samara told us that
    running a growing, profitable business only attracts attention from corrupt
    government officials and organized crime. According to a Russian report
    cited in a State Department publication, small businesses spend 10 percent
    of their income paying off corrupt officials. 10 Some donor officials told
    us that in many respects their influence on the domestic political decisions
    of the Russian government was limited after the initial years of the
    transition period, as anti- reform elements were in control of the Duma; the
    oligarchs wielded significant power; crime and corruption were on the rise;
    and the population- after nearly a decade of 9 See “Political Economy
    of Stalled Reforms,” Finance and Development, IMF, Vol. 37, No. 3

    (Sept. 2000). 10 State Department Report to Congress on U. S. Efforts to
    Combat Crime and Corruption in Russia, Feb. 1999.

    economic and democratic reform dating back to the Gorbachev era- was weary,
    cynical, and skeptical. To many Russians, reform had become associated with
    declining living standards and loss of global power and influence.

    Limitations in Design and Although conditions in Russia were major
    impediments to project success,

    Implementation of limitations in the design and implementation of
    international assistance Assistance Programs

    programs also created obstacles to achieving reform objectives. Some of
    these limitations were directly related to the mandates and traditional
    roles of the institutions and donors we reviewed, and also to political
    guidance. Others stemmed from limited institutional and program capabilities
    and decisions about what strategies to pursue and how to implement them.

    By the middle of 1992, the international lending institutions we reviewed
    faced pressures to lend to Russia quickly, given early evidence its economy
    was in serious decline. The World Bank, for example, was under considerable
    political pressure from its members, led by the United States, to develop
    projects and disburse funds as rapidly as possible. The World Bank also
    faced concerns from some members about Russia's ability to undertake agreed-
    to reforms and to repay World Bank loans. Many members were thus reluctant
    to put the Bank's financial soundness at risk by devoting too large a share
    of its lending to Russia. In the case of the

    EBRD, pressure to provide substantial financing to Russia heightened
    conflicting pressures already built into its mandate. By design, the EBRD
    was supposed to take risks but also ensure that its financing decisions
    followed proper due diligence to protect against financial losses. The EBRD,
    moreover, aimed to have its overall portfolio turn a small profit every
    year. Both World Bank and EBRD officials told us that balancing

    these competing demands was difficult and complicated efforts to develop
    coherent strategies.

    The IMF's mandate to provide balance- of- payments support for member
    countries was not well suited to Russia's transition needs, according to a
    number of officials and analysts. The IMF's role generally is to provide
    balance- of- payments support to a member country in need and help it to
    achieve macroeconomic stability to eliminate balance- of- payments problems.
    The IMF could not easily adapt its lending instruments just for

    Russia, according to IMF and other officials, although it did develop a new
    lending program, the Systemic Transformation Facility, specifically for
    transition countries. Although it needed budgetary support during its

    transition, Russia did not have a traditional balance- of- payments problem

    because it had high levels of commodity exports. While it did have problems
    with inflation, much of the basis for its financing need was due to
    underlying structural problems, such as lack of an effective tax system and
    inefficiently structured enterprises. While the IMF tried to address
    Russia's structural needs over time through the use of conditionality, many
    of those

    needs were in areas outside of the IMF's traditional expertise. Both the
    international institutions, which had the lead in providing assistance for
    Russia's economic and political transition, and bilateral donors lacked
    significant experience with transition economies and depth

    of staff familiar with Russia. The World Bank and the IMF had limited
    experience with the region, the language, or the special challenges
    associated with transition economies. The EBRD and TACIS were brandnew

    organizations with no track record, simply trying to get operations up and
    running. USAID had not operated in the Soviet Union prior to 1992. According
    to some former U. S. officials, the program initially failed to adequately
    take advantage of expertise within the U. S. government on the unique
    political context of Russia's economic transition, and relied too

    much on personnel whose experience was primarily in poor developing
    countries. This was an obstacle in some cases to achieving the respect of
    and effective communication with Russian officials, according to these

    officials. Others have emphasized that no one within the U. S. government
    had both development and transition expertise.

    Some donors, especially USAID and TACIS, were required to use private
    contractors to implement projects whenever possible. Initially, the Russians
    welcomed the experts but did so less over time. Russian officials and
    several donor officials told us that although many consultants offered
    excellent advice, the overall quality was very mixed. Russians were
    particularly concerned about the high pay received by consultants, the
    “fly

    in, fly out” approach taken by some, or the inexperience of many
    experts in a particular sector and the treatment of Russia as though it were
    like any other developing country.

    Institutions and donors acknowledge that in some cases early pressures to
    get funds out quickly limited the program design and effective
    implementation. In the case of the U. S. program, for example, to show that
    funds were being obligated quickly, the program used large umbrella
    contracts, which in some cases were poorly managed. 11 For example,

    $300 million of U. S. assistance to Russia was overseen and strategically
    guided by the Harvard Institute for International Development with task
    execution by several U. S. contractors. This approach resulted in the
    Harvard Institute's having substantial control over portions of the U. S.
    assistance program with relatively little USAID oversight. USAID ended its
    contractual relationship with the Harvard Institute in 1997.

    The broad scope of World Bank, EBRD, U. S. Freedom Support Act, and TACIS
    programs in the early years undermined potential impact, according to
    assessments by institutions and donors. As our prior program and strategy
    descriptions illustrate, assistance funds were spread broadly for a number
    of reasons, ranging from a belief that wide- ranging involvement was called
    for to pressure from different constituencies (such as agencies within the
    U. S. government or different EU member countries). The

    consensus among Russian government and program officials we met with was
    that this broad dispersion of effort reduced impact. Unrealistic program
    objectives compounded the problem of lack of focus, according to Russian and
    program officials, with the gap between expectations and

    reality damaging the Russian perceptions of assistance programs and harming
    the credibility of later assistance efforts.

    11 See Foreign Assistance: Harvard Institute for International Development's
    Work in Russia and Ukraine.

    Interdependencies and Success in meeting different assistance objectives has
    clearly been limited

    Scale of Programs by the interdependencies across Russia's needs and also
    the relative scale

    of assistance programs. Project objectives in specific areas have often been
    difficult to attain absent progress in key supporting areas. The scale of
    transition challenges dwarfed the size of some assistance programs and
    available resources. We discuss in the following section examples of the
    interdependencies across several broad policy areas. Also on a smaller
    scale, there are many instances in which even very successful donor

    programs have had only a limited impact. For example, several donor and
    Russian officials pointed to the EBRD's Russia Small Business Fund as a
    successful project to help promote the development of small- and mediumsized
    enterprises in Russia. Although EBRD officials believe the fund has made
    important contributions, they recognize the fund's disbursement of

    $381 million in small loans since 1993 only begins to address nationwide
    Russian needs in the small- and medium- sized enterprise sector. 12 Several
    U. S. officials cited the success of USAID efforts to create public access

    Internet sites- giving 12, 000 Russians access to the Internet. Agricultural
    reform provides one example of how the full range of obstacles to program
    success can combine to limit effectiveness. The World Bank, USAID, and TACIS
    have undertaken agriculture reform projects, all with limited success. The
    World Bank and USAID have now limited their work in the sector. Program
    assessments and our discussions with officials and analysts identified the
    following interrelated

    impediments to program success: the scale of the problem relative to the
    size of assistance programs, the lack of adequate expertise in designing and
    implementing programs, and the lack of serious interest by Russian officials
    in providing for private ownership of land or the elimination of government-
    owned distribution chains. 12 For a very rough order of magnitude
    comparison, note that the Russia Small Business Fund has disbursed in seven
    years roughly what the U. S. Small Business Administration lends to U. S.
    firms in a week.

    Four Policy Areas The successes and limitations of assistance in four key
    policy areas-

    Illustrate Challenges macroeconomic stabilization, social safety net
    protection, privatization (particularly voucher privatization and the loans-
    for- shares privatization

    and Interdependencies program), and banking sector reform- illustrate both
    the range of

    Across Assistance challenges faced and the degree to which the amount of
    progress in one

    Objectives area has affected reform efforts in other areas. For example, the
    limited

    degree of social services to cushion the impact of economic restructuring in
    Russia is widely believed to have been an obstacle to economic restructuring
    and may have constrained overall economic performance. While privatization
    of state- owned enterprises was an essential element of Russia's transition,
    the way in which some of the largest enterprises were privalized increased
    the concentration of economic power and made

    achieving reforms in areas such as tax collection more difficult. This, in
    turn, increased the fragility of Russia's macroeconomic situation.
    Macroeconomic A stable macroeconomic environment was identified early on by
    the Stabilization

    international community and some Russian government officials as a necessary
    condition for economic growth. Establishing such an environment has remained
    a challenge throughout the transition and has been the key focus of IMF
    programs in Russia. After 3 years of limited success, Russia finally brought
    inflation under control in late 1995.

    However, substantial macroeconomic imbalances remained, and the fragility of
    Russia's economic policies culminated in the financial crisis and debt
    default in August 1998. The issue of how much influence and leverage the IMF
    actually had on Russia's macroeconomic policies continues to be debated.

    A stable macroeconomic environment consists of three interrelated elements:
    low, sustainable inflation; a sustainable overall balance of payments along
    with a relatively stable foreign exchange rate; and a

    government budget that does not require overly high domestic interest rates
    to finance any deficit. Macroeconomic stabilization policies in Russia have
    primarily focused on controlling inflation, with some success by late 1995.
    During 1992- 94, Russia's budget deficit was largely financed by an
    expansionary monetary policy, with resulting high inflation. Between 1995
    and mid- 1998, less inflationary government bonds were used to partially
    finance the deficit, and a monetary policy based on maintaining a stable
    exchange rate helped in controlling inflation. 13 The inability to increase
    tax

    revenue, however, left a high and unsustainable fiscal deficit that made the
    Russian economy vulnerable when the external environment turned negative.
    Figures 13 and 14 illustrate trends in Russia's federal budget expenditures,
    revenues, deficit, and inflation over the transition period.

    13 In July 1995, the government adopted a managed exchange rate system. It
    targeted the growth of the money supply to maintain the ruble- dollar
    exchange rate within preannounced upper and lower bounds. The central
    exchange rate and its associated bounds were periodically devalued.

    Figure 13: Russian Federal Government Budget Expenditures and Financing,
    1992- 2000

    Percent of GDP 30

    25 20 15 10

    5 0

    1992 1993 1994 1995 1996 1997 1998 1999 2000 Expenditures Cash revenue
    Noncash revenue Deficit financing Budget surplus

    Note: The Russian Ministry of Finance counts noncash receipts as part of
    total revenue when calculating the budget deficit, as shown in the figure.
    The IMF computes the federal deficit on a cash basis resulting in a larger
    deficit.

    Source: Constructed from data from the IMF.

    Figure 14: Russia's Monthly Inflation Rate, 1990- 2000

    Percent 245% 70

    60 50 40 30 20 10

    0

    Russian Dec- 90 Apr- 91

    Aug- 91 Dec- 91

    Apr- 92 Aug- 92

    Dec- 92 Apr- 93

    Aug- 93 Dec- 93

    Apr- 94 Aug- 94

    Source: Dec- 94

    Economic Trends

    in figure 13, cash revenues 14 generally declined during the preventing
    budget deficits from falling below 5 percent of substantial reductions in
    government expenditures. This collections was part of a complex web of
    nonmonetary throughout the economy. For example, large energy 95

    As illustrated 1992- 1998 period, GDP despite decline in Apr- tax
    transactions monopolies that failed to pay taxes also were often not paid by
    other firms or government entities such as military bases for their energy
    use. The government's noncash receipts- which includes the overpriced value
    of and Aug- 95

    Dec- 95 Apr- government receives in return for canceling been substantial,
    accounting for about 21 percent

    1996- 98. A number of efforts by parts of the Russian made through financial
    transfers and checking accounts, actual currency.

    96

    goods services the delinquent taxes- have of total revenue during 14 Cash
    revenues include payments as well as payments made in Aug- 96 Dec- 96

    Apr- 97 Aug- 97

    Dec- 97 Apr- 98

    Aug- 98 Dec- 98

    Apr- 99 Aug- 99

    Dec- 99 Apr- 00

    government, in some cases with international assistance, were made during
    1996- 98 to improve tax collection and compliance, but in general, they met
    with little success prior to 1999.

    Figure 15: Real and Nominal Monthly Exchange Rate Indexes for Russia, 1994-
    2000

    Index, 1995= 100 200 180

    Nominal 160

    140 120 100

    Real 80

    60 40 20

    0 Jan- 94

    May- 94 Sep- 94

    Jan- 95 May- 95

    Sep- 95 Jan- 96

    May- 96 Sep- 96

    Jan- 97 May- 97

    Sep- 97 Jan- 98

    May- 98 Sep- 98

    Jan- 99 May- 99

    Sep- 99 Jan- 00

    May- 00

    Note 1: The nominal effective exchange rate index is a weighted average of
    the ruble exchange rates of several of Russia's trade partners. The real
    effective exchange rate index adjusts for the relative inflation rates
    between Russia and these trade partners. The real index can be interpreted
    as the inflation- adjusted price of a traded unit of a Russian good or
    service, when the 1995 price was 100. Note 2: An increase in the index
    reflects an appreciation of the ruble.

    Source: Constructed from IMF, International Financial Statistics data.

    Two issues of continuing debate regarding IMF policies in Russia over the
    period are the questions of how much leverage the IMF had in influencing
    Russia's macroeconomic policies, and whether the IMF supported an exchange
    rate that was too high. A number of officials and analysts, including IMF
    officials, have maintained that the IMF was “too soft” on
    Russia. For example, although the IMF delayed or reduced disbursements
    several times during 1996- 98 when Russia missed some quantitative
    performance criteria requirements, it also granted waivers and made
    disbursements during this period when Russia had missed its targets. 15 Some
    officials and analysts argue that the Russian government would have

    implemented a stricter program if it knew it could not get disbursements
    otherwise. It is not possible to determine whether holding to stricter
    disbursement criteria would have resulted in better implementation of the

    economic program, given, for example, the key role of low tax collection in
    the government's failure to meet IMF performance criteria. Several
    international and Russian government officials we interviewed stated that
    eligibility for bilateral debt relief may have been Russia's primary
    motivation in agreeing to IMF programs. 16 The Russian government, with IMF
    advice and financial support, maintained a nominal exchange rate that was
    relatively stable from mid1995 to mid- 1998 (see fig. 15). According to some
    analysts, this reduced inflationary expectations helping to reduce
    inflation. However, analysts have also maintained that, with the benefit of
    hindsight, the exchange rate appears to have been overvalued, based on the
    strong performance of the Russian economy since the financial crisis. While
    that strong performance

    is partly explained by high oil prices, it is also largely attributable to a
    sharp rise in production by Russian firms, as the prices of Russian products
    became more attractive relative to imports after the government's move to

    a floating exchange rate in September of 1998 and the substantial
    depreciation of the currency. With high oil and export commodity prices and
    lower imports, Russia is running large trade surpluses in 1999 and 2000,
    adding to its international reserves.

    15 Missed criteria include, for example, international reserve, government
    revenue, and budget deficit targets. 16 Russia or any debtor country is
    required to have an IMF program in place before it can receive debt relief
    from bilateral creditors through the Paris Club. The Paris Club is an
    informal group of creditor countries that meets, on an as- needed basis, to
    negotiate debt

    relief efforts on official debt.

    Social Safety Net Protection A social safety net to cushion the effects of
    transition on vulnerable populations, particularly dislocated workers, was
    identified early on by

    some in the international community as necessary to a smooth transition in
    Russia. It was recognized that enterprise restructuring, price
    liberalization, and other dislocations associated with Russia's transition
    to a market economy would inevitably affect living standards. Some analysts
    argued

    that a social safety net was essential to achieving objectives of
    privatization. They pointed out that the restructuring of enterprises, one
    goal of privatization, would necessarily entail periods of unemployment. In
    addition to loss of income, workers would be hurt by the loss of social
    services such as housing, kindergartens, and hospitals, which were
    traditionally provided to workers at little cost through their employers.
    The concern was that, absent an effective system of reducing the social
    consequences of unemployment, economic restructuring would not take

    place. However, there was no real agreement within the international
    community about how support for an improved social safety net should be
    financed. One preliminary 1993 analysis by World Bank and IMF staff
    suggested additional international funding to help support a safety net with
    a very rough cost of $2- 3 billion the first year. There was, however,
    little support among the G- 7 members for directly financing social programs
    in Russia.

    According to several U. S. government officials, U. S. domestic political
    support for paying for pensions and other social needs in Russia did not
    exist. By the time of a summit between President Clinton and President
    Yeltsin in Vancouver in March 1993, bilateral funding for a social safety
    net was not included in plans for assistance to Russia. The role of
    providing assistance to address the social impacts of transition thus fell
    to the World Bank. Within the World Bank, discussions about how best to
    provide that assistance were a part of the larger debate about the World
    Bank's assistance strategy for Russia. That debate included the issue of
    investment lending versus adjustment lending and what level of exposure to
    the possible nonrepayment of its loans the World Bank should assume.

    The social sector did not consume a significant part of World Bank
    commitments or disbursement to Russia until 1997. A key reason, according to
    both World Bank and Russian officials, was the reluctance of Russian
    authorities to borrow funds for social needs. In November 1992, the World
    Bank approved a $70 million loan to strengthen the government's capacity to
    process unemployment benefits, in part through buying computers. However,
    the loan did not go into effect for 2 years and then

    had serious implementation difficulties. 17 A $200- million community social
    infrastructure loan approved in 1996 to improve the ability of local
    governments to provide essential social services in two regions, with the
    idea of possible expansion, was subsequently restructured with more modest
    objectives.

    In June 1997, the World Bank approved an adjustment loan of $800 million
    tied to social sector reforms, and disbursed the first tranche of $300
    million. The World Bank had, in 1995, indicated its willingness to consider
    such an adjustment loan and, according to World Bank officials, the

    prospect of an adjustment loan increased the interest of Russian government
    officials in discussing social reforms. However, a substantial period was
    required to work out loan conditions, since some Russian officials had
    initially viewed the loan as a source of general budgetary financing without
    expecting serious conditionality. The objectives of the loan were broad-
    reforms in social policy, pensions, unemployment

    assistance, social assistance, and social insurance. One goal was to improve
    targeting of needy groups within the government's existing social spending
    budget. 17 A World Bank official cited that loan as an example of how
    success can take time. He stated that it had been a problem loan for a
    number of years and that the World Bank had wanted to cancel the loan;
    however, the loan had recently become an example of a very successful small
    project.

    The World Bank disbursed a second tranche of $250 million under the social
    protection adjustment loan in December 1997, as scheduled, but the loan was
    restructured in July 1999; as of August 2000, all tranches had been fully
    disbursed and all loan conditions met. According to the World Bank,

    their most significant accomplishments under the loan have been in pension
    system reform, with little success in poverty reduction and the reform of
    social assistance. A World Bank official made several observations about the
    World Bank's work under this loan: It was

    important to have enough funding at stake to get the appropriate attention,
    but after that, the funding amounts have not been that important; working
    with regions was surprisingly positive; and while World Bank officials had
    anticipated the ability of special interests to block change, they had
    underestimated it. 18 Russia's system of social protection remains poorly
    suited to protecting poor and vulnerable groups, according to U. S.,
    Russian, and World Bank

    officials. Benefits are low- with unemployment benefits, for example,
    averaging 15 percent of the subsistence minimum- and badly targeted, with 20
    percent of the poorest households receiving no benefits and the bulk of
    housing subsidies still going to those who are not poor. World Bank
    officials cited social protection components of Russia's 10- year

    economic development plan, which was adopted in July 2000, as indicative of
    more serious discussion within Russia concerning needed economic reforms in
    this area. Some officials also indicated that proposals within the plan draw
    heavily on work done with World Bank analysts over the past several years,
    particularly in the area of pension reform. However, there

    still are serious differences of opinion within the Russian government
    regarding the priority of government spending for social needs. Voucher
    Privatization and

    No aspect of Russia's economic transition has been more controversial the
    Loans- for- Shares than the privatization of enterprises. Privatization of
    over half of Russian Privatization Program

    state- owned industry was accomplished quickly during 1992- 94, with the
    help of international funding. In Russia, specific motives for privatizing
    enterprises rapidly were to (1) decrease the chance of a communist

    18 In addition to these programs, the World Bank's coal sector adjustment
    loans, with the primary purpose of overall restructuring of the coal sector,
    featured social safety net provisions for coal workers, their families, and
    communities adversely affected by mine closures and downsizing.

    resurgence, (2) impose some order on a process that had begun to occur
    spontaneously during the Gorbachev era, and (3) decrease the government's
    direct financial burden of subsidizing enterprises. Beginning in early 1992
    and ending in June 1994, the Russian government designed and implemented a
    mass voucher privatization program. 19 Through this program, over 16, 500
    medium and large state- owned

    enterprises, 20 representing more than half of Russian industry, were
    transferred to the ownership of more than 40 million Russian citizens.
    (Under the Russian privatization law, most shops and some smaller firms had
    been allocated to local governments to sell off.) This was accomplished
    through several steps: corporatizing the enterprises as joint

    stock companies; distributing vouchers to the entire Russian population;
    creating investment funds to channel purchases of larger firms; and
    organizing a system of auctions throughout Russia through which shares in
    the enterprises were distributed.

    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. In late 1991, the World
    Bank and the EBRD signed an agreement with the Russian government to act as
    lead advisers on a broad range of privatization issues. The World Bank began
    providing advice to the Russian Privatization Center in 1991 under its
    Technical Cooperation Agreement with Russia. In December 1992, the World
    Bank approved a privatization implementation

    assistance loan, for $90 million. The main objective of the project was to
    provide funding to design the voucher privatization program. However, that
    loan did not become effective until the end of 1993, due in part to
    legislative opposition, at which time the voucher program was nearing
    completion. Similarly, the EBRD did not carry out planned efforts to support
    the voucher privatization process. USAID became the primary source of
    international funding for implementing the program, providing about $58

    million. 19 The Russian privatization law was passed in July 1991 and
    included a basic emphasis on giving away shares of enterprises. The
    privatization program, headed by Anatoly Chubais, was adopted by the
    government and the parliament in June 1992, after intense negotiations. It
    contained the basic elements of corporatization and insider privatization,
    although not vouchers. Vouchers were chosen by Chubais as the mechanism for
    mass privatization in late spring 1992 and adopted by presidential decree in
    the summer. 20 Small enterprises were defined as having less than 200
    employees, medium enterprises as having 200- 1,000 employees, and large
    enterprises as having more than 1,000 employees.

    While the voucher privatization program was carried out with surprising
    speed and efficiency, assessments of its ultimate impact are mixed. The
    design of the program represented compromises to win the support of
    enterprise managers and of the Russian parliament. In particular, the

    program's most popular option allowed workers and owners to acquire a
    majority stake in their enterprises, resulting in “insider
    privatization,” or what was effectively a management- employee buyout
    program. Although

    the program officially restricted privatization of the largest state- owned
    enterprises- more than 10,000 workers- a number of very large and strategic
    enterprises were ultimately privatized under the voucher program. 21

    Although many believe that the insider nature of the voucher privatization
    process was crucial for its political feasibility, there is wide agreement
    that this factor undermined to some degree the potential economic and
    political benefits of the process. It limited the incentives of new owners-
    managers

    and their employees- to improve the efficiency of businesses by downsizing
    or restructuring their operations. A common although not consensus view
    among officials and analysts with whom we met is that,

    with the benefit of hindsight, the privatization of the largest Russian
    firms may have proceeded too quickly. The degree to which the disappointing
    economic and political benefits of privatization that have been realized to
    date are due to the timing and manner in which parts of the voucher
    privatization were carried out, and how much are due to other factors,

    including the loans- for- shares program, continues to be debated. 21 By
    June 1994, more than 300 of Russia's largest enterprises had in fact been
    privatized through special national voucher auctions, under pressures from
    managers who realized the benefits of gaining control of their enterprises.

    The loans- for- shares program, by far the most controversial aspect of the
    privatization of Russian enterprises, followed voucher privatization. 22
    Through the loans- for- shares program, a handful of financial- industrial
    groups in Russia became controlling shareholders in some of the country's
    most valuable assets, including several large oil and metals companies.
    Under this program, carried out during the last quarter of 1995, the
    government auctioned off large stakes in these companies to banks, in return
    for loans, and in some cases, payments of firms' tax arrears. 23 This scheme
    was prompted by the government's need for a source of noninflationary
    financing of its budget deficit and also, according to some officials we
    interviewed, by President Yeltsin's desire to consolidate the support of
    Russia's business elite for his 1996 election campaign. Over the

    course of 1995, as revenues from other privatization efforts fell short of
    anticipated amounts, the government was failing to meet financing targets
    that had been agreed to with the IMF. Through loans for shares, the
    government was able to provide an additional $1 billion of budget financing
    and met the financing targets. According to IMF staff, alternative forms of
    financing were available to the Russian authorities.

    The loans- for- shares auctions are generally viewed as having been
    effectively rigged in favor of the large banks that were carrying them out.
    The Russian government had modified the original loans- for- shares
    proposal, made by a consortium of banks, from a closed process to auctions
    that would ostensibly be open, including to foreigners. However, in the
    actual auctions foreign investors were barred, the auctions were

    attended by a limited number of bidders, and the winning bids were lower
    than expected. The winners were generally the banks who were managing the
    auctions. 24 22 Following voucher privatization, Russia began a second round
    of privatization, with the objective of selling the remaining government
    holdings in order to raise cash. The cash auctions and investment tenders
    (bids) used were not transparent (open) and were poorly advertised, and the
    government fell far short of its revenue goals. 23 The government maintained
    the right to repay its loans and thus buy back the shares until

    September 1996 although, according to some officials, there was little
    expectation among knowledgeable individuals that the government would repay
    the loans. 24 Only 12 of the 29 companies that were initially identified by
    the government as candidates for the program were actually auctioned, due in
    part to efforts by company directors to avoid an auction.

    The loans- for- shares program is widely considered a major setback in
    Russia's economic transition. It consolidated the fortunes of Russia's new
    “oligarchs.” The program was criticized in the Russian press as
    evidence of corruption within the government and became an issue in the 1996
    presidential election. A number of western and Russian analysts have
    criticized the West for not being more outspoken in opposition to the scheme
    at the time. In contrast to its support for voucher privatization, the
    international community did not directly support the loans- for- shares
    program. It did not, however, strongly object, according to evidence we have
    reviewed.

    The U. S. Executive Director of the IMF, in April 1995, in response to an
    early loans- for- shares proposal, went on record as asking for additional
    information regarding the proposal and potential negative impacts. The U. S.
    Executive Director told us she was involved in other conversations

    regarding concerns about the loans- for- shares program, but U. S. officials
    did not provide us with any other documentation on objections. In an October
    1995 staff report, IMF staff raised concerns about the way the loans- for-
    shares scheme was designed, but stated that Russian authorities assured the
    IMF that the government would exercise strong oversight to ensure that the
    program was operated fairly. In a December 1995 staff

    report, IMF staff raised concerns about the Russian authorities handling of
    the loans- for- shares program. In both instances, the staff recommended and
    the board approved further disbursements to Russia. A senior IMF official
    told us that the IMF's focus was primarily on macroeconomic issues and less
    on the details of particular privatization schemes. USAID officials

    told us they had objected to loans for shares during 1995 but did not have
    information regarding the specific circumstances of the objection. According
    to World Bank officials, a World Bank official in Moscow expressed serious
    concerns about loans for shares as the program was being implemented in 1995
    and raised concerns to senior World Bank management, but high- level
    protests were not made by the World Bank. According to senior World Bank
    management, the World Bank's dialogue with Russian officials was generally
    not at a very high level during that time, and the World Bank was not in a
    good position to put major issues like the loans- for- shares transactions
    on the table. He stated that World

    Bank management concluded there was no way to reverse the program and that
    the World Bank needed to work to make sure that privatization was done more
    transparently in the future.

    We heard differing views regarding how much difference clear western
    opposition to loans for shares would have made in 1995 and 1996. Several
    officials expressed the view that by the time the West realized the degree
    to

    which the outcome could further undermine reform objectives, it was too
    late. According to a former World Bank official, the only possible effective
    influence would have to have come from the U. S. President. Others stated
    that effective opposition would not have had to come from that level, with
    one former senior Russian official describing the overall western reaction

    to the program at the time as a conspiracy of silence. Banking Sector Reform
    During the Soviet period, the state bank had wide responsibilities for all
    banking- related activities in the Soviet Union. Five specialized banks

    carried out some of these tasks under the supervision of the state bank.
    Russia's banking sector began to evolve with the reform laws of 1988 and,
    with the dissolution of the Soviet Union in 1991, Russia introduced its own
    banking laws and created the Central Bank of Russia (which replaced the
    Soviet state bank) to issue currency and supervise banks. The new central
    bank followed a liberal policy of bank licensing, resulting in a rapid
    increase in the number of commercial banks. For example, in 1993, Russia had
    licensed 2, 000 new commercial banks. Banks benefited from operating

    in an environment where there was limited prudential regulation, and
    inflation and currency depreciation created opportunities for quick profits.
    Although the vast majority of Russia's banks remained small and
    undercapitalized, the sector became dominated by a number of large banks
    that are at the center of industrial groups. Virtually all lending by
    Russian banks is short term. Banks concentrate their activities on trading
    in the treasury bill and foreign currency markets, lending to related
    entities, and on trade finance, and real estate activities.

    Early on, several institutions and donors targeted Russia's banking sector
    as an area for providing transition assistance. However, for a variety of
    reasons, progress in strengthening Russia's banking sector has been limited.
    The 1998 financial crisis decimated Russia's banks and revealed the extent
    of their unsound financial condition. It also illustrated the need for
    better coordination between the government and donors on banking reform.
    Since the crisis, institutions and donors have provided substantial
    technical assistance on bank restructuring, but have been hesitant to commit
    significant financial resources for banking reforms, although some

    planning efforts were underway in summer 2000.

    The financial institutions development project was approved in 1994 to
    support the institutional development of commercial banks, modernize the
    regulatory framework, and improve bank and enterprise accounting practices.
    The project was financed by a $200 million loan from the World Bank and $100
    million loan from the EBRD, with some supporting grants from the EU and the
    Japanese government. In hindsight, the World Bank believes the accreditation
    process for financial institutions development

    project banks proceeded too rapidly. The project banks and outside investors
    saw the accreditation as the World Bank's “seal of approval”
    when, in reality, these banks were not necessarily following prudential
    banking practices. Implementation of these projects came to a halt following
    the 1998 financial crisis. The project was restructured in August 2000, with
    some small disbursements approved.

    Under the Freedom Support Act program, USAID funded bank supervisor and
    commercial bank training programs in Russian cities. In its most recent
    country strategy document, USAID acknowledged that the success of such
    efforts has depended in part on the Russian government's commitment to
    specific reforms. USAID officials say they are working with other donors

    and government representatives on the Coordinating Committee to determine a
    useful role for its assistance. In addition, the U. S. Treasury provided
    resident advisers to work with the Central Bank of Russia; their activities
    included, among other things, helping to draft bank legislation.

    From its earliest involvement with Russia, the IMF has targeted Russia's
    banking sector as an area that needed reform in order to support the
    country's economic growth. In the early years of its involvement with
    Russia, IMF staff provided technical assistance to the Central Bank of
    Russia on banking supervision, monetary and exchange operations, the
    payments system, public debt accounting, and bank accounting. In 1993, it
    also posted three resident advisers with the central bank. Although banking

    sector reform was mentioned in the government's March 1995 request for a
    Stand- by Arrangement, it was not until 1996, with the Extended Fund
    Facility program, that banking reform became a stronger focus of an IMF
    arrangement. In its February 1996 request for the Extended Fund Facility,
    the Russian government outlined its strategy for a comprehensive approach to
    strengthening the banking system. However, laws regarding bankruptcy and
    bank license revocation, identified as necessary for bank restructuring,
    were not passed or implemented. In addition, although all donors believed it
    was necessary to introduce the use of international

    accounting standards into Russia's banks, the Central Bank of Russia and the
    banks themselves resisted this change. 25 Only in 2000 did the authorities
    agree to introduce international accounting standards accounting for the
    Central Bank of Russia by year end- 2000 and in commercial banks by year
    end- 2001.

    Experts have identified several factors specific to banking business that
    contributed to the breakdown of the market in 1998, including the use of
    Russian accounting norms rather than international accounting standards;
    inadequate credit risk analysis; and investment concentration in related
    borrowers, foreign exchange, and government securities.

    The government's default on its securities, banks' failure to properly hedge
    their foreign exchange risks, and the sharp ruble devaluation are the
    factors that threw nearly all Russian banks into insolvency when the crisis
    hit. In addition, these measures resulted in a serious disruption in the

    payment system and a collapse of the domestic banking system. There were
    severe liquidity shortages as banks were unable to make payments or obtain
    liquidity through the usual channels, such as the sale on the open market of
    a portion of their portfolio of government securities. 25 Russia's 1999 IMF
    program continued to acknowledge basic legislative needs related to the
    banking sector. It laid out a plan for bank restructuring that included
    developing a bank restructuring law and amending the central bank law, bank
    bankruptcy law, and civil code.

    In the aftermath of the August 1998 financial crisis, the World Bank and the
    IMF convinced the Central Bank of Russia to conduct detailed reviews using
    western accounting standards of the financial condition of 18 large

    banks representing about 50 percent of the assets of the privately owned
    banking system. The audits found that 15 of the 18 banks were insolvent.
    According to World Bank officials, these results helped strengthen the
    credibility of the international financial institutions' advice in the eyes
    of the Central Bank of Russia.

    In the wake of the financial crisis, two new bodies were formed to help deal
    with Russia's banking reform. One, the Interagency Coordinating Committee on
    the Restructuring of the Banking System, was established by the Central Bank
    of Russia with the multilateral donors as members. The Coordinating
    Committee, as well as the working groups formed under it, provide a forum
    for carrying out technical discussions between the Russian authorities and
    international experts on a wide range of issues and a means for coordinating
    technical assistance from the donor community.

    The second, the Agency for Restructuring of Credit Institutions, was
    established in November 1998, with the task of restructuring large and
    insolvent banks. It has made progress in restructuring regional banks that
    voluntarily submitted to its oversight, but according to several officials
    from programs we reviewed, progress in dealing with large, Moscow- based

    banks has been limited. Several officials we spoke with in Russia told us
    that the restructuring agency has been relatively ineffective, due, in part,
    to a lack of political will on the part of the Russian authorities and, in
    part, to

    a lack of consensus on how these large banks should be treated as well as
    the limited financial resources for bank restructuring.

    According to representatives from the World Bank/ IMF technical assistance
    team, since the financial crisis, progress has been made in establishing the
    enabling environment for banking restructuring, but Russian authorities have
    failed to use this environment with full effectiveness. The team has
    identified areas in which the Russians must choose their strategy on
    fundamental issues, including the role of public versus private banking, the
    role of national versus regional banking, the

    role of domestic and foreign- owned banks, and the question of whether banks
    should be limited to traditional banking practices, such as taking deposits
    and making loans, or be permitted to conduct investment banking.

    Pending agreement on these fundamental issues, the World Bank/ IMF team has
    proposed an action plan for 2000 that is divided into three strategic areas:
    (1) continued consolidation of the banking sector, (2) creation of a

    small number of viable core banks, and (3) establishment of a competitive
    and transparent environment for banking.

    Views of officials we met with in Russia were mixed on the priority level of
    banking sector restructuring and reform. Although there is still little bank
    lending to small- and medium- sized enterprises, many experts felt the
    demand for such lending did not yet exist and that those needing finance
    were obtaining it from other sources, such as retained earnings. Many
    officials we spoke with felt that the power of state banks impedes progress
    in creating a well- functioning commercial banking sector because it is hard
    for private commercial banks to compete with state banks. Also, restrictions
    on foreign banks limit citizens' choices. The Russian

    population in general is still suspicious of Russian commercial banks and is
    more likely to deposit its money with the state banks than with private
    commercial banks.

    Changes in Assistance The evolution of international assistance efforts in
    Russia since 1992

    Programs Reflect reflects institutions and donors' continued commitment to
    remain engaged

    in Russia because of the country's strategic importance. While donors have
    Commitment to

    faced a series of obstacles, they have never considered halting assistance
    Staying in Russia programs altogether. Changes in the programs and
    assistance strategies have reflected responses to these obstacles, learning
    from experience,

    changing needs in Russia, and political guidance. The rationale for
    continued engagement varies across institutions and donors depending on
    mandates and objectives. World Bank and IMF officials note Russia's
    strategic importance, and also their mandate to support member countries.
    Officials of these institutions have stated that they will continue to
    support Russia's process of reform, which they believe is likely to take a
    number of years. U. S. officials told us that they

    will continue to implement projects in Russia as long as the Russians show
    continued commitment to supporting the process of economic reform and
    democracy building. The EBRD and TACIS were specifically created to help
    support reform in transition countries, of which Russia is the largest and
    most important. According to senior- level EBRD officials, the EBRD

    has remained engaged in Russia during times of crisis like 1998 and will
    continue to be engaged there. When the EU reauthorized its TACIS program in
    December 1999 for another 6 years, its Commissioner for External Relations
    noted that the program would help build closer and more constructive
    relations.

    Changing Resources and Some shifts in donor strategy reflect differences in
    the nature, mandate,

    Political Guidance Have and political context of the institutions
    themselves. For example, the Affected Assistance United States and the World
    Bank modified their assistance programs in

    Strategies sharply different ways over the decade. Their shifts are
    explained in part by differences in available resources, instruments, and
    mandates and may also

    reflect different perceptions of conditions and prospects in Russia. The
    World Bank's shift, beginning in 1996, away from subnational

    lending for investment projects to providing mostly large structural
    adjustment loans to the central government reflected an increasing emphasis
    on the importance of nationwide reforms and the obstacles to achieving
    reform objectives at the regional level. The shift also reflected
    institutional issues. For example, because the World Bank's charter requires
    it to lend only to, or obtain a sovereign guarantee from, national
    governments, implementing regional projects required complex

    negotiations regarding who would pay back loans and how funds would flow
    through the federal government before going to the regions. In contrast, in
    1996- 97, the United States changed its focus from working

    primarily with the federal government to working largely in specific regions
    on grassroots projects. U. S. officials told us this change was driven by a
    number of factors, including (1) substantial reductions in U. S. funding
    which, in their opinion, greatly reduced the ability to obtain nationwide
    results; (2) the growing resistance within the Duma and

    federal government to enact meaningful reform, exacerbated by corruption
    within parts of the government; and (3) the importance of showing results of
    U. S. assistance to Congress and the White House. Several U. S. officials
    told us that by 1994 or 1995, it was becoming clear that many U. S. efforts
    to promote change at the federal level were not achieving success. In
    addition, by the mid- 1990s, Congress was placing a

    growing number of restrictions on Freedom Support Act assistance for the
    national government- restrictions that did not apply to assistance at the
    regional or local level. In addition, in contrast to requirements for World
    Bank loans, implementing Freedom Support Act projects at the regional level
    does not require detailed negotiations with the Russian federal government.

    Political considerations have affected program implementation in a variety
    of ways for the institutions and donors we reviewed. IMF decisions regarding
    Russia have been affected by political concerns. For example, despite
    concerns regarding poor implementation of the first program, the IMF Board
    approved

    disbursement of $1.5 billion in March 1994 to show support for the Russian
    government. The December 1993 Duma elections had been widely viewed as a
    sharp repudiation of reform efforts and of the federal government by the
    Russian people. U. S. officials told us that the political stakes in this
    decision outweighed concerns about lack of progress in

    meeting IMF requirements. 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. Several Russian officials, however, told us they
    were concerned that this action contributed to the belief that Russia did
    not have to comply with IMF requirements since Russia was

    too important to fail. In response to reports of massive civilian casualties
    and widespread

    human rights violations in connection with the war in Chechnya, the European
    Council adopted a resolution in December 1999 limiting new TACIS projects
    for 2000 to human rights, rule of law, and support for civil society.
    Institutions and donors have recently reported the need to alter their

    approach for assistance to Russia because of changing Russian needs.
    According to a number of Russian and donor officials, Russia's assistance
    needs have changed to some extent away from basic transfer of know- how to
    assistance in implementing specific reforms. For example, in December 1998,
    a meeting of G- 7 technical experts on assistance to Russia concluded

    that assistance projects showed the greatest success when they made use of
    both Russian expertise and western support. A February 2000 report on the
    TACIS program in Russia recommended that future assistance move away from
    the past focus on explaining the “right way” to the Russians and
    instead help them find “the best way in their conditions.” IMF
    and World Bank officials told us they will expect the Russian government to
    have greater input into formulating its own program than in the past, and
    that they believed that their future programs with Russia would be more
    closely

    linked to supporting the government's implementation of reform packages than
    in the past.

    Donors' Response to Crime Over time, resources allocated directly to
    developing judicial and law

    and Corruption enforcement institutions in Russia have represented a
    relatively small share of international funding, reflecting the greater
    focus on economic

    policies and institutions. For example, $632 million, or 24 percent, of
    funds

    budgeted under the Freedom Support Act have been under the broad objective
    of promoting democracy and rule of law. In terms of a percentage of annual
    funding, however, funding for this objective has increased to 36 percent of
    funds budgeted for 2000. Specific programs include anticrime

    training and training Russian law enforcement officials. Some programs under
    the broad objective of promoting market reform have had direct
    anticorruption aspects, such as providing training to Russian businesses in
    western accounting standards. In the case of the World Bank, the structural
    adjustment loans it has extended to Russia have provisions that could

    reduce the potential for corruption, such as strengthening tax
    administration, and reforming key infrastructure monopolies and the banking
    sector by fostering competition.

    The World Bank first explicitly addressed corruption in its 1999 country
    assistance strategy for Russia, 26 although according to Bank officials,
    several aspects of its Russia program over time have had an anticorruption
    aspect. A recent report of the World Bank's progress to help countries fight
    corruption indicates that, since the executive board endorsed an

    anticorruption strategy for the World Bank in 1997, 27 four of its active
    investment projects, involving $128.8 million in loans, relate to
    governance. 28

    26 In January 1999, the World Bank issued new policy guidance that required
    every country assistance strategy to examine governance issues, including
    the extent of corruption. This was part of the anticorruption initiative
    that the Bank President launched in 1997.

    27 See World Bank: Management Controls Stronger, but Challenges in Fighting
    Corruption Remain (GAO/ NSIAD- 00- 73, Apr. 6, 2000). 28 The World Bank,
    Helping Countries Combat Corruption: Progress at the World Bank Since 1997
    (Washington, D. C.: The World Bank, June 2000).

    World Bank officials pointed to its coal sector lending as an example of a
    program where limiting opportunities for corruption has had an increasing
    focus over time. The World Bank's $500 million 1996 adjustment loan was

    designed to reduce the impact of the coal sector on the federal budget by
    decreasing subsidies to the sector. While progress was made toward this
    objective, including institutional changes to improve the targeting of
    subsidies, there was insufficient monitoring of funds from the Russian
    government that went to pay subsidies to coal companies and some evidence
    that such subsidies were not necessarily being allocated or used for their
    intended purposes. As a result, the World Bank's second coal sector loan
    approved in 1997, designed to further sector restructuring and

    promote privatization, more explicitly addressed controls over public funds.
    As a precondition for the loan, for example, the government made changes in
    sector governance and management of coal subsidies. This included changing
    its method of distributing coal subsidy payments. 29 According to World Bank
    officials, this change has substantially decreased the possibility of
    corruption within the government's system of coal subsidy payments.

    The institutions and donors we reviewed have also implemented specific
    procedures to increase protection of their own funds from corruption and
    theft. These institutions and donors have reported either that they have not
    suffered serious theft or diversion of funds or that they have not suffered
    any theft or diversion of funds in Russia. We did not attempt to
    independently verify these claims during our review.

    Because technical assistance funds, which comprise the bulk of assistance
    under Freedom Support Act and TACIS assistance, have been paid to U. S. and
    European contractors, the potential for diversion has been limited. Since
    the early 1990s, State Department and USAID officials have testified and
    reported that the vast majority of the funds for the Freedom Support Act
    program in Russia were obligated to U. S. contractors, universities, and
    private organizations. Since 1995, USAID has implemented increasingly
    stringent financial controls for its operations in Russia. TACIS officials
    told us they believed their funds were adequately protected from misuse.

    29 They are now distributed through earmarked accounts in the regional
    offices of the federal Treasury and delivered directly to the intended
    beneficiaries.

    In 1999, the IMF called for an investigation by an independent international
    accounting firm into allegations that its funds for Russia had been stolen
    or misused. The firms reported that they found no evidence that IMF funds
    were stolen, but they did find that Russia had

    misreported information to the IMF during 1995- 98. This misreporting may
    have enabled Russia to obtain funds it may not have been entitled to. Based
    on these findings, the IMF determined that Russia had violated mandatory
    reporting requirements established in the IMF's Articles of

    Agreement. As a result, Russia agreed that new IMF funds would be held in an
    account at the IMF and go directly to repay Russian debt to the IMF. This
    procedure would apply to any new IMF program negotiated in 2000. 30 EBRD
    officials told us that an outside review of their Russia portfolio by

    an independent accounting firm in late 1999 found no egregious misuse of
    funds in any of its Russia programs and that the EBRD had instituted changes
    to tighten the EBRD's procedures for disbursing funds after the

    review. According to World Bank officials, none of their reviews have
    revealed any diversion of funds in Bank- supported projects in Russia. In
    June 1999, the World Bank, in response to concerns from its Executive Board,

    introduced new procedures to improve controls over the tracking of
    counterpart funds in adjustment lending disbursements. In addition, the
    World Bank has completed a draft country procurement assessment review,
    which is under discussion with the government. While World Bank policy now
    calls for country financial accountability assessments for its borrowers,
    such an assessment has not been completed for Russia. This was a matter of
    concern to some executive directors when

    the board discussed Russia's country assistance strategy in December 1999.
    In May 1998, the World Bank posted a procurement specialist to its Moscow
    office, and he was later joined by a financial management

    specialist in August 1999. 30 See International Monetary Fund: Status of
    Efforts to Strengthen Safeguards Over Lending (GAO/ NSIAD- 00- 211, Sept. 1,
    2000).

    Chapt er 4

    Conclusions and Lessons Learned After nearly a decade of experience, a
    number of conclusions can be drawn about what has and has not worked in the
    international community's efforts to aid Russia's economic transition, some
    with implications for the design of future programs. The overarching lesson
    is that without some degree of consensus and political will within Russia,
    the impact of donor programs is generally limited. Expectations of quick
    results at the beginning of the transition process were unrealistic, and the
    international community now realizes that Russia's transition will be a
    lengthy one. In

    some areas, conclusions about what policies are appropriate remain difficult
    to draw. The surprisingly strong growth of Russia's economy during the past
    2 years, for example, illustrates that, in some respects, the evolution and
    functioning of the Russian economy is still not well understood and Russia
    and the international community will need to work together to determine how
    policies should evolve.

    Donors Assessing As of September 2000, the institutions and donors we
    reviewed are

    Status of Russia generally in the process of reevaluating, with the Russian
    government, the level and design of their assistance programs. Factors
    playing into these

    Programs evaluations include: (1) the extent of Russia's current need for
    foreign

    funding; (2) Russia's desire for debt relief from bilateral creditors, which
    is conditional on having an IMF program; (3) the determination of what
    macroeconomic policies are appropriate at this point; (4) Russia's choice of

    direction for the government in terms of a number of reforms ranging from
    restructuring inefficient enterprises to overhauling social protection
    policies; and (5) the Russian' government's commitment and ability to
    address fundamental obstacles to change caused by corruption and vested

    interests. Of great interest to the international community has been the 10-
    year economic strategy adopted by the Putin government in July 2000. The
    plan lays out ambitious reforms that address many donor concerns about
    structural impediments to reform. Developed by Russian officials, the plan

    was discussed with representatives of the international financial
    institutions and other analysts during its formulation. Although the Duma
    has adopted some reforms called for in the strategy, it is too early to
    conclude the degree to which needed changes will be approved, implemented,
    and enforced.

    The international community is also closely watching political changes in
    Russia, with concerns about how proposals to alter the central- regional
    balance of power, for example, will play out. While some changes have

    been viewed positively, such as Duma approval of systemic tax reform, others
    are being viewed with serious concern, particularly moves against
    independent media, nongovernmental organizations, and political

    opposition. Given the complexities of Russian politics and economics, and an
    8- year track record of periods of optimism followed by frustration, both
    donors and the Russian government have been approaching the design of future
    assistance cautiously.

    Conclusions Based on our work looking at the programs of five major
    institutions and donors over the period, the following conclusions appear to
    have strong

    support and particular importance. In some cases, they have clear
    implications for future assistance programs. The challenge of Russia's
    transition was enormous, greater than generally appreciated by the West, and
    far greater than those faced by

    Central European countries such as Poland and Hungary. Russia began the
    period with almost no exposure to the western market culture and principles
    it set out to adopt, and with a vacuum in terms of internal institutions to
    support a democratic society and market economy. In hindsight, expectations
    within Russia and among the donors of quick results were unrealistic. The
    transition process is likely to continue for many years.

    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 a social safety net to cushion the impact of
    transition on workers and vulnerable groups has increased the social cost of
    transition, decreased Russian public support for reform, and

    contributed to the difficulties of economic restructuring. Russia's
    transition path has been made harder by the concentration of power and
    income in the hands of a few, which had begun prior to the transition
    process and was accelerated through the privatization of some of the most
    valuable enterprises in Russian industry. Donors agree that, in some
    respects, opportunities for reform and openness to international influence
    had diminished by the mid- 1990s.

    Whether the international community, with different policies and levels of
    involvement, could have influenced a different path remains the subject of
    substantial debate. This question cannot be fully answered because what
    would have happened under alternative policies remains unknown. At different
    points, complicated political choices were made by international players.
    However, many officials and scholars admit

    that, with 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 object strongly to the loans- for-
    shares privatization program in 1995. The donors' initial expectation 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. These changes have
    profound implications for Russian society and politics and 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 a commitment to reform and support from the Russian government,
    including the individuals and institutions with the authority to influence
    outcomes. It is ultimately up to those individuals to pass, implement, and
    enforce needed laws and develop and effectively operate the required
    institutions. Working to achieve and even identify adequate ownership has
    proved a challenge for all donors, however, because of change in Russian
    officials and government priorities. The unexpectedly strong performance of
    Russia's economy since the

    August 1998 financial collapse, due in part to high oil prices but also to
    increases in domestic production, underscores the limitations of how well
    the international community and Russians have understood the evolution and
    functioning of the Russian economy and demonstrates the lack of clarity
    regarding 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 and the debates surrounding its
    preparation also demonstrate 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 best to
    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 need to be structured for 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. Donor- sponsored exchange programs have
    been frequently mentioned as an effective mechanism

    for transferring to the Russians knowledge about and support for how market
    economies and democracy function. The impact of exchange programs can be
    felt over time.

    The Russian government should be encouraged to develop and implement
    policies that will lessen the impact of restructuring on vulnerable groups,
    which should strengthen public support for needed reforms in the economy.
    Because progress on the path to democracy and a market economy may

    continue to remain uneven, donors need to maintain flexibility in their
    programs to the extent their mandates and instruments allow, so that they
    can respond to changing conditions and windows of opportunity. In light of
    the fact that Russian political will and consensus 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. In many areas across the transition
    agenda, successful reforms may be geared toward policies and institutions
    that are in some respects different from western norms and reflect Russian
    priorities and experience. Working to develop

    commitment and buy- in as widely and deeply as possible within various
    levels of the Russian government and across society is likely to pay off in
    terms of assistance that will have the greatest benefit to the largest

    number of people.

    Appendi xes Additional Information on International

    Appendi x I

    Monetary Fund Programs in Russia Background The International Monetary Fund,
    established in 1945, is a cooperative, intergovernmental, monetary and
    financial institution whose purpose is to promote international monetary
    cooperation. As of July 2000, it had 182 member countries. The IMF's
    Articles of Agreement (as amended), or charter, provides that it may make
    resources available, under “adequate safeguards,” to members
    experiencing balance- of- payments problems. 1 The resources are intended to
    shorten the duration and lessen the degree of these problems.

    Member countries govern the IMF through the Executive Board, which comprises
    24 members, who are appointed or elected by one or more IMF member
    countries. The Executive Board is the IMF's permanent decisionmaking body
    and conducts the institution's day- to- day business. The United States is
    the largest contributing member 2 and therefore has the largest single share
    of voting rights on the IMF's Executive Board (17.67 percent). 3 Overall
    Objectives and

    The IMF‘ s broad objective in Russia, to assist the country to (1)
    achieve Initial Assumptions macroeconomic stabilization, (2) increase
    sustainable output growth, and (3) facilitate the transition to a market-
    based economy has remained generally consistent from the beginning of
    Russia's transition period in 1991 to the present. The IMF intended to gain
    macroeconomic stabilization

    through controlling inflation and achieving sustainable fiscal budgets and
    balance of payments. The main assumptions that guided the IMF's program for
    Russia were that the IMF would be Russia's main adviser in the international
    community's effort to promote macroeconomic stabilization and

    1 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. 2
    When a country joins the IMF and later when IMF members agree to an increase
    in the IMF's capital, the country pays a quota, or capital subscription, to
    the organization. 3 Japan (6. 33 percent), Germany (6. 19 percent), France,
    and the United Kingdom (5. 11 percent each) follow the United States in the
    number of voting shares allocated to them.

    Russia did not require a fundamentally different approach than that for any
    other country transition country despite its unique history. The IMF's
    Instruments The IMF uses a variety of instruments designed to deal with the
    specific

    nature of the problems facing member countries. These instruments generally
    contain three elements: (1) conditionality, or required policy measures; (2)
    technical assistance and high- level dialogue; and (3) financing. IMF staff
    work with the member country's government to design a program that is
    mutually agreeable. Then the IMF's Executive Board approves programs before
    they go into effect and before any

    disbursements are made. Conditionality “Conditionality” is an
    important part of the IMF's agreement with a member country. Access to and
    disbursement of IMF resources are conditional on

    the recipient country's adoption and pursuit of economic and structural
    policy measures. Russia's IMF programs have generally contained quantitative
    conditions including, for example, requirements for the level of net
    international reserves held by the central bank and the level of the federal
    budget deficit. Structural conditions, or benchmarks, such as banking
    sector, tax, and legal reform, have been included as well.

    Technical Assistance The IMF provides technical assistance to members to
    assist them in building technical expertise and competency in a variety of
    government

    functions. Most of the IMF's technical assistance is given to the technical
    areas of the central bank, the Ministry of Finance, the Ministry of Trade,
    and the Ministry of Tax. The types of technical assistance provided include
    training in bank supervision, foreign exchange regulation, public debt
    management, and central bank. The assistance has been given in the form of
    seminars, workshops, training in the United States, and long- and shortterm

    visiting experts. IMF Financial For member countries using most types of IMF
    financing arrangements, the Arrangements Used In

    resources are provided in increments. The IMF periodically reviews the
    Russia

    IMF programs, at which time the country's progress in meeting the agreedto
    conditions is examined, and the IMF Executive Board makes decisions on
    future disbursements. Although the IMF generally provides financing to
    countries' central banks, in Russia's case, on some occasions, the funds

    went instead to the Ministry of Finance and were used to finance the
    government budget's deficit. The IMF's general instruments are as follows:

    First Tranche Agreement: The First Tranche Agreement can be used provided
    that a member is making reasonable efforts to solve its balanceof- payments
    problems. A member can make use of IMF resources up to the limit of the
    first credit tranche, or 25 percent of its IMF quota, under fairly liberal
    conditions.

    Systemic Transformation Facility: Established in 1993, 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. Use of the facility was limited to loans up to 50
    percent of a member's quota. New loans were not possible under the Facility
    after December 1995 and the Facility no longer exists.

    Stand- by Arrangement: A Stand- by Arrangement provides short- term
    assistance of generally one to two years for problems of a temporary nature,
    provided that the IMF member observes the terms set out in the supporting
    arrangement. This arrangement has conditionality requirements that a country
    is to meet in order to continue receiving disbursements. Extended Fund
    Facility: The Extended Fund Facility provides longer- term, balance- of-
    payments assistance aimed at overcoming balance- of- payments difficulties
    resulting from macroeconomic and structural problems.

    Typically, an economic program, which includes conditionality requirements,
    for use of this facility states the general objectives for a 3- year period
    and the specified policies for the first year; policies for subsequent years
    are spelled out in program reviews, or annually.

    Funding History for The IMF has approved loans of around $37 billion for
    Russia and has

    disbursed $22 billion as of August 2000. Currently, Russia has repaid Russia
    around $8. 3 billion. 4 (See table 6 for the funding history of IMF programs
    with Russia.)

    Table 6: Funding History of IMF Programs for Russia IMF board Amount

    Amount Type of IMF program approval date approved disbursed

    First Tranche Agreement August 5, 1992 $1 billion $1 billion Systemic
    Transformation Facility

    June 30, 1993 $1.5 billion $1. 5 billion First Tranche Systemic
    Transformation Facility

    March 22, 1994 $1.5 billion $1. 5 billion Second Tranche Stand- by
    Arrangement April 11, 1995 $6.8 billion $6. 8 billion

    Extended Fund Facility (3 years) March 26, 1996 $10. 1 billion $6. 2 billion
    Interim financing package July 20, 1998 $11. 2 billion $4. 8 billion Stand-
    by Arrangement July 28, 1999 $4.5 billion $640 million Source: GAO analysis
    of IMF documents.

    Strategy The IMF first began its involvement with Russia prior to Russia's
    membership in the organization by participating in the 1991 “joint
    study” that reviewed the Soviet economy. 5 After the joint study was
    completed, the Soviet- IMF relationship was based on the Special Association
    of the Soviet Union to the IMF signed in October 1991, which led to the
    provision of 4 The IMF's lending amounts to its members are fixed in Special
    Drawing Rights (SDR)- an international reserve asset created by the IMF in
    1969 as a supplement to existing reserve

    assets, whose value is defined in terms of a basket of major international
    currencies that fluctuates with market conditions. As of August 31, 2000,
    Russia owed the IMF $12.4 billion, or Special Drawing Rights 9.5 billion,
    based on an exchange rate of $1. 305 per SDR. Since the 1990s, the value of
    the dollar has generally increased against the Special Drawing Right. Thus,
    to the extent that the dollar- Special Drawing Right rate is stronger at the
    time of repayment than at the time of borrowing, it requires fewer dollars
    to pay off the Russia Special Drawing Right debt.

    5 The report, “A Study of the Soviet Economy,” was done by the
    IMF, the World Bank, the European Bank for Reconstruction and Development,
    and the Organization for Economic Cooperation and Development and was issued
    in February 1991.

    technical assistance by the IMF. Russia joined the IMF in June 1992 and has
    negotiated seven agreements with the institution. In Russia, the IMF has
    generally followed its traditional approach of requiring conditionality.
    Several aspects of IMF policies and conditionality in Russia, however, have
    been subject to recent debate, particularly given Russia's 1998 financial
    crisis and the country's subsequent relatively strong performance since the
    last quarter of 1998. Some of these debates have to do with “technical
    issues” such as the

    exchange rate policies supported by the IMF. Others relate to whether the
    IMF paid adequate attention to the structural problems in the economy, such
    as indirect government subsidies and low tax collection rates. A
    controversial aspect of the IMF policy debate is whether the IMF was
    “too soft” on Russia, providing additional disbursements when
    Russia did not

    necessarily meet requirements. In addition to conditionality and financing,
    the IMF has also given technical assistance to Russian ministries and the
    Central Bank of Russia.

    The IMF's task in Russia was complicated by several factors. Russia's
    economic transition was politicized both in Russia and abroad, and the
    Russian political consensus and will required to implement reforms were
    often nonexistent or difficult to attain. This situation dominated
    decisionmaking and reform implementation during the course of the IMF's
    involvement in Russia. While the IMF's initial broad strategy of controlling
    inflation and achieving sustainable budgets and balance of payments remained
    generally consistent over time, actually achieving these goals has

    proven elusive. Despite repeated difficulties in achieving macroeconomic
    stabilization, the IMF Executive Board has made the decision to remain
    engaged in Russia. As discussed in chapter 2 and later in this appendix, the
    evolution of the IMF's strategy can be broken down into four stages: (1)
    efforts primarily to control inflation to bring about macroeconomic
    stabilization from 1992 to 1995; (2) continuing efforts to control inflation
    with increased stress on structural reforms from 1996 to mid- 1998; (3)
    efforts to support the Russian government to help it deal with a growing
    financial crisis from July to September 1998; and (4) continued support of
    the Russian government with little funding in 1999 and 2000.

    Efforts to Control Inflation: During 1992- 95, the IMF's primary goal in
    Russia was to reduce

    1992- 1995 macroeconomic imbalances, particularly inflation, and to
    stabilize the macroeconomy. According to an IMF official, controlling
    inflation was

    paramount because inflation adds to uncertainty in the economy and
    discourages investment. Although the focus of the IMF's programs was to
    reduce inflation, the structure of the programs evolved according to
    agreements made between Russia and the IMF concerning Russia's perceived
    needs. The first agreement, in August 1992, was a first tranche agreement of

    $1 billion- a 5- month package with a relatively limited number of
    conditionality requirements that sought to reduce inflation. To do so,
    Russia agreed to (1) cut its budget deficit by 11. 5 percent of its gross
    domestic product (GDP), (2) limit money creation by the central bank, and
    (3) support a flexible exchange- rate policy within the framework of a ruble
    zone. 6 In addition, the program stipulated that the entire amount of the
    IMF loan was to be held as reserves by the Central Bank of Russia. The IMF

    funds could not be used to support the budget. The central bank financed the
    budget deficit by supplying credits, which was inflationary. According to
    IMF documents, Russia did not consistently implement the program.

    Moreover, Russia failed to achieve the goal of reducing inflationary
    pressures and progress on structural measures was mixed, particularly in the
    area of privatization. 1993 The IMF created a temporary Systemic
    Transformation Facility in 1993

    because it recognized that some transition countries, including Russia, were
    not ready to meet the terms for full conditionality required under a Stand-
    by Arrangement. In June 1993, the IMF's Executive Board approved a

    $1. 5 billion loan to Russia from the Systemic Transformation Facility. IMF
    documents stated that the main goal was to reduce the monthly percentage
    rate of inflation to a “low single digit level.” Russia was to
    do so by limiting

    credit creation and reducing the government deficit to 10 percent of GDP. 6
    Following the collapse of the Soviet Union, Russia and the other former
    Soviet republics (except the Baltics) agreed to maintain the ruble as their
    common currency, with the money supply controlled by the Central Bank of
    Russia. The newly created central banks from the republics were eager to
    expand their domestic credit, largely by obligating the Central Bank of
    Russia to provide financing and trade subsidies borrowing from the Central
    Bank of Russia. This indirect source of inflationary pressure led to
    Russia's withdrawal from the ruble zone in July 1993, contributing to its
    ultimate collapse. The Russians decided to discontinue making automatic
    extensions of credit to other central banks in July 1, 1992, which led to
    the creation of separate currencies.

    In addition, Russia agreed to meet some limited structural measures under
    the program, including further liberalizing the exchange rate and trade
    system and continuing with privatization and financial reforms. According to
    IMF documents, the Systemic Transformation Facility program went seriously
    off track because the Russian government failed to abide by key commitments
    such as meeting the budget deficit target. According to a Russian government
    official, in September 1993, the Minister of Finance asked the IMF to
    discontinue the program because it was clear that the program had gone off
    track and that he would have more leverage within the government to improve
    the situation if there was no IMF financing. In late 1993, there was a
    marked shift in the political environment in Russia. Between October's
    attempted parliamentary rebellion and December's parliamentary elections,
    the government was briefly able to make some economic policy moves, bringing
    the Central Bank of Russia under executive control, reducing the budget
    deficit to 10 percent of GDP, breaking up the ruble currency zone, and
    abolishing most export quotas. However, the decline in the deficit was
    problematic: it was

    achieved by not paying wages and pension benefits to the Russian people. In
    the December 1993 parliamentary elections, the Russian public voted against
    the government “reformers” who, in turn, suffered heavy losses
    to the ultranationalists and Communists.

    1994 In March 1994, despite concerns regarding poor implementation of the
    first program, the IMF Board approved a new $1.5 billion Systemic
    Transformation Facility program to show support for the Russian government.
    According to an IMF official, the IMF Managing Director was under heavy
    pressure to approve the program. This agreement was reached with a Russian
    government that had changed significantly. The December 1993 Duma elections
    had been widely viewed as a sharp repudiation of reform efforts and of the
    federal government by the Russian people- Communists and ultranationalists
    who had gained seats in the December 1993 parliamentary elections were not
    supportive of the IMF's reform efforts. According to a Russian government
    official, a key reason for agreeing to go ahead with the Systemic
    Transformation Facility program, however, was the general concern at the
    time that without western support for Russia, there would be a heightened
    possibility of Communists taking

    over the government. The main goals for the second Systemic Transformation
    Facility were to reduce the monthly rate of inflation to 7 percent by the
    end of 1994 and to increase gross international reserves to approximately
    $10 billion by that

    time. To achieve these objectives, the program conditions called for reduced
    expansion of the money supply by the Central Bank of Russia and a
    significant decrease in the budget deficit. However, by the end of the year,
    the IMF staff viewed Russia's overall performance as significantly worse

    than programmed. End- year inflation was more than twice as high as
    targeted, the net international reserve target was missed by a significant
    margin, and fiscal policy began to move considerably off track starting
    midyear

    due to continued weak revenue collection and an increase in government
    expenditures. In addition, the Russian currency devalued by 20 percent
    against the U. S. dollar in one day in the October 1994 exchangerate crisis
    known as “Black Tuesday.” This crisis, however, had the positive
    effect of leading to greater Russian government resolve to achieve

    macroeconomic stabilization in 1995. 1995 The IMF Board approved a new 1995
    Stand- by Arrangement of $6.8 billion

    for Russia based on its assessment that the chances of implementing the
    agreed- upon program were better than they had been in the past. Russia had
    a more favorable political situation- the Russian President had

    replaced his economic policy team with more reform- minded players. At this
    point, the IMF changed from the limited conditionality and financing of the
    Systemic Transformation Facility to a stricter approach with considerably
    more financing under the Stand- by Arrangement. Not only

    were the conditions stricter, but also monitoring was also more frequent as
    Russia agreed to unprecedented monthly and quarterly IMF program reviews.

    The key objectives of the 1995 program were to bring the monthly rate of
    inflation down very quickly to a rate of 1 percent. Russia was to achieve
    this by limiting the growth of the central bank credit to the government to
    3 and restricting the government and Central Bank of Russia from extending
    credits or government loans to clear interenterprise arrears. 7 The
    government agreed to nearly halve the government deficit to 6 percent of
    GDP. The program also called for a continuation of the privatization

    program, including sales of public enterprises and large blocks of shares of
    those companies for cash. Privatization revenues were to be used to finance
    part of the budget deficit. During the 1995 Stand- by Arrangement, Russia's
    primary goal of reducing inflation was achieved, despite internal political
    pressures. The IMF reported that Russia was able for the first time

    to meet all of its macroeconomic targets, including its budget deficit
    target. 8 In addition, the Russian government passed the 1995 Budget Law
    that prevents the Central Bank of Russia from providing direct credit to the
    government. Also, in July 1995, in an attempt to stabilize market
    expectations, the IMF agreed to Russia's proposal to shift from a flexible
    to a banded exchange rate. 9 Although there were significant positive
    changes in Russia in 1995,

    underlying problems in the economy began to emerge. Although Russia met its
    1995 budget deficit targets, it was recognized at that time that the
    underlying budgetary situation was problematic and complicated by several
    factors. Russia met its budget deficit target by accumulating

    politically unpopular wage and pension arrears due to a shortfall in budget
    revenues. Although tax evasion was common, the shortfall in tax revenue
    collection in 1995 was also related to the lower inflation rate. In previous
    years, the nominal ruble revenue receipts were higher than expected because
    actual inflation was higher than projected. Expenditures were not indexed to
    inflation, and the budget deficit in ruble terms was reduced. With lower
    than projected inflation in 1995, the amount of nominal revenue receipts was
    less than projected, leading to a higher than anticipated ruble

    7 Interenterprise arrears occur when one enterprise does not pay another
    enterprise for goods or services. 8 A 1999 PriceWaterhouseCoopers audit
    shows that in 1995, Russia misreported required information pertaining to
    performance criteria to the IMF. The corrected figures show that Russia
    missed 2 targets during 1995.

    9 A “banded exchange rate” is 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.

    deficit. According to the IMF, Russia was able to meet its 1995 targets
    since the budget used outlays, not counting arrears, to measure the deficit.
    After the IMF recognized this trend, and as timely information on arrears
    became available, it changed the definition of budget expenditure so that
    arrears

    were also accounted for as part of the deficit, according to an IMF
    official. Inflation was reduced in part through the government's adoption of
    a banded exchange rate and in part by the government's pursuing supporting
    macroeconomic policies such as controlling the growth of the money

    supply and using government securities, called GKOs/ OFZs, yielding high
    interest rates, for nonmonetary financing of the budget deficit. Although
    the exchange rate was relatively stable during this period, some argue that
    the Russian government maintained an overvalued exchange rate. While such a
    rate may have been suitable for the overall balance of payments, it made
    domestically produced goods less competitive with imported goods for the
    Russian consumer. In hindsight, the exchange rate issue became

    increasingly important because it led to a decline in domestic industrial
    output. Toward the end of 1995, the Russian government faced serious
    pressures to raise revenue to pay increases in pensions and wage arrears and
    to finance reconstruction after the war in Chechnya in the runup to the 1995
    parliamentary elections. In October 1995, the Russian government began its
    loan- for- shares program, 10 which resulted in privatizing some of Russia's
    most lucrative metal and energy enterprises for significantly less revenue
    than their market value- about $1 billion was raised. The loans- for- shares

    program dramatically altered the Russian economy, placing wealth in the
    hands of a few politically well- connected businessmen, called
    “oligarchs.” 10 The 1995 loans- for- shares scheme auctioned
    ownership of some of Russia's most valuable companies (oil, metals,
    shipping) as collateral for hard currency loans and, in some cases, payment
    of some of the firms' tax arrears. Although the original plan called for
    open auctions, foreign investors were barred, while banks acting as the
    manager for a particular auction were allowed to submit bids -those managers
    won 2 of the 12 auctions. Suspicions of corruption were heightened by
    unexpectedly low bids: the loans yielded only 60- 90 percent of the market
    value of the shares -and in eight cases, the winning bids were within 6
    percent of the preestablished minimum bid. Although the scheme was presented
    as reversible, as of August 2000, the government had not repaid any of the
    loans nor had banks resold the shares they obtained. Donors, international
    financial institutions, Russian and

    U. S. officials, and academics we met with described the loans-for- shares
    scheme as highly corrupt.

    A Russian official we spoke with referred to the program as the
    “giving away of the family silver.” According to IMF documents,
    the IMF raised concerns about potential abuses of the loans- for- shares
    program when it was initially presented by the Russian government, but were
    assured that the government would exercise strong oversight to ensure the
    program operated fairly. The final scheme differed in important respects
    from the one discussed with the IMF, and was implemented in a nontransparent
    and collusive manner. IMF staff noted these concerns in their staff reports
    in the fall of 1995 prepared for board reviews of the program, but

    recommended that the reviews be completed, and that disbursements continue
    to be made. The board approved these recommendations. In light of concerns
    over the loans- for- shares operation, the 1996 IMF program

    included Russian government commitments to transparency and an evenhanded
    privatization methodology. Continued Emphasis on

    In March 1996, Russia and the IMF agreed to a 3- year Extended Fund
    Controlling Inflation and

    Facility arrangement that signified a shift to focusing more on structural
    Increased Stress on reforms than in previous programs. In the run up to the
    June presidential Structural Reforms: 1996 to elections, a number of
    developments caused Russia difficulties in meeting fiscal targets, and the
    IMF modified the targets. The 1997 program Mid- 1998 emphasized tax
    collection targets to try to address Russia's budget deficit problem. As for
    the 1998 program, it was affected by a worsening economic situation in
    Russia. 1996 In 1996, Russia and the IMF embarked on a 3- year, Extended
    Fund Facility arrangement of $10.1 billion that marked a strategy shift from
    a focus on

    stressing macroeconomic stability to one that now included greater emphasis
    on implementing structural reform measures. The conditions for each year of
    the 3- year program were negotiated at the beginning of that year. According
    to an IMF official, the move from a Stand- by Arrangement to an Extended
    Fund Facility was predicated on the IMF Board's belief that Russia had made
    progress in stabilization and should focus on needed

    structural reforms. This agreement was the second largest loan the IMF had
    ever extended to one of its members.

    At the time the 1996 program was being negotiated, serious budgetary
    imbalances existed. At the heart of the fiscal deficit problem was poor tax
    collection and government deficit spending. In addition, while many of the
    macroeconomic conditions negotiated in this program were similar to those of
    previous programs, meeting structural benchmarks played a much larger role
    in this arrangement. 11 Compared to earlier programs, the requirements for
    making structural reforms in the Extended Fund Facility were broader and
    more numerous than in previous programs, focusing on

    areas including strengthening the banking sector, privatization and
    restructuring of public enterprises, and energy sector taxation. At the same
    time, non- resident access to GKOs was officially permitted to provide an
    additional source of budgetary financing.

    For the first half of 1996, Russian presidential election concerns dominated
    western decision- making toward Russia. According to a Russian official,
    President Yeltsin's reelection over Communist opposition was important to
    the west and the IMF and, despite Russia's poor performance, the IMF could
    not delay or suspend the program. According to the IMF, fiscal discipline
    eroded as the government increased spending to pay back wage

    and pension arrears. The IMF staff visited Russia on a monthly basis and
    frequently modified targets. According to the IMF, these target
    modifications were made because of unexpected events, especially the

    large capital outflow in advance of the presidential elections that made
    those targets unattainable. Another factor that contributed to Russia's poor
    performance, according to an IMF official, was that in 1996, government
    leadership had changed and a less experienced team was attempting to
    implement the measures. As a result, while Russia had success in moderating
    inflation-the monthly average inflation rate for 1996 was 1. 7 percent- it
    achieved less success in meeting its fiscal goals. After Russia's repeated
    failures to address its budget deficit, the IMF included a cash revenue
    receipt target as one of its quantitative performance criteria. For 1996,
    however, the federal budget deficit registered 6.3 percent of GDP instead of
    the planned 4 percent. In addition, federal revenues fell from 10.5 percent
    of GDP in 1995 to only 9.5

    percent in 1996. Furthermore, although Russia had achieved limited
    structural reforms in instituting banking and tax- related fiscal measures
    and meeting many of the IMF macroeconomic conditions, progress in 11
    “Benchmarks” are points of reference against which progress may
    be monitored, but

    disbursements are generally not dependent upon meeting them.

    meeting IMF program goals generally fell short of its targets. IMF staff
    noted that, in hindsight, the structural work plan might have been too
    ambitious for Russia to manage, given Russia's limited institutional
    capacity.

    1997 Approval of the 1997 Extended Fund Facility program came after Russia
    implemented a series of “prior actions,” 12 all of which were
    structural measures. These included submission of the tax code and a new
    1997 spending plan to the Duma, 13 a crackdown on large tax debtors, and the
    announcement of transparent privatization measures. Russian tax revenues
    were targeted to increase, on average, to 8.3 percent of GDP in 1997,
    compared to 7 percent in 1996. Despite measures to improve tax collection,
    the lack of collection had become a perennial problem and, according to IMF
    officials, constant changes in government leadership and unclear federal
    government authority had contributed to the difficulties. In addition, an
    IMF official also stated that some government leaders fundamentally did not
    believe that tax collection was a priority and, at times, hindered efforts
    to collect

    taxes from large debtors. According to an IMF official, over time, there was
    extreme concern that tax revenues in cash were not being recovered in Russia
    and that “tax offsets”- allowing firms to pay in- kind rather
    than in cash- promoted a culture of barter and nonpayments. The business
    community in Russia argued that it's total tax burden, should it fully
    comply with the tax laws, would leave an enterprise with almost no after-
    tax profit. 14 However, according to an IMF document, a firm's total tax
    obligation was widely viewed as a “negotiated settlement”
    between a firm and its tax inspector.

    The inspectors exploited the ambiguities in the tax code to adjust a firm's
    assessment and extract bribes. As a result, IMF documents state that tax 12
    “Prior actions” are policy measures that the IMF views as key to
    the effectiveness of a country's program. They may have to be implemented
    before the IMF board approves an IMF arrangement or disbursement. Such
    actions are particularly important if severe macroeconomic imbalances exist
    or in cases where the record of policy implementation has been weak. 13 The
    Duma is the lower house of Russia's parliament. 14 IMF documents state that
    for a firm to give an employee a take- home wage of $1,000 each month, the
    firm's total cost after taxes would be around $1, 903.

    evasion, by concealing income or nonpayment, had become increasingly
    sophisticated.

    A stronger economic reform team; lower interest rates; and a large,
    transparent privatization venture increased Russian optimism despite fiscal
    imbalances and constant political conflicts between the President and the
    Duma. According to preliminary data, after 6 years of deep output declines
    the Russian economy had begun to turn around in 1997. This led to
    discussions in September 1997, in some circles, about the IMF's ending its

    assistance to Russia. In late 1997, however, the Asian financial crisis
    quickly spread to Russia, and Russia's economic recovery was halted. In
    November 1997, a combination of domestic factors, such as a continuing large
    budget deficit, and external factors such as the aftermath of the Asian
    financial crisis and a sharp decline in world oil prices, led to pressures
    on the exchange rate. To support the ruble exchange rate, Russian
    authorities intervened in both the government securities (GKO) market by
    raising interest rates and the foreign exchange market. According to an IMF

    official, the IMF advised the authorities to support the exchange rate by
    continuing to raise interest rates in an effort to stem capital outflows,
    rather than expending reserves. The rise in interest rates was insufficient
    to

    stem the capital outflows and, in 3 weeks, the Central Bank of Russia
    expended approximately 25 percent of its international reserves before
    raising interest rates more decisively, which succeeded in stabilizing the
    situation. The rise in interest rates, however, also had the effect of
    weakening the commercial banks because it reduced the value of their current
    GKO securities holdings. Despite these efforts, there was

    significant capital outflow at the end of 1997. According to IMF documents,
    at the end of 1997 the IMF and Russia created a fiscal action plan focused
    on tax collection and expenditure measures in order to bring the fiscal side
    of the program on track. On the revenue side, the plan included a measure to
    eliminate tax offsets, improve compliance by large tax debtors, and
    establish the right to seize and sell assets. Limits on energy consumption
    and administrative sanctions on

    officials who overspend their budgets were included on the expenditure side.
    By the end of 1997, however, IMF staff conceded that little had been
    accomplished on fiscal issues, particularly in the area of tax collection.
    Early 1998 The 1998 Extended Fund Facility program was negotiated against
    the backdrop of pressures in Russia's financial markets, weaknesses in oil
    prices, and unexpected changes in government leadership. Due to Russia's

    poor performance in 1997, the 1998 IMF structural reform program required
    that Russia take a wide range of measures as prior actions before the IMF
    board would consider a disbursement. Structural reforms that would have
    important macroeconomic impact over the medium term were designated
    benchmarks. Some of the structural measures were taken from the November
    1997 action plan and included (1) collecting taxes from large

    tax debtors, (2) identifying additional expenditure cuts needed to observe
    the program targets, and (3) establishing better monitoring and controls
    over expenditure.

    Despite a developing crisis in Russia and reversal of market confidence, the
    1998 Extended Fund Facility package was not agreed to until June 13, 1998.
    According to a Russian official, a change in government in March led to
    further discussions and renegotiations that delayed the process. On June

    30, 1998 Russia received its first financial disbursement in 6 months. Only
    a few weeks later, a massive financial crisis hit Russia. Support Government
    On July 20, 1998, in support of strengthened Russian government policies,
    Efforts to Deal with a the IMF agreed to lend Russia $11.2 billion in an
    interim package to ease Growing Financial Crisis:

    the financial crisis that threatened to collapse the country's fragile July-
    September 1998

    economy; the IMF immediately disbursed $4. 8 billion. In addition to IMF
    assistance, other sources announced additional financing bringing the entire
    package to over $22 billion. The announcement of the IMF's additional policy
    package had a positive, but very short- lived, effect on Russia's financial
    markets.

    Prior to the first disbursement of the July 20 interim package, IMF and
    Russian government officials agreed to seek implementation of several prior
    actions including tax revenue, government budgeting, and pension

    measures. While President Yeltsin issued presidential decrees to ensure the
    implementation of many of the measures, the Duma delayed passing personal
    income tax and pension legislation. As a result, the IMF reduced

    the amount of the first disbursement from $5.6 billion to $4.8 billion. The
    government also offered to investors a voluntary debt exchange of government
    securities (GKOs) for longer- term Eurobonds in July 1998. Only about $6.5
    billion of these government securities out of approximately $40 billion were
    exchanged. 15 The lack of significant response was interpreted as
    demonstrating that the markets had regained some confidence, according to a
    Russian government official. A Russian

    government official stated that overall, the package had temporarily
    increased investor confidence and the Russian government had believed that
    the crisis was temporarily halted.

    In mid- August, however, market sentiment changed. As a result, domestic
    investors who had lost confidence in the government's ability to undertake
    reform led the massive capital outflow by converting their rubles into hard
    currency. Foreign investors- who may have believed that Russia was too big
    or too much of a nuclear power to fail- followed. IMF officials told us
    that, in hindsight, they recognize that no package may have been large
    enough to overcome investor concerns regarding Russia's fiscal and

    balance- of- payments situation. In addition, the IMF reduced the initial
    tranche based on the Duma's unwillingness to take action on key legislation.
    Investor confidence in the government's ability to deliver on the overall
    package fell. During this time, the Russian President announced that the
    government would maintain the value of the ruble.

    15 Of this amount, $4. 5 billion was exchanged by Sberbank, a Russian
    government bank.

    On August 15, the Russian government and IMF officials met to negotiate
    strategies for handling the ensuing crisis. According to a former official
    of the Central Bank of Russia, the Russian government's major concerns at
    the time were related to the (1) government's inability to service its

    government securities (GKO) debt, (2) cost of maintaining the ruble band,
    and (3) foreign banking sector/ external debt. The Russian government
    initially suggested a plan that provided for unequal treatment of domestic
    and foreign investors; 16 however, the IMF advised against it. Instead, the
    Russian government decided unilaterally to restructure the government's
    ruble denominated securities (GKOs). In addition, it decided to widen the
    exchange rate band in order to allow the ruble to depreciate within the

    band and to declare a 90- day moratorium on external commercial debt for the
    banking sector. The Russian government informed the IMF of its plans.
    Although the government placed a 90- day moratorium on commercial/ banking
    external debt repayments, the remaining actions were more complicated. The
    government failed to clearly articulate a

    government securities (GKO) debt conversion scheme, adding to rising market
    uncertainty and upheaval after the Prime Minister was fired. Political
    factors at play within Russia during that period had a serious impact on the
    financial crisis. Although a new candidate for Prime Minister

    was nominated to replace the current Prime Minister, the Duma twice rejected
    his nomination. While the President and the Duma were engulfed in a
    political battle over the prime ministership, and despite heavy intervention
    by the Central Bank of Russia, the ruble continued to depreciate until the
    central bank finally allowed the ruble to float; the ruble then sharply
    devalued by over 40 percent in early September.

    During this time, Russia missed interest payments due on August 20 on
    sovereign (government) debt dating from the Soviet era. In addition, the
    Central Bank of Russia offered a line of credit to the government because
    the 1995 central bank law prevented direct financing to the government.

    Meanwhile, the central bank continued to provide liquidity to the banking 16
    The Central Bank of Russia viewed the key issue for residents as that
    government securities (GKOs) were the only liquid financial instrument
    available to banks and finance companies and the key issue for nonresidents
    as minimizing currency loss and maintaining the value of the investment.
    Thus, the central bank proposed that residents would receive 20- 25 percent
    cash, exchanging the remaining value into 1-, 2-, or 3- year ruble
    securities with 50, 40, and 30 percent interest rates. For nonresidents, the
    central bank proposed to

    convert ruble securities into dollar- denominated securities with low
    interest coupons and maturities of 5- 7 years.

    system while, at the same time, it was selling dollars for rubles to
    maintain the exchange rate band in the face of capital flight. Immediately
    after the financial crash and before the July 1999 program, IMF officials
    stated that their primary post- crisis strategy was to remain involved in
    Russia to stabilize the situation. The IMF provided Russia with

    assistance and advice and conducted assessments of the post- crisis
    situation in the country. In addition, the IMF was attempting to negotiate a
    new program. According to an IMF official, the new government's announced
    monetary policy was geared toward creating money to pay off budgetary
    arrears. However, the government modified its intended policies

    because of concerns about hyperinflation and exchange rate pressures.
    Continued Support of the On July 28, 1999, almost 1 year after the financial
    crisis in Russia, the IMF Government, with Limited

    approved a 17- month stand- by credit under a Stand- by Arrangement for
    Funding Provided:

    Russia for approximately $4.5 billion to support the government's 1999-
    1999- Present

    2000 economic program. The first- and only- disbursement of $640 million for
    this program was retained in Russia's account at the IMF to be used for
    servicing Russia's debt to the IMF. According to IMF documents, the IMF
    executive directors were willing to approve the 1999 program because they
    wanted to focus the program on fiscal improvements and

    structural reforms in light of the difficult, post- crisis economic
    situation in Russia. For the 1999 program, both structural and macroeconomic
    measures were included. The ruble exchange rate policy strategy shifted back
    to a flexible exchange rate policy allowing only limited intervention from
    the Russian authorities. New taxes, raising existing tax rates, as well as
    measures to improve tax compliance, were also stipulated. The IMF also
    required the Central Bank of Russia to undergo an investigation of its
    financial transactions with its subsidiaries due to allegations of the
    inappropriate

    use of funds. 17 The program targeted an annual inflation rate of 50 percent
    in 1999, compared to 84.5 percent in 1998. Net international reserves were
    to increase by $2.2 billion in 1999, with gross reserves to be at least $1.7
    billion during the last three- quarters of the year. Moreover, real GDP was
    assumed to decline by 2 percent in 1999. 17 See International Monetary Fund:
    Status of Efforts to Strengthen Safeguards Over Lending.

    The 1999 program was short lived. In December 1999, for the first time, the
    IMF, delayed a scheduled disbursement based on Russia's failure to meet
    structural benchmarks, while all macroeconomic requirements had been

    met. According to IMF staff, structural reform has become increasingly
    important in the task of achieving macroeconomic stabilization and, as a
    result, they held performance on these benchmarks to a higher standard. The
    IMF later stated that Russia had been required to meet several benchmarks
    related to financial audits of government agencies, tax collection, and
    legislation, which it had missed. Russia did not complete those structural
    benchmarks, and no further disbursements have been made. Although the IMF
    has not made any disbursements to Russia since July 1999, it has continued
    to remain engaged in Russia through policy dialogue,

    program discussions, technical assistance, and its usual surveillance
    activities for members. IMF and World Bank staff have worked together on
    technical assistance missions, primarily to assist Russia with banking
    sector reform and restructuring.

    Despite dire economic projections, however, in mid- 1999, the Russian
    economy began to experience economic growth, largely due to a stronger than
    expected increase in domestic production. The increase in domestic
    production has been led by higher demand for less expensive domestically
    produced goods, as the devalued ruble made imported goods relatively more
    expensive. In addition, oil prices had begun to rise from their historically
    low 1997 prices. Although the IMF states that Russia's future

    balance- of- payments outlook is uncertain, Russia has emerged from these
    changes in 1999 with a substantial balance- of- payments surplus, 18 a
    budget deficit of only 1.7 percent of GDP, and a real GDP growth rate of 3.2
    percent. For 2000, the IMF forecasts a balance- of- payments surplus

    exceeding 13 percent of GDP, a budget surplus of more than 4 percent of GDP,
    and real GDP growth of 7 percent. As of August 2000, the IMF was in the
    process of negotiating a new program with Russia. While the specifics of the
    program are unclear, IMF officials cited that the IMF program would seek
    structural reforms in three main areas: tax reform, banking reform, and
    barter and arrears. In addition, the IMF program will continue to focus its
    attention on macroeconomic stabilization and fiscal and monetary policy.

    18 The 1999 current account surplus was $25 billion, more than 11 percent of
    Russia's GDP.

    Lessons Learned Unlike donor agencies and some international institutions,
    the IMF has not formally identified institutional lessons learned from its
    years of involvement in Russia. However, through our review of IMF documents
    and discussions with IMF officials about their own experiences with Russia,
    some relevant lessons learned have surfaced.

    The IMF underestimated the complexity of Russia's transition process, in
    which the economic and political dimensions were intertwined. Russian
    political will is necessary for IMF programs to succeed. Russia's economic
    program is more likely to succeed if it is designed by

    the Russians themselves. The IMF's worldwide experience shows that economic
    programs are most likely to succeed when they are “owned” by the
    country implementing them. Achieving sustained, equitable growth in Russia
    will take a strengthening of macroeconomic stability and an intensification
    of sectoral structural reforms, including improving the social safety net.

    Additional Information on World Bank

    Appendi x II

    Assistance to Russia Background Since its inception in 1945, the World Bank
    has grown into a family of five related institutions known together as the
    World Bank Group. 1 In addition to the International Bank for Reconstruction
    and Development, the International Finance Corporation- the arm of the World
    Bank established in 1956 to finance private sector investments in developing
    countries- has also been active in Russia. 2 We did not specifically examine
    the

    International Finance Corporation's lending program for Russia in this
    review. 3 Rather, our work focused on assistance provided by the
    International Bank for Reconstruction and Development.

    Today, the World Bank is the largest source of market- based loans to
    developing countries and is a major catalyst for similar financing from
    other sources. 4 Its stated purpose is “to reduce poverty and improve
    living standards for people in the developing world.” The World Bank
    has 182 members and a 24- member Executive Board- the Bank's primary
    oversight and decision- making body. The board decides overall World Bank
    policies, reviews country assistance strategies, and approves specific
    project proposals presented by the President of the Bank. As the largest
    contributing member of the World Bank, the United States holds the greatest
    number of voting shares (16.5 percent) on the Bank's Executive

    1 The World Bank Group comprises the International Bank for Reconstruction
    and Development, the International Development Association, the
    International Finance Corporation, the Multilateral Investment Guarantee
    Agency, and the International Center for Settlement of Investment Disputes.

    2 The focus of the International Finance Corporation's efforts in Russia has
    been privatization and capital markets. From the time Russia became a member
    in 1993 through August 31, 2000, the Corporation has approved $458 million
    in financing for 36 projects in Russia: $276 million in loans, $154 million
    in equity, $11 million in quasi- equity, and $17 million in a risk- held
    portfolio. As of August 31, 2000, the Corporation's disbursed and
    outstanding portfolio in Russia stood at $256 million; $54 million in
    disbursements were pending.

    3 We also did not review the Multilateral Investment Guarantee Agency, which
    has an outstanding portfolio in Russia consisting of 10 contracts of
    guarantee for a total gross exposure of $269 million (net exposure of $127
    million). The Agency has facilitated a total of $1. 17 billion in foreign
    direct investment in Russia. Its portfolio is composed of manufacturing (47
    percent), financial (40 percent), and mining sectors (12 percent).

    4 The World Bank obtains most of its funds through the sale of bonds in
    international capital markets. Its lending terms are the average cost of
    borrowings plus a spread (typically less than 1 percent) for 12- to 20- year
    maturities, with a 3- to 5- year grace period for repayment on most loans.

    Board. 5 Russia, which has 2.8 percent of the voting shares, is also
    represented by an executive director on the Board.

    Overall Objectives and The World Bank's stated broad strategy for Russia has
    focused on three key

    Initial Assumptions objectives:

    Support Russia's transition to a market economy based on private sector
    initiative. Protect the poor and vulnerable groups. Develop and strengthen
    institutions.

    The main assumptions that guided the World Bank's program of assistance for
    Russia in the early years included the following: To shore up support for
    reform, the World Bank needed to move quickly. To have meaningful impact,
    the World Bank had to implement concurrent programs in several sectors
    because of Russia's size.

    To encourage change, Bank projects were to be implemented at the regional
    and local levels.

    The World Bank's To help Russia and other member countries with their
    development needs,

    Instruments the World Bank offers two basic types of lending instruments:

    1. Investment or project loans that support investment activities with a
    long- term focus of 5 to 10 years. Most of the World Bank's lending has
    historically been for investment projects such as building roads and
    bridges, providing basic services in health and education, and increasing
    agricultural production.

    2. Adjustment loans that provide quick- disbursing external financing to
    support policy and institutional reforms, generally with a short- term focus
    of 1- 3 years. These loans are often used to finance balance- of payments
    support while policy and institutional reforms are being implemented and to
    foster long- term economic growth.

    5 Japan (7. 9 percent), Germany (4. 5 percent), France and the United
    Kingdom (4. 3 percent each) follow the United States in the number of voting
    shares allocated to them.

    The World Bank also offers guarantees to cover risks that the private sector
    is not normally in a position to absorb or manage. The first such project
    guarantee for Russia was approved in May 1997. The guarantee, for $100
    million, protects commercial banks that lent funds to a joint international
    space launch vehicle venture. The guarantee provided protection against the
    possibility of nonpayment of the loan due to political risks in Russia.

    In addition to making loans and guarantees, the World Bank also provides
    nonlending services, including economic and sector work and technical
    assistance. Through the World Bank Institute 6 the World Bank also provides
    training programs, which over the years have included such topics as
    macroeconomic management, intergovernmental fiscal relations, and
    governance. 7 Finally, the World Bank administers trust funds that provide
    grants for specified purposes such as to cofinance some investment projects
    and provide technical assistance. For example, since 1994, more than

    $127 million in grant funds has been approved for Russia, including $83.3
    million from the Global Environment Facility and about $34 million from the
    Policy and Human Resources Development Fund financed by the Japanese
    government.

    Funding History for As of September 30, 2000, the World Bank had approved
    $12. 1 billion for 46

    Russia projects in Russia (see table 7).

    6 Formerly the Economic Development Institute, the external training arm of
    the Bank, that was merged in March 1999 with the Learning and Leadership
    Center, the internal training unit for World Bank staff. 7 The Institute has
    been involved in Russia since the beginning of the Bank's program,
    participating in the first World Bank mission to Russia. An office was
    established in Moscow as a separate operation in 1992 and staffed by locally
    hired employees, the only fully staffed unit of the Institute overseas.

    Table 7: Status of World Bank Loans for Russia, From Fiscal Year 1993
    Through September 2000 Loan

    Disbursed approved

    Date of Cancelled

    (in (in millions

    Board Date of loan

    (in millions millions of

    Fiscal year and project title of dollars)

    approval a effectiveness b of dollars)

    dollars) Closing date c 1993

    Rehabilitation I d $ 600.0 08/ 06/ 92 12/ 29/ 92 None $600.0 Closed 9/ 30/
    94 Employment services and social protection 70.0 11/ 24/ 92 09/ 09/ 94 14.
    4 55. 6 Closed 04/ 30/ 00 Privatization implementation assistance 90.0 12/
    17/ 92 12/ 07/ 93 3. 95 86. 1 Closed 6/ 30/ 99 Oil rehabilitation e 610.0
    06/ 17/ 93 11/ 15/ 93 196.0 414. 0 Closed 12/ 31/ 98

    1994

    Highway rehabilitation and maintenance 300.0 02/ 17/ 94 10/ 21/ 94 19. 2
    280.8 Closed 12/ 31/ 999 Financial institutions development e 200.0 05/ 19/
    94 07/ 28/ 95 59. 5 73. 0 12/ 31/ 02 Land reform implementation e 80.0 06/
    16/ 94 04/ 26/ 95 None 28. 7 10/ 31/ 00 Agriculture reform implementation e
    240.0 06/ 16/ 94 11/ 21/ 94 115.2 110. 4 12/ 31/ 00 Enterprise support 200.0
    06/ 21/ 94 07/ 31/ 95 None 39. 9 06/ 30/ 01 Oil rehabilitation II 500.0 06/
    29/ 94 05/ 25/ 95 153.5 346. 5 Closed 12/ 31/ 00

    1995

    Environmental management 110.0 11/ 08/ 94 08/ 30/ 95 None 49. 5 12/ 31/ 02
    Management and financial training 40.0 12/ 15/ 94 07/ 03/ 95 0. 01 40. 0
    Closed 11/ 1/ 99 Portfolio development 40.0 02/ 16/ 95 01/ 02/ 96 None 21. 2
    12/ 31/ 00 Housing e 400.00 03/ 07/ 95 07/ 27/ 95 30. 0 166.8 12/ 31/ 01 Tax
    administration modernization 16.8 03/ 09/ 95 07/ 03/ 95 None 12. 0 12/ 31/
    00 Emergency oil spill recovery and mitigation e 99.0 04/ 25/ 95 06/ 29/ 95
    None 82. 6 09/ 30/ 01 Urban transport e 329.0 05/ 16/ 95 03/ 28/ 96 55. 0
    245.9 06/ 30/ 01 Rehabilitation II d 600.0 06/ 06/ 95 09/ 28/ 95 None 600.0
    Closed 6/ 30/ 96

    1996

    Standards development 24.0 11/ 30/ 95 06/ 05/ 96 None 17. 7 12/ 31/ 00
    Bridge rehabilitation e 350.0 03/ 28/ 96 08/ 19/ 96 158.0 106. 6 12/ 31/ 01
    Community social infrastructure e 200.0 04/ 30/ 96 01/ 31/ 97 43. 5 40. 2
    12/ 31/ 02 Energy efficiency e 70.0 05/ 02/ 95 12/ 26/ 96 None 15. 2 06/ 30/
    01 Enterprise housing divestiture e 300.0 05/ 07/ 96 11/ 18/ 96 23. 2 30. 1
    12/ 31/ 03 Capital markets development 89.0 05/ 30/ 96 12/ 17/ 96 None 14. 6
    06/ 30/ 03 Medical equipment e 270.0 06/ 04/ 96 01/ 30/ 97 37. 7 196.1 06/
    30/ 01 Legal reform 58.0 06/ 21/ 96 09/ 09/ 96 None 20. 9 12/ 31/ 00 Coal
    sector adjustment loan d 500.0 06/ 27/ 96 07/ 02/ 96 None 500.0 Closed 12/
    31/ 97 Coal sector restructuring implementation

    25.0 06/ 27/ 96 07/ 25/ 96 None 13. 7 12/ 31// 01 assistance

    (Continued From Previous Page)

    Loan Disbursed

    approved Date of

    Cancelled (in

    (in millions Board

    Date of loan (in millions

    millions of Fiscal year and project title

    of dollars) approval a effectiveness b

    of dollars) dollars) Closing date c

    1997

    St. Petersburg center city rehabilitation e 31.0 03/ 27/ 97 04/ 13/ 98 None
    16. 7 12/ 31/ 01 Structural adjustment loan d 600.0 06/ 05/ 97 06/ 17/ 97
    None 600.0 Closed 3/ 31/ 98 Enterprise restructuring services f 85.0 06/ 05/
    97 N/ A 85. 0 None Lapsed 8/ 3/ 98 Education innovation e 71.0 06/ 05/ 97
    04/ 20/ 98 3.0 7. 9 12/ 31/ 03 Bureau of Economic Analysis 22.6 06/ 05/ 97
    12/ 18/ 97 None 13. 3 09/ 30/ 03 Electricity sector reform support 40.0 06/
    05/ 97 08/ 12/ 98 None None 12/ 31/ 01 Health reform pilot e 66.0 06/ 05/ 97
    04/ 17/ 98 None 13. 6 04/ 30/ 04 Sea Launch guarantee operation 100.0 05/
    29/ 97 05/ 12/ 98 N/ A N/ A 12/ 31/ 06 Social protection adjustment loan d
    800.0 06/ 25/ 97 06/ 26/ 97 None 800.0 Closed 9/ 30/ 00

    1998

    Social protection implementation 28.6 10/ 07/ 97 07/ 01/ 98 None 9.9 12/ 31/
    01 Second structural adjustment loan d 800.0 12/ 18/ 97 12/ 22/ 97 None
    800.0 Closed 12/ 31/ 98 Second coal sector adjustment loan d 800.0 12/ 18/
    97 12/ 19/ 97 None 650.0 03/ 31/ 01

    1999

    Third structural adjustment loan d 1,500.0 08/ 06/ 98 08/ 07/ 98 1, 100.0
    400. 0 Canceled 8/ 5/ 00 Second highway rehabilitation and

    400.0 12/ 22/ 98 N/ A 400.0 None Lapsed 9/ 27/ 99 maintenance f State
    statistical system 30.0 05/ 13/ 99 05/ 31/ 00 None 0.3 06/ 30/ 04

    2000

    Regional fiscal technical assistance 30.0 12/ 22/ 99 08/ 30/ 00 None 0.8 12/
    31/ 04 Sustainable forestry pilot 60.0 05/ 23/ 00 Not yet effective None
    None 09/ 30/ 04

    2001

    Coal and forestry guarantee facility 200.0 09/ 00 Not yet effective N/ A N/
    A Total $12,075.0 $2, 497.2 $7, 520.3

    Legend: N/ A= Not applicable a The date that the Executive Board voted to
    approve the loan and the Bank is authorized to sign the

    loan agreement. b The date when disbursements can be made under the loan.

    c The date when all financial activities related to the project stopped. d
    These are adjustment loans. e Projects that had sublending to regional
    entities, including governments and private sector companies in the regions.

    f These projects were allowed to lapse and were closed before they became
    effective. Source: World Bank.

    As shown in figure 16, a rapid buildup of the World Bank's portfolio
    occurred in the early years of the program. During fiscal years 1993 and
    1994, the World Bank approved 10 loans worth nearly $3 billion for Russia-
    the fastest increase in World Bank operations for a new member country.
    Annual approved lending to Russia has been in the $1.3 billion-$ 1.9

    billion range, except in fiscal year 2000, 8 when the World Bank approved
    only $90 million in new lending.

    Figure 16: Trends in Approved World Bank Lending and Disbursements to
    Russia, Fiscal Year 1993 - September 2000

    2.5 Dollars in billions

    2.0 1.5 1.0 0.5 0.0

    1993 1994 1995 1996 1997 1998 1999 2000 2001 Fiscal year

    Approved lending Disbursed

    Note: Fiscal Year 2001 reflects data for only one quarter, from July 1 to
    September 30, 2000. Source: World Bank.

    8 World Bank reporting generally goes on a fiscal year basis, starting from
    July 1 to June 30.

    Figure 17 illustrates the percentage of lending by type of instrument that
    the World Bank provided as of September 30, 2000.

    Figure 17: World Bank Lending to Russia, by Type of Instrument, Fiscal Year
    1993 Through September 2000.

    Investment loans Adjustment loans

    $5. 9 billion 49% 51% $6. 2 billion Source: World Bank.

    Of the $12.1 billion in total lending that has been approved for Russia, $9.
    3 billion has been committed as of September 30, 2000 9 -$ 3.1 billion for
    investment projects and $6.2 billion for adjustment loans. About $2 billion
    has been cancelled, and $485 million for two loans was allowed to lapse
    before the loans became effective. The two most recently approved loans for
    $260 million had not yet become effective. Figure 18 shows the status of

    the World Bank's lending activity to Russia as of September 30, 2000.

    Figure 18: Status of World Bank Approved Loans to Russia as of September
    2000

    17% Cancellation

    $2 billion Lapsed $485 million 4%

    2% Not yet effective

    $260 million 77%

    Committed $9. 3 billion Note: Approved lending since 1992 totals $12.1
    billion.

    Source: World Bank.

    The World Bank had disbursed about 62 percent of approved loans- or $7. 5
    billion- as of September 2000. This makes Russia among the World Bank's
    largest borrowers in terms of commitments and disbursements to date. About
    $2. 6 billion of the $7. 5 billion in disbursements was for investment
    projects, and $4.9 billion for adjustment loans. The relatively slow
    disbursements, particularly during 1993- 95, reflect the 9 Commitments in
    this case include fully disbursed and closed loans, as well as effective

    loans after cancellations. Newly approved but not effective loans are not
    included.

    implementation delays that were commonly experienced in a number of projects
    in the Russia portfolio. These disbursements spiked in 1997 and 1998,
    following intensive efforts to improve the portfolio, and then declined with
    the deterioration of the portfolio after the Russian financial crisis in
    1998 (see fig. 16).

    Strategy The evolution of the World Bank's program of assistance to Russia
    can be broken down into five stages: (1) the initial years between 1990 and
    1992,

    which primarily involved activities to prepare the World Bank for a program
    of lending to Russia; (2) the early years of engagement between 1993 and
    1994, which saw a rapid buildup of projects; (3) the transition years,
    between 1995 and 1996, when addressing poor project performance became a
    high priority, and the World Bank began to move toward adjustment lending;
    (4) the later years from 1997 to 1998, when the World

    Bank expanded its program of adjustment lending and the financial crisis
    hit; and (5) the post- financial crisis period, from 1999 to the present,
    when portfolio performance declined to its lowest levels as a result of the
    financial crisis and then rebounded following intensive efforts to improve
    it. Today, the World Bank is looking toward a long- term strategy to assist
    Russia address systemic weaknesses that remain.

    The Initial Years (1990- 92): Russia became a member of the World Bank on
    June 16, 1992, although

    Establishing the Russia World Bank efforts to prepare for Russia's
    membership began prior to that Program

    time. In July 1990, in response to a request made by the Group of Seven (G7)
    industrialized countries at its Houston Summit, the World Bank- along with
    the International Monetary Fund, the Organization for Economic Cooperation
    and Development, and the European Bank for Reconstruction

    and Development- participated in a joint study of the Soviet economy. 10 In
    the fall of 1991, the Executive Board established a trust fund to provide
    technical assistance grants to the former Soviet Union republics. The $30-
    million technical cooperation program funded work on economic issues and
    culminated in a February 1992 report to the board. The report proposed
    undertaking the work and specific measures necessary to enable

    the World Bank to provide assistance for Russia and the former Soviet
    republics soon after they joined the Bank. These studies provided the basis
    for developing the Bank's initial assistance strategy for Russia. The trust

    10 The report, entitled “A Study of the Soviet Economy,” was
    issued in February 1991.

    fund also enabled the World Bank to set up a resident mission in Moscow in
    the fall of 1991, and on December 1, 1991, the Bank established a new vice
    presidency for the Europe and Central Asia region. Shortly after Russia's
    independence at the end of 1991 and its membership in the World Bank in mid-
    1992, the Bank faced immediate pressure to organize itself and build its
    capacity to deliver a program of assistance as quickly as possible. On
    August 6, 1992, the first loan to Russia was approved- a $600- million
    rehabilitation loan that was essentially for balance- of- payments support.
    It was tied to the IMF's first credit tranche

    arrangement to support macroeconomic stabilization. However, the loan did
    not become effective for another 5 months. The rehabilitation loan was
    extended to finance imports needed to maintain production capacity and limit
    the decline in output while enterprises adjusted to the rapid devaluation of
    the ruble at the beginning of the transition. One objective of the loan was
    to initiate dialogue with the Russian government for longerterm reform and
    to build Russia's capacity to implement World Bank projects. Two other
    projects were approved later that year- an

    employment services and social protection loan for $70 million and a
    privatization implementation assistance loan for $90 million.

    The Early Years (1993- 94): As Russia's economic decline continued, pressure
    grew on the World Bank

    Seeking Areas for Rapid from western donors to quickly develop and implement
    projects. However, Buildup of the Portfolio

    according to World Bank documents and officials, project implementation
    early on was fraught with difficulties. To some extent, this was due to the
    lack of institutional capacity on the part of both the World Bank and the
    government of Russia. Specifically, World Bank staff had limited expertise
    and experience regarding the Russian economy and institutions, while
    government officials did not know how to deal with international donors and
    how to implement World Bank- financed projects. Bank officials told us that
    they were frustrated with “bureaucratic inertia” and the lack of
    highlevel

    engagement by their Russian counterparts. One World Bank official told us
    that their Russian counterparts changed roughly twice a year or about six
    times between 1992 and 1995, so it was often not clear who the World Bank
    was supposed to be working with. An additional impediment was the
    requirement early on that each individual project be approved by the Duma,
    11 which was time- consuming. For this reason, the effective dates for first
    two investment loans approved for Russia were substantially delayed- it took
    about 1 year for the privatization loan to go into effect and

    nearly 2 years for the employment services loan to take effect.

    Although it was clear to World Bank officials that they were expected to be
    engaged in Russia's transition to a market economy, the specific strategy
    for doing so was less obvious. According to these officials, it was
    difficult to strike the right balance between the World Bank's having a
    development

    impact and the financial risks that the World Bank could prudently assume,
    as well as what the proper mix, composition, and funding level of projects
    should be. The situation early on was chaotic, and a number of obstacles
    stood in the way of systematically implementing projects. In the end, the
    World Bank decided to implement concurrent projects, including operations at
    the regional and local level. This approach was driven, in part, by the
    belief that, given Russia's size, the World Bank needed broad

    involvement in order to have meaningful impact and a credible voice in the
    reform process. It was also borne out of the frustrations that World Bank
    officials faced as they tried to work with their Russian counterparts.

    According to World Bank officials, the Bank's initial approach was dictated,
    to a large extent, by areas where the doors for World Bank involvement were
    open. Between 1993 and 1994, the World Bank approved about $2.3 billion for
    nine projects in several sectors ranging from energy and infrastructure to
    privatization, agriculture, and institutional development. Although social
    protection 12 was an explicit focus of the World Bank's initial strategy for
    Russia, the social sector accounted for a small fraction

    of actual projects. However, by the end of 1994, only $655 million, or 23
    percent, of the $2.9 billion approved for Russia had been disbursed due to
    start- up delays in project implementation. About 90 percent of these
    disbursements represented the $600- million rehabilitation loan; only $56
    million were for investment projects. World Bank officials stated that a
    major factor that impeded their effectiveness during the early years was the
    Bank's limited presence and role in Moscow. Although the World Bank had a
    resident mission in Moscow since 1991, up until 1997, the Bank's operations
    in Russia, including project oversight functions, were primarily managed by
    staff at its Washington headquarters.

    11 The Law on External Borrowing was approved in 1995. It clarified the
    procedures for obtaining parliamentary authority for borrowing from the
    World Bank. While the Duma still authorizes an overall ceiling for
    borrowing, responsibility for approving the World Bank's lending program and
    reviewing the country assistance strategy has been placed with the
    Interministerial Commission for Cooperation with International Financial and
    Economic Institutions and the G- 7.

    12 The World Bank defines “social protection” as a collection of
    measures to improve or protect human capital, including labor market
    interventions, unemployment or old- age insurance, and income support.

    The Transition Years In June 1995, the World Bank approved the second
    adjustment loan of (1995- 96): Addressing

    $600 million. 13 According to World Bank officials, the Bank was unwilling
    to Project Effectiveness and

    make additional adjustment loans at the time because it did not think that
    Reassessing the Strategy there was sufficient consensus in Russia to carry
    out and sustain reforms, and it believed that large- scale lending would
    leave Russia with debt but little reform to show for it. Thus, between 1995
    and 1996, the World Bank

    approved $2.3 billion for 14 investment projects in numerous sectors
    including transportation, energy, housing, public sector management, and the
    environment. Yet, even as new loans were being approved, delays in actual
    project implementation continued. By the end of 1995, less than 10 percent
    of lending approved for investment projects, had been disbursed. Improving
    the World Bank's Russia portfolio, especially the implementation of existing
    projects, became a priority of the World Bank beginning in late 1995. By the
    end of 1996, $875 million, approximately 19 percent of the $4. 7 billion
    approved for investment projects, had been disbursed.

    In 1996- following the presidential elections in July of that year- the
    World Bank began to shift the focus of the Bank's program and the lending
    instruments it employed. In response to encouraging political and economic
    developments, and the poor performance of many of the

    investment projects underway, the World Bank began to move in 1996 toward
    large, quick- disbursing adjustment loans. According to World Bank
    officials, it was becoming increasingly evident that investment loans-
    including those that funded regional projects such as urban transport,
    bridge rehabilitation, housing, and medical equipment- were not

    addressing systemic structural issues. Furthermore, the lack of legal
    frameworks made it difficult to manage projects. The Later Years (1997- 98):
    To support policy reform and institutional development, the World Bank
    Shifting the Strategic Focus

    extended adjustment lending to Russia in some key areas. Specifically, it to
    Federal Structural approved (1) coal sector restructuring for $1. 3 billion
    between 1996 and Reform

    1998, (2) social protection adjustment for $800 million in 1997, and (3)
    structural adjustment for $2.9 billion between 1997 and 1999. With these
    loans, the World Bank's emphasis shifted away from financing regional
    activities to providing support to the federal government with fewer but
    larger adjustment loans.

    13 The second rehabilitation loan was fully disbursed by October 1995.

    By the spring of 1998, there had been substantial improvement in the
    performance of the World Bank's Russia portfolio. According to World Bank
    officials, the improvement achieved in project implementation was due to the
    improved and higher- level dialogue with Russian officials. In

    addition, World Bank officials told us that the relocation of their work to
    the field in 1997 14 -including elevating the Bank's resident representative
    to the position of country director- increased their effectiveness. It has

    enhanced their ability to establish a high- level dialogue with Russian
    officials and work more closely with them to improve the implementation of
    projects. However, much of the progress they had made was wiped out when the
    financial crisis hit in August 1998. Potential World Bank financing of $6
    billion was part of a bailout package of more than $22 billion

    announced by the World Bank, IMF, and the Russian government in July 1998,
    also including financing by the Japanese government. This included funds to
    be distributed through 1999, under a new third structural adjustment loan.
    However, World Bank disbursements over this period were far less than this
    amount with only $1. 5 billion actually committed before the financial
    crisis and only $400 million eventually disbursed. Post- Financial Crisis

    The Russian financial crisis in August 1998 caused disruptions in project
    (1999- Present): Focusing on

    implementation and a deterioration in the Bank's Russia portfolio rating. In
    Long- term Efforts a review of the Bank's country portfolio performance in
    July 1999, only 33 percent of Russia's portfolio was rated
    “satisfactory”- down from 74 percent prior to the crisis. The
    remaining two- thirds of the portfolio (67 percent) were actual problem
    projects and were rated “unsatisfactory.” Thus, the Russia
    portfolio performance became the Bank's weakest for any

    country with a significant portfolio. Three of the largest operations that
    were considered “at risk” 15 were adjustment loans for Russia,
    and half of the Bank's largest investment projects at risk were Russia
    projects. The World Bank has decided that, in order to qualify for any new
    investment lending, the Russian project portfolio must demonstrate
    satisfactory progress in meeting specified performance targets.
    Specifically, at a review of Russia's portfolio in July 1999, the World Bank
    and the government of Russia agreed to increase the share of satisfactory
    projects to 70 percent by 14 As part of the World Bank's “Strategic
    Compact” initiative in 1997, the World Bank reorganized and
    decentralized many of its headquarters staff to the field. In addition,

    responsibility for the day- to- day supervision of project and management
    activities were largely delegated to the field.

    15 “At risk” includes actual and potential problem projects.

    January 2000, 80 percent by January 2001, and 85 percent by June 2001.
    According to World Bank officials, concerted efforts to address problem
    loans in the past year are showing encouraging results with 73 percent of

    the projects rated satisfactory in June 2000 and further improvement
    reported since then. See figure 19 for a review of Russia's portfolio
    performance from 1993 through June 2000.

    Figure 19: Russia's World Bank Portfolio Performance, 1994 to June 2000

    Percent of projects 90 80 70 60 50 40 30 20 10

    0 1994 1995 1996 1997 1998 1999 2000

    Fiscal year

    Source: World Bank.

    As of June 30, 2000, Russia's projects and commitments at risk- despite
    marked improvement in overall project performance- were higher than the
    average for all World Bank projects worldwide and regionwide for Europe and
    Central Asia countries. See figure 20 for a comparison of Russia's World
    Bank projects and commitments considered to be at risk

    and those of the World Bank and the region overall.

    Figure 20: Russia's World Bank Projects and Commitments Considered to Be at
    Risk, June 2000 .

    100 Percent at risk

    90 80 70 60 50 40 30 20 10

    0 Russia Region Bank

    Projects at risk Commitments at risk

    Source: World Bank.

    On a project basis, few evaluations have been conducted because of the
    limited number of projects that have been completed. 16 World Bank staff
    prepare an implementation completion report after a project closes, and as

    of September 30, 2000, reports for 9 out of the 15 projects that have been
    16 As of the end of September 2000, out of the 46 loans approved for Russia,
    12 had been fully disbursed and closed; 2 projects had lapsed; and 1 has
    recently been canceled. There are presently 31 active projects in the
    portfolio.

    completed, had been issued. In addition, the Bank's Operations Evaluation
    Department routinely conducts independent assessments of individual projects
    upon their completion and periodically conducts country assistance
    evaluations. According to World Bank officials, that department is expected
    to complete audits of several completed projects within several months, and
    is now undertaking a country assistance evaluation of the Russia program. In
    addition, in the spring of 1999, Bank staff conducted an internal
    retrospective review of the Bank's Russia program at the Board's request, 17
    and according to Bank officials, a number of conclusions from that review
    are reflected in the December 1999 country assistance strategy.

    Current Status of the Today, the World Bank's program of assistance to
    Russia is at a crossroads.

    World Bank's Russia The Bank's overarching objectives- promoting structural
    reform,

    protecting the poor, and developing institutions in Russia- are expected to
    Program remain largely the same. However, the strategy that the World Bank
    uses to implement its program of assistance for Russia- in terms of the type
    of lending instruments, the level of funding, and the mix and composition
    projects- will need to be revisited in light of changing conditions,
    according to World Bank officials.

    World Bank officials have told us that the strategy for their involvement in
    Russia must be long term. Yet, at a time when some donors are looking to the
    World Bank to take the lead in the structural reforms that must take place
    in Russia, more modest levels of lending are anticipated. During the past
    fiscal year, which ended June 30, 2000, the World Bank approved a program of
    lending that was its lowest ever-$ 90 million for two projects, just a
    fraction of the Bank's lending program in years past. 18 While this decision
    appears to signal a dramatic shift in the Bank's strategy, World

    Bank officials pointed out that this level of funding is consistent with the
    reduced lending levels that the latest country assistance strategy calls
    for. Moreover, they believe that the Russians, in the years ahead, will look
    to the World Bank not so much for financial support but for the policy
    advice, analytical advice, and assistance that the Bank can provide as the
    country moves further with transition.

    17 This paper was not formally presented to the Board and therefore was not
    available to GAO. 18 Since then, a coal and forestry guarantee facility for
    $200 million has also been approved. Because it was approved in September
    2000, this loan is reflected in fiscal year 2001 data.

    Lessons Learned The World Bank routinely documents and disseminates
    “lessons learned” from its past work, operations, and
    strategies. The following discussion highlights some of the themes from key
    lessons learned during the course of the Bank's experience with its Russia
    operations over the years.

    Ownership is key to success. Numerous World Bank officials emphasized that
    Russian government commitment to and ownership of reform is needed to
    achieve success. For instance, a World Bank evaluation of the structural
    adjustment loans it provided to Russia in 1997 and 1998 indicated that the
    implementation of reforms was

    “complicated by extremely strained political relations- among and
    between the President, the Prime Minister, the Federation Council, the State
    Duma, and regional governments.” As a result, implementation of the
    reforms in some areas proved more difficult than anticipated. Consensus-
    building efforts are needed. The lack of consensus building

    around World Bank- financed programs made early reform efforts difficult to
    implement. In addition, the government must reach out to the public and be
    more open and transparent in explaining its programs to the public. For
    example, the coal sector adjustment loans- cited by World Bank and
    government officials as relatively successful- enjoyed broad support from
    the central government. High subsidies, somewhere in the order of $2 billion
    to $3 billion per year, provided the incentive for the government's
    commitment to restructure the coal sector. While the road to reform was not
    easy, with numerous vested interests at stake, ownership improved as even
    initially reluctant parties began to see the benefits of coal restructuring.

    In contrast, the World Bank's experience in the social sector is generally
    viewed as somewhat less successful due to little government ownership and
    cooperation. The motivation to borrow money to address this important area
    did not come about until 1996 with the promise of an

    adjustment loan. But even with a substantial amount on the table, according
    to World Bank officials, progress on social reform has been slow, albeit
    steady.

    Financial support provides limited leverage. World Bank officials we spoke
    with generally agree that money itself is not the most important factor in
    assisting a transition process. For instance, while financial

    support was an important incentive to move along on reforms in the coal
    sector and on social protection, it did not seem to make much of a
    difference on effecting reforms under the third structural adjustment

    loan, which was stalled last year after the first disbursement. Nonetheless,
    as was the case with the first rehabilitation loan, World Bank officials
    told us that financial assistance helps open doors. For example, in the
    second half of the 1990s, the World Bank put more money on the table
    directly to support core ministries such as the ministries of finance and
    economy. A senior World Bank official said this was one of the factors that
    facilitated a closer relationship with these ministries. Moreover, the
    financial investment lends credibility to the Bank's efforts and advice. For
    example, the intensive dialogue that took place to turn around the Russian
    portfolio in 1999 made it clear that the World Bank was serious about not
    making disbursements until project performance improved. Furthermore, in
    some cases, World Bank

    financing attracts additional financing from other donors and lending
    institutions, thereby increasing the Bank's leverage. For example, on the
    second coal sector restructuring adjustment loan, the Japan Bank for
    International Cooperation provided $800 million in cofinancing, thus having
    the effect of doubling the World Bank loan.

    Long- term World Bank involvement will be necessary. World Bank officials
    now acknowledge that expectations for rapid results were unrealistic and
    that its long- term involvement will be necessary. According to a World Bank
    assessment, the devastating impact the 1998 financial crisis had on Russia
    showed that not enough progress had been made in addressing major structural
    problems such as the issue of corruption, the lack of fiscal and financial
    discipline, and the

    deterioration of the social safety net. Further progress in building
    institutional capacities also needs to be made, and addressing these and
    other systemic weaknesses will take years. As a result, the World Bank will
    need to plan on more modest levels of financial support in the years ahead
    in order to ensure that Russia remains well within its lending ceiling. 19
    Finally, a number of people we met with suggested that what needs to

    happen is a “generational change.” A former senior World Bank
    official stated that transformation must go beyond the transfer of
    knowledge, technical know- how, and institutional development- it will
    require Russians believing and behaving entirely differently than they have
    in the past. Not only must old systems of control be abolished, but also

    19 The lending ceiling is determined by the Executive Board annually. For
    the fiscal year that ended June 30, 2000, the limit was set at $13.5 billion
    for any single country. The limit for this fiscal year, which ends June 30,
    2001, remains the same.

    new institutions must be built and the legal and regulatory frameworks
    established- all of which take time. World Bank lending needs to be more
    selective. The latest country assistance strategy for Russia emphasizes the
    need to be more selective

    in the programs that the World Bank supports in the near future,
    particularly in light of an anticipated reduction in new lending. This means
    focusing on projects that seek to achieve the Bank's overall objectives-
    structural reform, social protection, and institution building. For example,
    in an effort to develop a positive investment climate, the strategy calls
    for reforms in financial management and

    administration to improve the performance of public institutions such as the
    ministries of finance and taxation. The U. S. Executive Director has also
    advocated public sector reform as a way to fight corruption- viewed by many
    as a symptom of weak institutions and lack of transparency- and for an
    independent judiciary and the rule of law.

    Other Lessons The World Bank has drawn a number of lessons learned from its
    experience in working with the regions. The 1999 country assistance strategy
    states that support for regional projects may have been premature for
    several reasons:

    Implementation capacity, especially fiscal management, is still weak.
    Results are localized and do not address systemic problems. Supervision of
    projects is resource intensive and costly.

    We note that a number of the local government officials in Novgorod and
    Samara- the two regions we visited- expressed interest in increased lending
    from the World Bank despite their complaints about the lengthy delays they
    experienced in implementing Bank- financed projects.

    Regarding adjustment loans, the World Bank has learned that those loans need
    to be disbursed in association with significant

    structural reform; loan conditions should be based not on interim steps but
    on outcomes,

    so that disbursements, for instance, would be based on legislation enacted
    by, rather than simply submitted to, the Duma; and multiple disbursements
    for loans seem to be effective in certain

    situations, such as in the second coal sector adjustment loan, where
    splitting the loan into “bite- size chunks” enabled the World
    Bank to be engaged in the sector longer and resulted in better compliance.

    Several Russian officials we met with expressed a preference for
    sectorspecific adjustment loans over structural adjustment loans. They felt
    that the sector adjustment loans are more focused and, as such, they are
    easier to manage and implement, and the results are more measurable.

    Additional Information on European Bank for Reconstruction and Development
    Programs in

    Appendi x I II

    Russia Background In May 1990, representatives from 40 countries, including
    the United States and most European nations, signed an agreement creating
    the European Bank for Reconstruction and Development. 1 When the EBRD began
    its operations in April 1991, it was specifically tasked with assisting
    formerly communist nations with their transition to market economies, with a
    particular focus on promoting the development of the private sector. In
    developing strategies, the EBRD must balance several competing aspects of
    its mandate. The charter requires the EBRD to devote at least 60 percent

    of its total portfolio to financing private sector projects and forbids
    concessional (below market interest rate) loans or grants. The EBRD must
    also follow sound banking principles in its investment decisions, and
    achieve profitability. At the same time, the EBRD must be willing to take
    risks and make sure its projects further the recipient country's transition
    efforts. The EBRD frequently works in concert with private sector investors
    and lenders to help share the costs of projects but ensure that its efforts
    do not crowd private sources of financing out of the market.

    Overall Objectives and At the broadest level, the EBRD is supposed to
    “foster the transition Initial Assumptions

    towards open market- oriented economies and to promote private and
    entrepreneurial initiative in... countries committed to and applying the
    principles of multiparty democracy, pluralism and market economics.”
    The EBRD's focus on the private sector is supposed to complement the

    International Monetary Fund's work on macroeconomic stabilization and the
    World Bank's sectoral work.

    Throughout its operations in Russia, the EBRD's strategy has been guided by
    a relatively stable set of assumptions:

    The ability to achieve reform depends on the desire of the Russians to
    change. Since most of the EBRD's financing in Russia goes to the private
    sector, the EBRD relies heavily on the recipient's government to establish
    and enforce the proper legislation necessary for an enabling

    environment. It must also rely on the recipients of its financing to make
    promised changes. The EBRD recognized that it could not expect to have a
    major influence on national- level reform efforts. While its resources can
    play a 1 The United States has 10. 3 percent of the voting share at the
    EBRD. Institutions and member countries of the European Union have a
    combined voting share of 58.0 percent.

    significant role for an individual project or company, they are small
    relative to the size of Russia and its transition needs. Consequently,
    assistance needs to be focused on particular sectors or regions to ensure
    transition impact beyond the individual project. Since 1993, the EBRD has
    assumed that it will have greater impact working directly with the private
    sector in reform- minded regions. Like

    other donors, the EBRD has targeted its work in a number of regions. The
    EBRD has also assumed that it can influence the process of institution
    building in Russia by encouraging or requiring recipients to

    meet western financial standards. Indeed, institution building has been an
    explicit goal of its strategy since 1992. EBRD financing can directly
    support institution building or provide an inducement to convince existing
    institutions to change.

    The EBRD's The EBRD has primarily relied on four instruments to achieve its
    goals in Russia: direct project lending, equity investments, financing
    through Instruments

    intermediaries, and technical cooperation funds. 2 Project lending: The EBRD
    loans money to mainly private sector firms at market interest rates. 3
    Although the terms can vary depending on the project, the EBRD typically
    requires repayment within 5- 10 years. About

    three- quarters of the EBRD's total commitments for projects in Russia to
    date have been through loans. For example, in May 2000, the EBRD approved a
    $150 million loan to Lukoil, a large Russian oil company. Lukoil will use
    the funds for export- related payments, crude- oil production, and

    oil processing. As a condition for receiving EBRD financing, Lukoil agreed
    to increase its financial transparency, implement an initial public offering
    of its shares, and improve its environmental standards.

    Equity investments: The EBRD also buys noncontrolling stakes in firms. Its
    charter generally prohibits the EBRD from taking a controlling interest,
    although in some cases the EBRD will work with other western investors to
    obtain a majority interest and thus have an important voice in how the firm
    is organized and run. The EBRD sees itself as a medium- term investor and

    generally plans to hold equity investments for 5- 6 years before selling and
    2 The EBRD has also provided a small number of guarantees for projects in
    Russia. 3 Actual rates for private sector projects vary depending on the
    EBRD's assessment of project risk.

    hopefully turning a profit. For example, in July 1996, the EBRD approved a
    $30 million investment in the Russian Black Earth Regional Venture Fund.
    This fund invests in Russian companies in southwestern Russia to help them
    modernize and restructure their operations.

    Financing through intermediaries: Many of the EBRD's lending and finance
    projects are implemented via Russian financial intermediaries. The EBRD
    believes this not only contributes to the primary goal of developing

    the private sector in Russia, but it also promotes the development of
    Russian financial institutions. Some of the EBRD's most well- known
    projects, such as the Russia Small Business Fund and Regional Venture Funds,
    are implemented on the ground by such intermediaries as contractors, private
    firms, and Russian financial institutions. For example,

    in July 1999, the EBRD invested $6 million in a bank in which it was the
    principal shareholder, reorganized it into a bank that finances micro- and
    small enterprises, then provided it a $30 million loan. Since then, the EBRD
    has used this bank to lend to small- and medium- sized enterprises through
    its Russia Small Business Fund.

    Technical cooperation funds: The EBRD has provided a significant amount of
    technical assistance to Russia- nearly $300 million for 425 projects from
    1991 to1999. Most of this assistance supports preparing projects and
    improving project implementation. About 95 percent of the EBRD's technical
    assistance efforts are financed through reimbursement by clients

    or grants from other donors, including the European Union's Technical
    Assistance for the Commonwealth of Independent States (TACIS) program. For
    example, in 1992, the EBRD approved a $7- million technical assistance
    program, financed entirely with funds from TACIS, to provide advice to the
    Russian government on the implementation of its mass privatization program.
    The EBRD also pursues its objectives in Russia through methods not directly
    tied to specific projects. For example, recipients have to comply with EBRD
    requirements about transparency or corporate governance to receive funding,
    a tool the EBRD frequently uses to advance transition

    efforts. The EBRD also provides advice to government officials at the
    national and regional level. And since the financial crash of 1998, the EBRD
    has aggressively sought legal channels to obtain repayments from defaulting
    loan recipients. EBRD officials told us they believe this approach protects
    their interests, forces the Russian judicial system to operate, and sheds
    possibly unwelcome light on its activities if cases are

    not handled fairly.

    Funding History for Since 1991, the EBRD has approved $5.5 billion worth of
    projects for

    Russia, of which $4. 4 billion were eventually signed. 4 Roughly half of the
    Russia

    signed projects-$ 2.2 billion- has been disbursed, and about $600 million
    has been repaid as of May 2000. Most of the EBRD's projects with Russia were
    signed in the mid- 1990s, with new activity falling off dramatically since
    the 1998 financial crisis (see fig. 21).

    4 After the EBRD's executive board approves financing for a project, EBRD
    staff negotiate the specific terms of the operation with the Russian
    recipient. When agreement is reached on these terms, the project is signed,
    and disbursements can begin. In some instances, the amount of financing
    changes between approval and signature. In other instances, approved
    projects are not signed.

    Figure 21: Annual EBRD 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.

    More than half of the EBRD's signed projects to date have been for the
    financial and energy sectors, with transportation and food production also
    getting significant amounts. 5 However, the EBRD has financed projects in
    over two dozen sectors across the Russian economy (see fig. 22).

    5 EBRD activities in the food sector primarily represent investments in and
    loans to firms that manufacture food or drink products.

    Figure 22: EBRD Lending and Equity Investment for Signed Projects by Sector
    in Russia, 1991- 2000

    Others 16%

    Finance Manufacturing

    36% 7%

    Food 9%

    Transport 12%

    Energy 20%

    Source: EBRD. Note: “Others” include mining, property, and
    public administration.

    Strategy The EBRD's strategy for providing assistance to Russia has changed
    over time. Its initial approach stressed engagement across several sectors,
    relying heavily on technical assistance due to the lack of viable projects.
    Later, the EBRD narrowed its primary focus to emphasize the financial
    sector, especially as it pertains to supporting small- and medium- sized

    enterprise development, and to provide targeted support for the
    restructuring efforts of large firms, especially in the oil and gas sectors.

    Early EBRD Efforts for When the EBRD began its operations in April 1991, the
    Soviet Union was Russia Focused on one of its charter members. However, the
    charter allowed the EBRD to Technical Assistance:

    provide no more than $300 million worth of assistance to the Soviet Union
    over 4 years- an amount equal to the initial Soviet capital contribution. 6
    As 1991- 93 it turned out, there were very few viable business opportunities
    in Russia at that time, so 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. It also

    approved two small loans in late 1991. By the end of 1991, the EBRD had
    approved $17.5 million in financing and spent about $8. 3 million on
    technical assistance for the Soviet Union.

    After the formal dissolution of the Soviet Union in December 1991, Russia
    became a member of the EBRD in March 1992. The EBRD began operations in
    Russia facing significant challenges. The EBRD was a new organization
    starting programs in a new country in the midst of rapid and dramatic
    political and economic changes. With no road map, no historical precedents,
    and no institutional history or experience to fall back on, the

    EBRD found that its early 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 ambitious objectives. Much of the EBRD's early attention was focused
    on identifying potential projects, trying to find financing partners;

    and providing technical assistance, most significantly in the area of
    privatization. By the end of 1993, the EBRD had spent more than $68 million
    for 122 technical assistance projects, largely in the area of private sector
    development, and signed 7 loans and 3 equity investments worth $362 million,
    with about two- thirds of these funds going for the oil and gas sectors.

    Program Development and The EBRD had not been set up to provide technical
    assistance, and its own Growth: July 1993- early reports questioned the
    wisdom of devoting so much energy to this area. By

    1998 late 1993, as it began to identify and invest in a growing number of
    projects,

    its overall approach to assistance to Russia changed. The EBRD shifted its
    emphasis from technical assistance, tried to narrow its focus to fewer
    sectors, and developed more realistic goals to avoid making promises to the
    Russians that could not be fulfilled.

    6 The United States had resisted allowing the Soviet Union to join the EBRD,
    on the grounds that the Soviet Union was not part of Europe. However, the
    European countries believed it was important to include the Soviet Union,
    and their position prevailed. As a compromise, the United States insisted on
    including limitations on the amount of assistance the Soviet Union could
    receive from the EBRD.

    The foundation for much of the EBRD's new approach in Russia was laid at the
    G- 7 Tokyo Summit in July 1993. Coming into the meeting, the EBRD hoped to
    play a central role in Russia's ongoing privatization efforts, small- and
    medium- sized enterprise development, nuclear energy safety, and oil and gas
    sector support. Several of the EBRD's major programs for Russia were
    launched at the Tokyo Summit. For example, the EBRD felt it had a

    comparative advantage in finance and banking and attempted to directly shore
    up the Russian financial sector by providing advice and equipment through
    the Financial Institutions Development Project. 7 The EBRD also pursued the
    dual objectives of small- and medium- sized enterprise development and
    institution building in the banking sector in several projects, most notably
    the Russia Small Business Fund. Through this program, the EBRD provided
    funds to Russian banks, which then lent them to small- and medium- sized
    enterprises. According to EBRD, Treasury, and

    State Department officials, Russian banks learned how to lend to small
    businesses, small businesses learned how to organize their operations and
    pay loans, and the small- and medium- sized enterprise sector began to grow.
    The EBRD also provided financing for some larger firms such as

    Kamaz and GAZ (major Russian truck manufacturers) and Chernogoreft (oil
    production) to improve production and the company's environmental programs.
    In addition, the EBRD made a conscious effort to cluster its projects in
    regions such as St. Petersburg, Vladivostok, and Samara that were more
    reform minded or more open to investment. In general, the EBRD believed

    it could have a better impact by supporting three good projects in one
    region than by spreading three good projects across three different regions.
    This approach required the EBRD to learn more about the various regions and
    led to greater deployment of resources and authority in the field.

    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 viewed
    this as an inexpensive way to have greater impact at the smaller end of the
    economic scale. Almost as important was the belief that use of
    intermediaries also created opportunities for Russian institutions to learn

    how to operate and flourish in a market economy. This institution- building
    aspect of the program was central to the EBRD's strategy for having an
    impact on the transition to a market economy.

    7 The EBRD and the World Bank jointly implemented this project.

    EBRD operations during this period were characterized by rapid growth. For
    example, the EBRD added 25 projects to its portfolio in Russia worth nearly
    $1 billion in 1996. At the same time, the growing reliance on financial
    intermediaries meant placing a lot of trust in Russian counterparts and

    relying on Russian institutions to implement the programs that were supposed
    to achieve the EBRD's overall objectives in Russia. By late 1997, the EBRD
    was the largest single foreign investor in Russia; had seats on the boards
    of several Russian enterprises and banks; and, through its various
    operations, had staff on the ground throughout Russia. The country strategy
    for 1997 noted that Russia had made important progress in the transition but
    continued to be dogged by persistent

    economic problems and a mixed record on political commitment to reform.
    Financial Collapse and

    By mid- 1998, the EBRD realized that its rapidly growing portfolio in Russia
    Recovery: mid- 1998 to the could be threatened by the escalating financial
    trouble in Russia. In April present

    1998, Tokobank, a major Russian bank in which the EBRD had taken a $32
    million equity position in 1994, collapsed. In June 1998, the EBRD updated
    its Russia strategy due to the increasing financial and economic uncertainty
    there, calling for continued engagement, retaining the emphasis on
    institutional development, setting standards for business

    practices, attracting foreign and domestic investment, and engaging in
    policy dialogue.

    Although the June 1998 EBRD strategy update noted the potential for a
    crisis, what happened 2 months later was much worse than the EBRD and other
    institutions had anticipated. The collapse in the value of the ruble made it
    more expensive for Russian firms and banks to repay dollardenominated debt.
    A moratorium on foreign exchange payments by domestic banks led to defaults
    on foreign debt, and the Russian government's defaulting on domestic debt
    essentially ruined the domestic government securities market. The
    combination of these factors essentially destroyed the value of most of the
    assets on the balance sheets of Russian banks. 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 the year, the
    EBRD took provisions of over

    $600 million for loans and investments for the year, primarily for banking
    sector projects in Russia. 8 Some of the EBRD's Russian partners defaulted 8
    The EBRD's operating loss for 1998 was $293 million.

    on loan repayments or stripped assets from institutions partially financed
    by the EBRD. In a few months, the overall state of the EBRD's portfolio in
    Russia and the region suffered as the Russian economy went into a tailspin.

    The EBRD responded to the collapse by evaluating the quality of its
    investments in the region, increasing provisions, restructuring its Russia
    portfolio, and almost entirely halting new operations in Russia. In the

    6 months after the crash, the EBRD only signed three new projects for
    Russia, worth $15 million. 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 in Russia. The EBRD also tried to salvage the projects it
    could, and close out those that could not be saved. The EBRD immediately
    took advantage of its rights as a preferred creditor to protect most of its
    investments outside the financial sector. 9 This action allowed the EBRD
    eventually to salvage much of its investment outside the banking sector.
    Without these rights, the EBRD could have been in an even worse position.

    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. Guided by a May 1999 country strategy
    update, the EBRD noted that its role in Russia was now even more important,
    since the transition would take longer than initially envisioned. Its
    operations focused on portfolio management and selection of only the

    highest- quality projects, 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 a major return to the
    Russian market, pending the outcome of presidential elections and potential
    change in the overall reform environment. 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 its
    lender and shareholder rights in an effort to combat corruption and

    promote sound business practices. 9 This step enabled the EBRD to obtain an
    exemption from the Russian government's halting of foreign exchange
    payments.

    In recent months, the EBRD has restated its commitment to remain engaged in
    Russia and has announced several new projects there. During January- June
    2000, the EBRD had approved about $300 million in new projects for Russia,
    or more than in all of 1999. In addition, senior EBRD officials have
    publicly stated that the EBRD could commit about $1 billion per year for
    Russia, in an effort to provide an inducement for reform and change by the
    Russians. At its annual meeting in May 2000, the EBRD board approved a
    medium- term plan to devote 30 percent of the Bank's portfolio

    to Russia, provided the Russian government establishes the proper reform
    framework and Russian enterprises adopt more transparent and fair business
    practices. A shift to 30 percent would represent a substantial increase from
    the current level of 22 percent.

    However, EBRD officials noted the difficulties in identifying and securing
    deals within Russia. Because the EBRD generally seeks co- financing, it has
    to find viable Russian business partners and private sector co- investors
    willing to share the financing and risks with the EBRD. This has been

    difficult to do ever since the crash of 1998 and raises questions about the
    EBRD's ability to meet its 30- percent medium- term financing goal.

    In addition, the EBRD's strategy toward Russia is part of a larger debate
    within the EBRD on the relative level of resources to devote to Central
    Europe versus the former Soviet Union. Investments in Central Europe to

    support countries like Poland and Hungary can help their efforts to meet EU
    standards for eventual membership in the EU. Investments in these countries
    may also be more profitable, since they are further along in the transition
    process. However, most Central European countries are capable of raising
    finances on the private capital markets, and some argue that EBRD resources
    should be shifted out of these countries and into the

    former Soviet Union where the greater transition challenges lie. This
    approach emphasizes the EBRD's mandate to support transition but entails
    greater risks and possibly lower profit. How the EBRD decides to balance
    these conflicting objectives will have important implications for its future

    strategy for Russia. In October 2000, the EBRD publicly released its new
    country strategy for Russia. The EBRD plans to commit from $300 million to
    $1 billion per year for projects in Russia, depending on government actions
    to improve the investment climate. Future investments will be targeted to
    improve corporate sector governance and transparency, promote financial
    sector competition, rapidly build- up small business financing, and increase
    support for infrastructure. The EBRD also intends to:

    increase the share of equity and public sector projects in its Russia
    portfolio, develop long- term strategic partnerships with selected
    companies, and continue to aggressively defend its legal rights in Russian
    courts.

    The EBRD plans to remain realistic about its ability to affect change within
    Russia. Although it will continue efforts to promote national level change
    through high- level policy dialogue and technical assistance, the EBRD's
    main focus will be on achieving change at the corporate level.

    Lessons Learned According to the EBRD's 1999 Transition Report, which
    assesses the EBRD's experience with transition since 1989, countries that
    pursued rapid liberalization and sustained macroeconomic stabilization were
    able to lay the basis for economic reform and gradual institutional change.
    However, countries such as Russia that did not follow this path suffered
    slow and

    uneven progress and faced threats to economic stability from continued soft
    budget constraints. The report also found that corruption was a major
    impediment to transition in several countries, including Russia.

    Additionally, the EBRD also has a formal, institutional “lessons
    learned” process. EBRD staff identify and enter lessons learned into a
    large database. 10 A summary of these lessons is presented annually in
    evaluation overview reports, with additional lessons noted in country
    strategies and individual evaluation reports. Based on our analysis of these
    lessons and our discussions with EBRD officials, the following lessons
    regarding the EBRD's experience in Russia have broad application.

    The ability to create and sustain transition in Russia depends on a
    demonstrated commitment to reform, sound macroeconomic conditions,
    transparent and consistent rule of law, and progress in furthering
    institutional reform. Sustainable transition requires strong grassroots
    support. Russia and the problems it faces are so large that EBRD cannot
    expect to have major, nationwide impact. The EBRD can play an important role
    in supporting transition by developing projects that can have important
    demonstration effects or by clustering projects in reform- minded

    regions to enhance the impact at the local level. Good, consistent
    monitoring of the project enhances impact, maintains

    important lines of communication, and builds trust. Projects with clearly
    defined objectives tend to be more successful than

    projects with broad, vague objectives. 10 The EBRD does not currently allow
    access to this database, but plans to put an amended version on its website
    in 2001. Some of the main themes each year are presented in the Annual
    Evaluation Overview Report, which is distributed to the board but not the
    public. However, the EBRD's lessons from the 1998 financial crisis in Russia
    were publicly presented in its 1999 annual report.

    Additional Information on the U. S. Freedom

    Appendi x V I Support Act Program in Russia The United States began
    providing limited assistance to the Soviet Union in December 1990 to support
    the reform effort and then increased its aid after the Soviet Union
    dissolved in December 1991. U. S. assistance has taken many forms: the
    Cooperative Threat Reduction program, which provides aid to safeguard and
    dismantle nuclear weapons and other weapons of mass destruction; support for
    programs provided through international

    financial institutions; food aid provided by the U. S. Department of
    Agriculture; and programs authorized by the Freedom Support Act, implemented
    mainly by the U. S. Agency for International Development (USAID). In
    addition to these funding sources, many federal agencies have used funds
    from their regular appropriations to provide technical assistance and other
    types of aid to Russia. Figure 23 shows the budget 1 and spending patterns
    for the major U. S. programs with Russia since 1992.

    1 The Coordiator allocates funds appropriated for the former Soviet Union to
    each of the countries, creating country budgets.

    Figure 23: Funding Levels for Major U. S. Programs With Russia Since 1992
    (Budgeted and Expended, Respectively)

    In billions dollars 2.2 2.0 1.8 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 Other 0.02 0.04 0.03 0.02 0.14
    0.19 0.22 0.42 0.25 Agriculture 0.13 1.03 0.03 0.03 0.02 0.01 0.00 1.16 0.20
    CTR Nunn- Lugar DOD 0.01 0.17 0.26 0.15 0.17 0.25 0.28 0.39 0.43 Freedom
    Support Act 0.09 0.31 1.00 0.36 0.22 0.14 0.21 0.16 0.18

    Fiscal year

    2.2 In billions of dollars

    2.0 1.8 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 Other 0.02 0.03 0.03 0.02 0.09 0.14
    0.17 0.25 Agriculture 0.13 1.03 0.03 0.03 0.02 0.01 0.00 1.16 CTRNunn- Lugar
    DOD 0.00 0.02 0.04 0.12 0.17 0.09 0.13 0.21 Freedom Support Act 0.08 0.30
    0.97 0.35 0.22 0.12 0.15 0.07

    Fiscal year

    Legend: CTR = Cooperative Threat Reduction; DOD = U. S. Department of
    Defense Source: U. S. Department of State and GAO analysis

    The Freedom Support Act, enacted in October 1992, signaled a change in the
    character of U. S. aid to the former Soviet Union, from a period of ad hoc
    assistance, including agricultural commodity credit guarantees and food and
    medical aid, to a long- term development effort characterized by provision
    of technical assistance in a variety of sectors and by U. S. private

    sector investment support. Nearly half of all expenditures related to the
    Freedom Support Act for the former Soviet Union from 1992 through 1999, or
    $2.26 billion, went to programs with Russia. The goal of the Freedom Support
    Act was to provide the expertise and support necessary to ensure Russia's
    continued progress on economic and

    political reforms. The Freedom Support Act authorized bilateral economic
    assistance activities in at least 13 sectors, including humanitarian needs,
    educational television, administration of justice, and civilian nuclear
    reactor safety. Congress stated that technical and managerial assistance
    should be provided on a long term, on- site basis, supplying practical
    management and other problem- solving advice, and encouraged assistance to
    be provided through nongovernmental organizations, enterprise funds to
    invest in the Russian economy, and cooperative development and research
    projects.

    The Freedom Support Act also established in law the Coordinator of
    Assistance to the former Soviet Union. The Coordinator was a State
    Department official, answering ultimately to the Secretary of State. The
    State Department's involvement in all assistance to the former Soviet Union
    demonstrates the political sensitivity of the program. The

    Coordinator was to (1) design an overall assistance and economic strategy
    for the former Soviet Union; (2) ensure program and policy coordination
    among U. S. agencies and foreign governments and international
    organizations; (3) ensure proper management, implementation, and

    oversight by U. S. agencies; and (4) publish an annual report on U. S.
    assistance for the former Soviet Union. The effect of this broad assistance
    program was to allow the President and his Assistance Coordinator wide
    latitude to design the U. S. assistance strategy. USAID became the primary
    implementor of Freedom Support Act assistance.

    Objectives and Initial Since 1992, the United States has pursued three
    objectives for assistance to Assumptions

    Russia through the Freedom Support Act: The first objective was to foster
    the emergence of a competitive,

    efficient, market- oriented economy in which the majority of economic
    resources were privately owned and managed, so that economic decisions were
    based primarily on individual choice.

    The second objective was to foster transparent, open, and accountable
    governance; the empowerment of citizens, working through their civic and
    economic organizations; and democratic political processes that ensure
    broad- based participation in political and economic life and

    respect for human rights and fundamental freedoms. A third objective was to
    foster redefined public and private sector roles in the management of
    humanitarian, health, and related social services fundamental to a
    successful transition to stable democracy and a market- based economy. 2

    The relative priority 3 of the objectives has varied over the years. In the
    earliest years from 1991 4 through 1992, the third objective, providing
    “humanitarian assistance,” was the priority. As the technical
    assistance program developed from 1993 through 1995, the market reform
    objective assumed the priority. With the development of the Coordinator's
    new “Partnership for Freedom” approach (for more information,
    see later paragraphs), the democratic reform objective has been emphasized
    since 1996. During fiscal year 1995, as a response to U. S. budget cuts, the

    humanitarian assistance objective was dropped outright, only to be
    reinstated as budgets increased in the late 1990s.

    The U. S. program was built on a number of initial assumptions about how
    Russia might make the transition to a market economy and the role foreign
    assistance could play in that transition. Some assumptions identified by
    State and USAID included the following:

    Russia was wealthy in natural resources but misdeveloped. Russia had a
    generally healthy, educated, and productive populace, a significant
    industrial base, and a potentially strong agricultural base. Russia was

    misdeveloped, especially in respect to many institutions essential for a
    market economy and democratic politics. The challenge was not to develop
    basic human and physical infrastructure but to assist Russia in redirecting
    resources to support open and participatory political and economic systems.
    Assistance had to happen quickly. If assistance were not provided quickly,
    the Russian state might revert to Communism. This assumption

    drove the United States to expend assistance funds as quickly as possible,
    sometimes with minimal concern about the effectiveness of the activity.

    2 A fourth objective, related to Cooperative Threat Reduction funding rather
    than Freedom Support Act funding, was to accelerate demilitarization and
    promote responsible security policies. This objective became a regular part
    of the Coordinator's reports in April 1996, reporting on fiscal year 1995.
    The report consistently presents data about the Cooperative Threat Reduction
    program.

    3 These objectives were routinely listed in early Coordinator's reports
    without ordinal numbers beside them. 4 Before the collapse of the Soviet
    Union, the United States had provided humanitarian assistance in the form of
    pharmaceuticals and medical supplies worth $39. 1 million under

    the President's Medical Initiative. This assistance precedes the Freedom
    Support Act and the Coordinator's reports, which first express the
    objectives.

    Russians had to want change. Just as no outside agency, institution, or
    country could substitute for or replace Russian reformers themselves, so no
    one country or agency by itself could shoulder the task of encouraging
    Russian reform at the margin. Only Russians would be able to create the
    political will to do what they must.

    Protracted support was not needed. Russia was a well- endowed country, fully
    capable of remaking itself into a full, democratic, prosperous partner in
    the international community, with the help of strategically targeted support
    during the critical period of economic and political transition. U. S.
    programs would be of limited duration.

    Aid should follow reform. Former Soviet Union states and regions within
    countries would receive aid based on their progress toward democratic and
    economic reform. Projects should be generally regional and managed from
    Washington.

    Organizing projects across the former Soviet Union would allow the United
    States to respond quickly to the changing circumstances in the former Soviet
    Union states and keep design and contracting actions to a manageable number.
    Achieving U. S. assistance objectives and developing assistance priorities
    was to be most effectively accomplished through a Washington- based
    Coordinator responsible for overseeing policy development and implementation
    of the assistance

    effort. The whole assistance program was to be managed from Washington, with
    a small number of USAID officials in the former Soviet Union.

    The Freedom Support U. S. Freedom Support Act assistance program has used
    the following

    Act's Instruments instruments from the beginning of the program to the
    present. Technical assistance has been provided by U. S. contractors and

    agencies, primarily USAID, to Russia to convey know- how. Exchanges run by
    the U. S. Information Agency, USAID, and other

    agencies bring Russians to the United States for training and exposure to
    the U. S. style of democracy and capitalism and the institutions that
    underlie them, thus supporting the transition to free market economies

    and democratic society. The exchanges, which could help create peopleto-
    people linkages, run the gamut from secondary school students to Russian
    parliamentarians. Many U. S. citizens are also sent to Russia.

    Commodity import programs, such as the Russia Energy and Environmental
    Commodity Import Program, have introduced U. S. designed equipment to
    Russia. The purpose of this particular program

    was to improve the efficiency of energy use and improve environmental
    quality, primarily in the energy sector. Enterprise funds, primarily The U.
    S. Russia Investment Fund or TUSRIF,

    also have been used to make equity investments in and provide loans and
    technical assistance to Russian businesses. Most of these investments have
    been in small- and medium- sized businesses. Trade and investment programs
    have been established through the

    Overseas Private Investment Corporation, the Department of Commerce, the
    Trade Development Agency, and the U. S. Export- Import Bank. The Freedom
    Support Act authorized supplementing these

    agencies' regular appropriations to pay for programs of technical
    assistance, feasibility studies, and orientation visits. The act also paid
    for programs fostering long- term commercial ties between Russia and the
    United States to help American companies defray the costs of hosting Russian
    managers and scientists for hands- on training. These programs are viewed as
    assistance. On the other hand, to the extent that these agencies' programs
    have funded export credits or insurance, they are not usually considered
    assistance. Programs providing small grants have been used to promote
    democracy

    and market reform. The Eurasia Foundation is a prime example of a provider
    of small grants. The Eurasia Foundation is a privately managed grantmaking
    organization, originally funded by USAID and dedicated to funding programs
    that build democratic and free market institutions in Russia.

    Funding History for From fiscal year 1992 through 2000, the United States
    budgeted $2.68

    billion for Freedom Support Act programs in Russia. 5 From fiscal year 1992
    Russia

    through 1999, the United States expended $2.26 billion in programs
    authorized by the Freedom Support Act in Russia, which comprise about 36
    percent of the U. S. assistance expenditures. USAID was responsible for
    spending almost 75 percent of the funds for programs authorized under the
    Freedom Support Act. Figure 24 shows how funds for programs authorized under
    the Freedom Support Act were budgeted among the primary U. S. objectives.

    5 The Coordinator allocates the appropriation for assistance to the former
    Soviet Union among the countries, creating country budgets.

    Figure 24: Funds Budgeted for Freedom Support Act Assistance to Russia,
    Fiscal Years 1992- 2000 (in $millions)

    In millions of dollars 600

    500 400 300 200 100

    0 1992 1993 1994 1995 1996 1997 1998 1999 2000

    Address Urgent Human Needs Related to $44.86 $45.41 $123. 32 $62. 58 $27. 84
    $15. 76 $18. 10 $28. 80 $23. 32

    Transition Nonproliferation/ Security Related Items $16.14 $10.25 $92.28
    $11.50 $12.00 $9. 50 $9. 05 $15.45 $58.35 Promote Democracy and Rule of Law
    $8. 05 $52. 86 $213. 33 $74.00 $42.40 $46.56 $57.48 $72.44 $64.06 Promote
    Market Reform $17.58 $205. 09 $572. 30 $210. 83 $136. 66 $72.23 $125. 69
    $46. 83 $32. 53

    Source: U. S. Department of State and GAO analysis.

    Strategy Humanitarian Assistance

    Prior to the passage of the Freedom Support Act, there were several
    Priority: 1991- 1992 projects in process that paralleled the objectives in
    the Freedom Support Act. During the early years of U. S. assistance to
    Russia, there was no written U. S. strategy nor specific authorizing
    legislation to guide the program. 6 In fact, according to officials, the
    State Department prohibited USAID from developing country strategies or
    country budgets because it

    wanted to develop a general approach for assistance to the entire region of
    the former Soviet Union. Therefore, to determine the strategy for 1991 and
    1992, we relied on the Coordinator's early annual reports and our previous
    work (see Related GAO Products section). The United States' general approach
    assumed that the needs of the former Soviet Union states were similar and
    that the same project could be implemented across several countries.

    Although some of the assistance that went to Russia in the early 1990s
    financed projects to support economic and democratic reforms, the main focus
    was on humanitarian assistance (see fig. 24 for specific sums). The

    Departments of State and Defense collaborated on a large- scale airlift of
    medical, food, and other supplies 7 to needy populations throughout Russia,
    called Operation PROVIDE HOPE. The economic and democratic assistance from
    this period was generally spread across several sectors 8 in a deliberate
    effort to try different approaches and find out which ones were most
    successful. 9 The emphasis across the entire program was on speedy delivery
    and

    limiting the cost visible in the U. S. budget. The State Department
    emphasized quick- impact projects in an effort to show that the United
    States was engaged in and making an effort to help with the reform process.
    At the same time, domestic budgetary and economic problems in the United
    States created pressure to find ways to deliver assistance without having to
    seek additional appropriations. Thus, Operation

    PROVIDE HOPE shipped surplus commodities from the Defense Department as well
    as commodities from private donors. The initial 6 The Freedom Support Act
    was signed into law in October 1992. 7 These supplies were a combination of
    Department of Defense surplus items and donations from private
    organizations. From fiscal year 1992 through 1999, the estimated value of
    the items was $602 million. The Freedom Support Act paid for the
    transportation costs, which were $59 million. 8 In a December 1992 report ,
    Former Soviet Union: Assistance by the United States and Other Donors (GAO/
    NSIAD- 93- 101), we reported that the experience gained in Central and
    Eastern Europe would help shape the aid program in the former Soviet Union,
    according to U. S. officials. U. S. officials cited lessons they learned and
    intended to apply, including that aid should be concentrated in a few
    priority areas to prevent a proliferation of projects. 9 USAID's grant
    assistance to help with the implementation of mass privatization is an
    exception. In that instance, the United States devoted relatively
    significant resources in a deliberate effort to influence a major aspect of
    the reform process.

    economic and democratic assistance programs were financed from the transfer
    of U. S. economic support funds initially designated for Pakistan and the
    Philippines. The nature and approach for the assistance were greatly
    influenced by

    initial assumptions and the domestic political environment in Washington.
    For example, part of the rationale for running the program from Washington
    and not developing country strategies stemmed from efforts to limit the
    numbers of State Department new embassies and USAID new missions in the
    former Soviet Union and the accompanying costs. This pressure, in turn,
    arose from the administration's desire to reduce the deficit and combat the
    recession underway in the United States during the

    early 1990s. In the earliest years of the program, this may have made sense
    because assistance officials generally knew little about how the Soviet
    economy and the economies of the former Soviet Union states worked. However,
    according to U. S. officials, the policy of not having countryspecific
    budgets actually undermined Washington management and control of the
    assistance program. Project managers, implementing work in one sector across
    several countries could leave a given country out of the

    project by committing all funds to projects in other countries. This limited
    the ability of officials at the Coordinator's office to control the program.

    Market Reform Priority: The approach to providing assistance to Russia and
    the other former Soviet 1993- 95 Union states evolved with the change of
    administrations in early 1993.

    Although humanitarian assistance continued, the primary emphasis was now on
    working with the Russian Federation government to develop and implement
    national reforms. Using the authority provided by the Freedom Support Act,
    the new U. S. administration sought to increase dramatically the size of the
    U. S. program in an effort to increase its impact on the reform

    process in Russia. The hope was that U. S. help in key areas would jumpstart
    the reform process and assist in bringing about the numerous structural
    changes needed in Russia for a democratic, market- based

    economy. For example, large contracts were created to assist Russians with
    privatization, and capital markets development. By September 1993, 8 U. S.
    firms were working in these areas under contracts worth up to $60 million.

    The United States developed the overall approach for these programs in
    preparing for two major international summits in mid- 1993. At the April
    Vancouver summit meeting with Russian President Yeltsin, President Clinton
    announced a $1.6- billion bilateral package of humanitarian and

    technical assistance for Russia. Components of the package had been
    announced before and required no new appropriations. These programs were
    designed to be implemented very quickly to ensure that the U. S. bilateral
    program was having tangible effects for the Russian population to see.

    At the annual summit of the world's seven largest industrial economies (the
    G- 7) in Tokyo in July 1993, the leaders of the G- 7 countries approved a
    plan to extend an additional $3 billion in financial assistance to Russia.
    The U. S. portion totaled $1. 5 billion for Russia in addition to the
    amounts pledged

    previously at Vancouver and consisted of private sector development funds,
    including grants; trade and investment money, including commodity import
    programs; democracy initiatives; funds to support troop withdrawal from the
    Baltics; an energy and environment program; and humanitarian assistance. In
    September 1993, Congress appropriated the money necessary to implement these
    programs, approving over $2. 5 billion in the fiscal year 1993 supplemental
    fiscal year 1994 appropriation for assistance to Russia and the remaining
    former Soviet Union states.

    We have reported about the complex iterative interagency process involved in
    developing these packages. 10 Several groups, whose membership included many
    different U. S. agencies convened by the National Security Council, met to
    develop programs for Russia and the remaining former Soviet Union states.
    These programs focused on specific sectors such as

    Agricultural Technical Assistance, Anti- crime, Democracy, Energy,
    Environment, Enterprise Fund, Financial Sector, Food Aid, Law Enforcement,
    Rule of Law, Trade and Investment, and Russian Officer Housing and
    Retraining. Several officials described the challenges of making a coherent
    program with so many agencies. Although the general thrust of the program
    had shifted to emphasize economic reform, it maintained the broad and
    disparate nature of the early 1990s. By 1994, a

    wide variety of U. S. departments and agencies were implementing programs in
    Russia, including the Departments of Commerce and Energy, as well as the U.
    S. Information Agency and the Environmental Protection Agency. In December
    1995, we reported that 23 departments and independent agencies were
    implementing over 200 programs in the former 10 See Former Soviet Union: U.
    S. Bilateral Program Lacks Effective Coordination (GAO/ NSIAD- 95- 10,
    February 7, 1995).

    Soviet Union -including 180 in Russia. The sheer magnitude of the U. S.
    bilateral program made coordination difficult and complicated efforts to
    focus U. S. efforts in a few key areas. In 1993 and 1994, the U. S. program
    still stressed the need for quick implementation due to pressure from
    Congress and the White House. However, the rationale for speed changed. In
    the early 1990s, U. S. officials

    believed that rapid humanitarian assistance could stave off social unrest
    and show the Russia public the benefits of the new economic system. In the
    mid- 1990s, the desire for rapid assistance in market reforms was driven by
    the belief that rapid reform would improve reform results and decrease
    hardship for the population in the long run.

    By mid- 1993 the United States moved away from having a single program for
    all the former Soviet Union. In late- 1993, the Coordinator began writing
    the country strategies that were published in 1994, with the first country
    strategy being completed for Russia. Country budgets for assistance were
    also developed, and program design and management moved more to the

    local USAID mission and U. S. embassy. The Coordinator told us that, because
    of the Russia program's sensitivity, it would always receive more scrutiny
    than other country programs. As State and the other agencies implemented the
    emphasis on market reform throughout 1994 and 1995, congressional support
    began to wane. After budgeting $1. 0 billion for Russia for programs
    authorized under the Freedom Support Act in 1994, Congress cut funding to
    $359 million for 1995 and $219 million for 1996. These dramatic funding
    reductions were driven by two main factors. First, the large appropriation
    for Russia in 1993 was presented by the administration to be an exceptional,
    onetime event to support what was likely to be a relatively short transition
    period. Indeed,

    the 1995 U. S. strategy for Russia supported this idea by stating that there
    would be no need for new funding for assistance to Russia after 1998.
    Second, Congress began to raise bipartisan concerns about the effectiveness
    of assistance to Russia and started earmarking significant portions of the
    Freedom Support Act program's appropriations for other former Soviet Union
    states, most notably Ukraine. Officials told us that the

    decrease in funding to Russia stemmed from a desire to do more in other
    parts of the former Soviet Union and not necessarily to do less for Russia.
    Democratic Reform Priority:

    The significant decreases in U. S. funding, heightened concerns about the
    1996 to Present

    program's effectiveness, and a growing sense of unease about the state of

    transition in Russia combined to bring about the next shift in U. S.
    strategy. Faced with these challenges, in early 1996 the Coordinator began
    to reevaluate the U. S. program for Russia. He found many problems affecting
    project effectiveness, which were published in the annual report.

    Since a large amount of funding was appropriated early in the process, the
    rate at which a project was able to expend its funds became an important
    criterion in the initial rush to move money out the door, in some cases
    sacrificing cost- effectiveness. Under political pressure to expend as much
    money as possible, the Coordinator's office and the implementing agencies
    could not take time to figure out what projects worked. Contracts were let
    with objectives so large and vague that the money would always be spent.
    During the first several years of providing assistance to Russia, the

    desire to start up programs as quickly as possible, in combination with the
    need to ensure strict control over program implementation, resulted in a
    heavy reliance on large contracts for program implementation. For example,
    as we reported, under USAID's cooperative agreement with the Harvard
    Institute for International Development, the Institute

    oversaw the work of contractors involved with Russian privatization with
    minimal oversight from USAID. 11 According to the Coordinator, the United
    States had to move away from primary reliance on the largecontract

    mechanism. The difficult and rapidly changing environment in Russia, as well
    as the

    need for outside expertise, led to the predominant use of U. S., rather than
    Russian contractors in the early years of the program. The Coordinator
    concluded that the United States also had to make greater use of
    alternatives to U. S. contractors, such as local Russian

    nongovernmental organizations and experts. 11 In Foreign Assistance: Harvard
    Institute for International Development's Work in Russia and Ukraine (GAO/
    NSIAD- 97- 27), we reported: The Harvard Institute for International
    Development conducted this project with minimal oversight from USAID. USAID
    did not always enforce the reporting requirements contained in the
    cooperative agreement, did not set measurable goals, and was not aware of
    decisions HIID was making that could have resulted in added cost to the
    government or significantly

    affected U. S. strategy. In addition to assistance provided to Russia
    directly by HIID, HIID also helped USAID to manage and oversee contractors
    and consulting firms. The U. S. contractors were paid by USAID, not HIID.
    The total value of USAID'S obligations for 199296

    for the Russian privatization program as of May 10, 1996, amounted to about
    $325 million, including approximately $40 million for HIlD.

    As a result of the Coordinator's review, State, USAID, and other agencies
    began to close down projects considered to be less effective or less
    important to the overall effort, including efforts in (1) agriculture, (2)
    energy reform, and (3) housing. Several USAID and State officials told us
    that the dramatic cuts in funding for Russia forced them to prioritize
    stringently their assistance efforts and limit strictly the scope of
    assistance.

    As Figure 24 shows, the United States began shifting funds away from the
    market reform objective and toward promoting democracy in fiscal year 1996.
    Since 1995, budgets for promoting market reform have generally dropped from
    a high of $572.3 million in fiscal year 1994 to $46.83 million in

    fiscal year 1999. For promoting democracy, the trendline since 1996 rose
    steadily, with the exception of a $12 million decrease in 2000. The funding
    for Promoting Democracy surpassed the funding for Promoting Market Reform in
    1999 by $24 million.

    The Coordinator's review also led to a significant shift in U. S. strategy.
    In mid- 1996, the Coordinator formulated a new U. S. approach, called the
    “Partnership for Freedom.” Assistance to the Russian federal
    government would diminish as projects at the national level ended, and new
    funding would focus mainly on grassroots efforts at the regional, local, or
    individual level. Implementation of the new approach began in fiscal year
    1997 and has continued to the present. The restructuring focused U. S.
    assistance efforts on promoting (1) investment- led economic growth; (2)
    people- topeople linkages, bringing citizens of Russia and the U. S.
    together; 12 and (3) the development of civil society. In Russia, according
    to the Coordinator, technical assistance provided by the United States and
    other

    donors had played an important role in helping to begin building the basic
    institutional building blocks for developing a market economy and a
    democratic government. Nonetheless, implementation of many institutional
    reforms was blocked in the Russian federal government.

    Under the new approach, the United States would remain involved to support
    the development of small- and medium- sized enterprises and civil society.
    The United States also place a greater emphasis on partnerships between U.
    S. and Russian universities, hospitals, nongovernmental organizations,
    cities, and business and professional associations as well as exchanges
    between U. S. and Russian students, professionals, and

    12 In fiscal year 1997, people- to- people linkages included low- cost,
    high- impact activities such as community- based exchanges and training, and
    U. S.- NIS institutional partnerships which were designed to be increasingly
    self- sufficient and ultimately self- sustaining.

    entrepreneurs. The purpose of this grassroots effort was to demonstrate to
    Russians the value of reform and the values of a democratic society.
    Connecting Russians with the world beyond their borders is supposed to
    encourage pressure for reform from below. In addition, the recipients of U.
    S. assistance shifted from organizations working largely at the federal
    level to organizations in regions that demonstrated more reform- minded
    policies. Under this aspect of the program, known as the Regional
    Initiative, the United States targeted its assistance towards three Russian
    regions- Novgorod, Samara, and the Russian Far East 13 - whose local
    governments were deemed to be among the most reform minded and hospitable to
    investment. Moving to the regions was part of the approach to increase the
    bottom- up pressure from

    Russian citizens for reform in Russia. Supporting the development of
    nongovernmental organizations, financing public access Internet locations,
    and helping independent media were intended to bolster the development of a
    pluralistic democracy. Similarly, the United States hoped that providing
    advice to businesses, training in international accounting standards, and
    microlending opportunities would bolster the development of a vibrant small-
    and medium- sized enterprise sector that, in the long term, would grow large
    enough to counteract the influence of large enterprises controlled by the
    “oligarchs.”

    These shifts involved rejecting a number of old assumptions. First, the
    Coordinator recognized that the transition process in Russia would extend
    over generations and that U. S. assistance in these efforts would last
    beyond fiscal year 1998, which was the initial end date in the original 1994
    Russia strategy. As a result of the changed assumption, many U. S. programs,
    such

    as Junior Achievement programs or exchanges for young Russian leaders,
    became rooted in “investing in the future.” Second, the U. S.
    embassy and USAID mission in Russia played an increasing role as more U. S.
    assistance was targeted for specific regions within Russia. Finally, U. S.
    assumptions

    about what its assistance could accomplish were scaled back. The earlier
    emphasis on impacting national- level reforms shifted to hope that creating
    “success stories” at the local or regional level would spread,
    over time,

    throughout Russia. The election of President Vladimir Putin in 2000 and the
    renewed possibility of reform driven at the federation level presented the
    United

    13 The Tomsk region joined the Regional Initiative in 2000.

    States with a quandary. So much of the U. S. assistance funding was
    committed to the Partnership for Freedom and the Regional Initiative that
    little was available to move back to the federation level to encourage

    reforms there. The Coordinator told us that the United States will continue
    to emphasize work at the grassroots level away from Moscow. Such assistance
    corresponds with the U. S. long- term perspective in Russia and with U. S.
    political realities. According to the Coordinator, if the Russian government
    makes specific requests for assistance, the U. S. government will consider
    responding positively if (1) a significant opportunity exists to advance
    reform; (2) the U. S. government has a comparative advantage in providing
    assistance in the requested sector; and (3) the Russian

    government is judged not to have sufficient resources to purchase assistance
    from private sources or the assistance requested is not available from
    private sources. If a large number of requests is received, the Coordinator
    may have to consider reallocating current budgets, or, in an

    extraordinary case, asking Congress for additional funds. U. S. officials
    expect to maintain some bilateral engagement in support of economic and
    democratic reforms in Russia over the long haul, believing that needed
    changes in Russia will require generations.

    Lessons Learned U. S. agencies implementing assistance in Russia learned
    many lessons about assisting the transition to a market democracy. In
    general, the

    magnitude of change in Russia posed challenges greater than expected. The
    very difficult operating environment limited the progress of the program.
    The following are key lessons learned based on our review of U. S. documents
    and discussions with State Department and USAID officials.

    The Russian economy did not perform as predicted. According to U. S.
    officials, incomplete implementation of the reforms contributed to the
    failure to perform as predicted. Stabilization, liberalization, and
    privatization were supposed to transform centralized economic systems into
    competitive market economies. Economic reform was supposed to lead to
    growth, which would generate the money to pay for social programs. However,
    the hardships resulting from incomplete transition, economic stagnation, and
    collapsing social services, created greater

    resistance to reform. A lack of political will and consensus slowed the
    implementation of the transition. The governing elite in Russia, supporting
    the transition, was supposed to provide leadership for reform, and a growing
    middle class

    was to provide grassroots support for economic reforms, making them
    sustainable. However, the Russian transition has not spawned a growing

    middle class. Russian Federation officials were not committed to specific
    transition policies, despite professed official statements to the contrary.
    Because the United States believed that the “ideas” of reform

    were so powerful, the United States underestimated the political dynamics in
    Russian society, particularly the struggle between reformers and entrenched
    power center, including the oligarchs. Lack of consensus in Russia about
    what kind of society was ultimately

    desired resulted in fundamental disagreements about the institutional
    arrangements needed for transition. Where entrenched interests dominate the
    Russian national level, leadership for reform may need to come from the
    grassroots level (for example, business associations, nongovernmental
    organizations, community organizations, and local government). Because the
    next generation will provide tomorrow's leaders, it is in this generation
    that the United States must seek a reform orientation to deepen and
    consolidate the transition. Building the political will for reform after so
    many problems is a more difficult task now than it was in 1992 and must be
    viewed as a longer- term process. Russian commitment to assistance projects
    is vital. Russia must be

    ready for and open to the type of change that the assistance activities are
    designed to promote, and there must be willing private and public sector
    officials who can be full partners in reform. By requiring Russian

    partners to share program costs, the United States can accomplish two
    objectives: (1) reduce the costs of U. S. programs and (2) ensure that the
    recipient actually wants the program. Involving Russian staff in projects as
    much as possible is also important, because it teaches them new skills.

    The United States underestimated the difficulty in reorienting existing
    Russian institutions toward the principles and practices of market
    democracies. New economic reform policies-even once passed into

    law-were difficult to carry out due to insufficiently developed institutions
    in either the bureaucracy or the newly created private sector. Formal and
    informal public and private sector institutions fundamental to the
    operations of a market economy and democracy

    were and still are lacking or severely underdeveloped in Russia. By itself,
    training in how western systems work has limited effect when the trainees
    must return to the Russian environment. Likewise, new institutions filled
    with people who have not adopted new approaches will not be institutions of
    change. Corruption is a pervasive major constraint to reform. Corruption is
    pervasive in Russia and is a major constraint to the development and

    growth of the private sector. Powerful private interests use their

    connections to the state to block reforms. Economic restructuring will not
    be successful without addressing corruption. Relations between the United
    States and the Russian Federation will fluctuate based on international
    politics or the pace of reform in Russia. However, there are useful, long-
    term programs mutually beneficial to the United States and the people of
    Russia that remain relatively immune to fluctuations in the pace of
    governmental reforms. These include (1) training and exchange programs that
    increase exposure to and knowledge of democracy and market economies among
    those involved; (2) direct assistance to independent media or democratic
    political institutions; (3) help for the emerging private sector; and

    (4) people- to- people, and institution- to- institution programs. Sustained
    contact with assistance recipients enhances projects: A

    regular complaint from Russian and other former Soviet Union officials was
    that technical aid consisted of too many assessments and too few actions.
    Effective aid projects, such as housing reform by the Urban Institute,
    relied on sustained contacts between American experts and Russian
    counterparts, not whirlwind site visits by consultants.

    Additional Information on the European

    Appendi x V

    Union's TACIS Programs in Russia Background In December 1990, the European
    Council decided to offer technical assistance to the Soviet Union in an
    effort to bolster the reform agenda and help foster the development of a
    market economy and a democratic society. 1 The European Union (EU) was
    concerned that the growing economic and political instability in the Soviet
    Union could affect the EU's member countries. EU members believed that
    aiding the transition could stave off large refugee flows, help ensure that
    nuclear reactors operated safely, and maintain economically important trade
    ties.

    However, the EU was aware of the potentially large sums of money that could
    be spent on transition efforts. The German government was just beginning to
    expend billions of dollars trying to integrate eastern Germany with the rest
    of the newly unified country. EU leaders were deterred by the

    potential price tag for providing direct investment in infrastructure for
    Russia and decided that EU assistance efforts would focus on the provision
    of technical assistance. This choice played into the assumption at the time
    that Russia, although misdeveloped by years of communism, also enjoyed the
    benefits of a large industrial base, an educated population, and abundant
    natural resources. The EU believed that a large program with several hundred
    targeted, short- term projects would help train Russians in how to
    revitalize their economy, integrate Russia into the global market,

    and contribute to overall political stabilization in the region. In July
    1991, the EU adopted a regulation establishing the legal authority for the
    European Commission 2 to implement a technical assistance program, later
    named the Technical Assistance for the Commonwealth of Independent States.
    Since that time, the Commission has been responsible for implementing the
    program. The EU has reauthorized TACIS three times since its creation,
    through regulations issued by the Council of the EU in 1993, 1996, and 1999.
    3 These regulations, combined with periodic policy

    1 The European Council is composed of representatives from the 15 member
    states of the European Union. Its decisions reflect the consensus political
    will of the EU member states and provide overall political guidance to the
    activities of the EU.

    2 The European Commission is responsible for, among other things, the
    implementation of political decisions made by the institutions of the EU. 3
    The Council of the European Union adopts resolutions, which are legally
    binding on the institutions that comprise the EU, such as the European
    Commission, and the EU member states. In this instance, the regulation
    creating TACIS is roughly equivalent to congressional authorizing
    legislation.

    resolutions issued by the EU Council, provide the Commission with overall
    political guidance for the program. In addition, implementation decisions
    such as issuing tenders (bids) for contractors and developing the objectives
    and scope of work for specific projects are overseen by representatives from
    the 15 member states of the EU, with input from the Russian government.

    Overall Objective and Since its inception, the overall objective of the
    TACIS program in Russia

    Initial Assumptions has been to assist and accelerate market economic
    reforms in Russia.

    Other objectives pertaining to democracy and rule of law were added in 1993
    and 1999. The program has been guided by a common series of assumptions
    about how TACIS projects would help bring reform to Russia.

    From the outset, the EU recognized that its ability to influence change in
    Russia through TACIS was limited. The European Council resolution that
    created TACIS in 1991 explicitly noted that the resources available for the
    program were minuscule relative to the size of Russia and the problems it
    would face during the transition. Successful individual projects could have
    little impact in such a large country. As a consequence, TACIS strategies
    and plans stressed the importance of focusing efforts in a few key sectors

    and tried to cluster projects in reform- minded localities and regions to
    help achieve broader impact. EU leaders also believed the transition in
    Russia would take some time and be very expensive. A TACIS document from
    1992 speaks openly of the challenges the program faced in starting
    operations in Russia. These included the rapidly changing political
    situation and the magnitude of the problems to be addressed, as well as
    TACIS' own institutional constraints,

    especially a critical shortage of staff. Implicit in TACIS' design is the
    EU's belief that technical assistance is a relatively inexpensive and cost-
    efficient way to promote reform. Rather than providing large sums of money
    to enhance restructuring of enterprises

    or to finance the social safety net while reforms were being implemented,
    the EU focused on encouraging the transfer of know- how about market systems
    to Russia. Related to this assumption was the belief that TACIS' technical
    assistance would help bring about market reforms. These reforms would
    attract the foreign direct investment Russia needed to help share the high
    costs of modernizing and restructuring the Russian

    economy.

    The TACIS program has also stressed the importance of close cooperation with
    Russian counterparts on strategies, project design, and evaluation. By
    working alongside its Russian counterparts, the EU hoped to ensure that the
    resulting TACIS projects would be closely tied to Russian priorities and

    would reflect the realities on the ground in Russia. This would enhance the
    program's impact. TACIS also recognized that Russian buy- in to an
    individual project might not be enough to ensure success. Broad progress in
    making appropriate reforms and providing stability in the macroeconomy
    creates a stable foundation for technical assistance efforts that are
    important for overall program success. This assumption recognized that
    projects were not being conducted in a vacuum. The EU assumed that the
    support of government officials, an enabling environment of sound economic
    policies, and progress toward an open and democratic society were necessary
    for individual TACIS projects and the program as a whole to achieve its
    goals.

    TACIS' Instruments Since its inception in 1991, the TACIS program has relied
    almost exclusively on six different forms of technical assistance to meet
    its objectives. 4

    Policy advisers to government agencies: This has been the primary instrument
    for the program since its inception. TACIS hires European contractors to
    work with Russian government officials- sometimes at the federal level, but
    more frequently at the regional or local level. Policy advisers are supposed
    to work closely with their counterparts and assist them in pursuing their
    reform agenda. For example, TACIS is providing policy advisers to assist the
    Russian government in drafting and implementing tax laws. Training and
    advice to the private sector: Although used less

    frequently in recent years, many of TACIS' early projects involved training
    people in various aspects of the operation of the market economy. For
    example, the largest single project for 1991 provided

    management education and training for Russian business people in cooperation
    with the Academy of National Economy. Recently, TACIS has relied less on
    this instrument due to (1) growing knowledge among Russians about the market
    and (2) the realization that mass training

    4 Since 1996, the TACIS regulation has allowed limited use of funds for
    investment projects. So far, the TACIS program has rarely used this
    instrument in Russia.

    programs may not be effective if there are no opportunities to use the
    training outside the classroom. For example, an internal evaluation of TACIS
    programs in Russia found that training Russians in bank standards based on
    western practice was not necessarily relevant to the way banks actually
    operated in Russia. Internships: TACIS finances internships that allow
    Russians to work at EU companies. For example, the managers' training
    program gives Russian managers from the manufacturing sector a 2- to 3-
    month internship working at a European firm.

    Funding studies, including pre- investment plans, market research, and
    feasibility studies: TACIS has provided funding for a wide variety of
    studies and plans, especially in the early years of the program. The

    rationale for this instrument is that the Russians may need basic
    information about the particular problem or issue they hope to address.
    Studies also sometimes helped form the foundation for much larger

    financing from the World Bank or the European Bank for Reconstruction and
    Development. For example, TACIS recently completed a 2- year study of the
    feasibility of a gas distribution network

    extension for the Russian Ministry of Energy. This effort is being used as
    preparatory work to support a World Bank loan. Developing and reforming
    legal and regulatory frameworks, institutions, and organizations: The EU has
    also provided technical

    assistance to help the Russians establish key institutions and processes
    vital for a market economy. Much of this work involves drafting legislation,
    training government workers in necessary skills, and offering advice on
    changing operations. For example, since 1997, TACIS

    has been supporting efforts to improve the federal- level management of the
    public health care system in Russia by working with the Ministry of Health
    to improve its ability to develop and monitor activities to address health
    concerns.

    Linking EU and Russian institutions: In recent years, the EU has placed more
    emphasis on developing permanent links between EU and Russian institutions,
    a process the EU calls “twinning.” Rather than hiring
    consultants who may not be around in 12 months' time, the EU will use a
    European institution, such as a hospital, to implement a program in a

    Russian hospital. Twinning helps ensure that the Russian counterparts will
    have a consistent EU partner for follow- up after the conclusion of the
    program. Ideally, the EU institution would begin to operate its programs in
    Russia without further EU funding. For example, TACIS' Tempus program
    promotes links between Russian and EU academic institutions in the areas of
    economics, business administration, and law.

    Funding History for Since 1991, TACIS has committed $2.7 billion for
    programs in Russia and

    Russia disbursed $1.6 billion (see fig. 25). For most of this period,
    commitments

    ranged from $250 million to $300 million annually, although commitments for
    1999 and 2000 dropped considerably. 5

    Figure 25: TACIS Commitments and Disbursements for Russia, 1991- 2000

    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

    Note: Data for 2000 is through August 31. Source: European Commission. 5
    Part of the reason for this drop is the introduction of an incentive scheme
    within the program. About 10 percent of total program funding for 2000 has
    been taken from country budgets and set aside to finance the best project
    proposals from all TACIS countries.

    TACIS assistance has been spread across seven major sectors since 1991 (see
    fig. 26). Energy and enterprise support account for about half of total
    disbursements to date. 6 Human resources development and agriculture
    spending are also important sectors. In fact, TACIS has devoted a larger

    share of its funding- about 9 percent- for agriculture than any of the other
    donors in our study. Although the 2000 program for Russia emphasizes human
    rights and civic society, funding for democratic reform has been only a
    minor portion of the program to date.

    Figure 26: TACIS Commitments by Sector, 1991- 1999

    Telecom 2% Other

    Environment 7%

    3% Energy Transportation

    28% 8%

    Agriculture 11%

    Human Resources Development Enterprise Support

    20% 21% Source: European Commission.

    Strategy Drawing generalizations about strategy with such a broad and
    diverse program is difficult. Since 1991, TACIS has implemented more than
    500

    projects in Russia and as of August 2000 had about 100 projects underway. 6
    Energy programs include nuclear reactor safety efforts, as well as technical
    assistance to rationalize Russia's delivery of all forms of energy within
    the economy.

    Although the TACIS strategy for Russia has evolved over time away from
    having a quick impact toward placing more emphasis on laying the foundations
    for reform and paying greater attention to democratic reform, some central
    tenets have remained consistent. TACIS remains largely a technical
    assistance program that has delivered help to essentially the

    same sectors since 1991. The EU presents its strategy for TACIS assistance
    to Russia in a series of publicly available documents, including multiyear
    indicative plans and annual action plans.

    Early Efforts in 1991- 94 TACIS projects during the early years of the
    transition focused on having a Focused on Quick Impact quick impact, with
    special attention devoted to training Russians in market

    economics. Democracy building was not initially a significant part of the
    program. Although democracy was included as an overarching objective in
    1993, the projects TACIS implemented during this period were almost
    exclusively related to various aspects of economic reform including human

    resource development, enterprise support, energy, transportation, financial
    services, and food distribution. The specific projects implemented to pursue
    these goals emphasized quickly identifying problems and putting consultants
    in the field to meet specific Russian needs. Many of the early projects were
    small, with a focus

    on diagnosing a problem, and often involved study tours, conferences, or
    writing reports. There was also an emphasis on training as many people as
    possible in a variety of areas including banking, finance, and economics.
    Most of this training was conducted in Russia because TACIS also attempted
    to support or create permanent institutions to carry out the

    training after TACIS funding stopped. From the beginning of the program,
    TACIS frequently implemented projects at the regional and local levels. In
    fact, it prepared action plans specifically for ten regions of Russia from
    1992- 1995, in addition to plans for Russia as a whole. The rationale for
    focusing on the regions, later echoed by other donors such as the United
    States and the European Bank for Reconstruction and Development, included a
    desire to reward more reform- minded regional governments in an effort to
    show other regions that reforms were both preferable and possible.

    Greater Emphasis on During this period, support for economic reform and for
    democracy were Attaining Systemic Change,

    the dual goals of the TACIS program in Russia. However, TACIS 1995- 98

    implementation continued to focus mainly on economic reform, with greater
    emphasis on attaining systemic change at the federal level.

    The change in TACIS' approach was driven by the changing conditions in
    Russia. The EU realized the challenges of transition in Russia proved to be
    much harder than expected in terms of complexity and the length of time the
    process would take. From working in the regions, TACIS learned that the
    success of projects often depended on the overall reform environment.
    Without a strong base of reform and market- oriented institutions, it proved
    difficult to have lasting impacts. Thus, TACIS shifted its focus in an
    attempt to have greater influence on systemic reforms. TACIS implemented
    larger projects and worked more frequently with partners at the federal
    level, but projects with federal institutions generally had activities in
    pilot regions. Although TACIS changed its relative focus from the regions to
    the federal level, it continued to operate in essentially the same sectors
    as it always had. For example, the only change in priority sectors between
    1994 and 1998 was the addition of environment to the list of sectors that
    were the focus of technical assistance.

    The political context for the TACIS program changed after 1994, when the
    Partnership and Cooperation Agreement between the EU, EU member states, and
    the Russian government was signed. 7 This document was an effort to
    delineate and tighten the links between Russia and the EU. For TACIS, the
    Partnership and Cooperation Agreement provided clear political guidelines
    for the program, something that had been lacking in the

    past. By 1996, TACIS' plans included specific references to the agreement,
    although the selection of specific projects remained more closely linked to
    the annual action and multiyear indicative plans. Some of TACIS' initial
    assumptions changed during this period. Like other donors, TACIS realized
    the challenges of promoting reform in Russia were more complicated than
    initially expected. As an interim EU Commission evaluation of the program
    reported in 1997, “With hindsight, it is clear that the complexity of
    societal change in the NIS [new independent states of the

    former Soviet Union] was grossly underestimated.” As a result, project
    7 The Agreement entered into force in December 1997.

    selection began to include more grassroots efforts related to improving
    civil society and developing small- and medium- sized enterprises.

    Post- crisis Reflection Leads The Russian financial crisis in late 1998
    reinforced TACIS' earlier to Modified Approach

    assumption that Russia's transition to a market economy would be a longterm
    process. TACIS officials told us that it was clear the transition had not
    gone as well as initially expected, in part because (1) the institutional
    underpinnings for a market economy and democratic society were lacking and
    (2) the necessary political consensus within Russia on how to proceed

    was not developed. The EU in general revisited its overall approach to
    helping Russia with the transition process. The increased focus on the
    institutions necessary for a market economy and democratic society led the
    EU to add a third objective to the program: support for the development of
    the rule of law. By 2000, the TACIS' annual program made democracy building
    the central focus for the first time. TACIS also placed greater emphasis on
    building institutions, working at the grassroots level,

    and developing more linkages-“ twinning”- between Russian and EU
    institutions.

    During this period, TACIS also changed the way in which it consulted with
    the Russians about plans and projects. Until the end of 1999, the Russian
    government had to initiate project proposals before TACIS could develop and
    implement them. In practice, relying exclusively on Russian project
    proposals limited TACIS' ability to play a role in several key areas of the
    transition, especially the democracy building and social service sector.
    Consequently, the 1999 regulation for TACIS moved to a so- called
    “dialogue- driven” approach in which project ideas can be
    initiated by the

    EU or the Russian government. Project approval remains a mutual EURussian
    decision.

    TACIS' strategy in Russia was also placed more firmly within the framework
    of broader EU political goals in Russia. The Partnership and Cooperation
    Agreement was supplemented by the development of a common EU strategy for
    relations with Russia. 8 The main finding in the

    strategy was that a stable, democratic Russia closely tied to a united 8
    Under the terms of the treaty obligations that form the legal basis for the
    EU, the Commission is allowed to act on behalf of the joint interests of the
    15 member states on certain foreign policy matters. EU member states
    negotiated the common goals set out in the common strategy, which were later
    approved by the Council of the EU after consultation with the Russian
    government.

    Europe was essential for maintaining lasting peace in Europe. To achieve
    this goal, the EU would focus on achieving two aims: (1) a stable, open, and
    pluralistic democracy in Russia underpinned by a market economy; and (2)
    intensified cooperation with Russia on global security goals. Technical
    assistance to Russia was now more explicitly tied to supporting broader EU
    goals. In practice, this meant development of projects like improving
    transportation links, upgrading border controls, and addressing

    environmental concerns in northwest Russia. Projects like these supported
    the dual EU goals of backing the transition in Russia to a market economy
    and democratic society for its own sake and increasing Russia's integration
    within Europe as a whole.

    New Assistance Slowed in The year 2000 has been unusual for the TACIS
    program in Russia. First, the 2000

    introduction of a new regulation for the entire program caused some shifts
    in priorities, tactics, and instruments. Second, Russia's ongoing war in
    Chechnya and the EU's concern about the human rights situation there led

    to a political decision by the EU Council in December 1999 to suspend most
    work on new TACIS assistance to Russia. Previously approved projects could
    continue to function, and work began on developing $32.3 million in new
    projects to bolster civil society and human rights. 9 However, work on new
    economic assistance projects for Russia was halted. The EU lifted this ban
    in July 2000 and currently plans to devote $53.3 million for economic

    assistance to support the implementation of Russia's economic reform
    package.

    TACIS has the legal authorization to continue assistance to Russia through
    the end of 2006. Given the EU's political commitment to support reform in
    Russia and increase its integration with the rest of Europe, the nature of

    the help may change. EU officials told us that future programs may place
    increasing emphasis on supporting EU- Russia bilateral goals such as
    complying with Partnership and Cooperation Agreement requirements,
    approximating EU standards, and removing technical barriers to additional
    trade, in addition to promoting democratic development and the growth of
    civil society.

    9 The EU approved the plan for these projects in June 2000.

    Lessons Learned TACIS does not have a systematic process for collecting
    lessons learned about its projects. TACIS officials stressed that such a
    system would be

    difficult to implement, given the large number of projects it carries out
    across Russia and the rest of the former Soviet Union. However, TACIS
    officials and TACIS reports and evaluations provide some lessons learned
    from experience in Russia.

    Achieving an impact in Russia is difficult, given the challenges of the
    operating environment. Russia is a large country with complex problems that
    are not easily addressed by technical assistance, unless there is clear
    commitment to reform. Such commitment and consensus are hard to build during
    a period of economic decline and continued

    political crisis. Sustainability of results is also difficult and requires
    follow- through on recommendations. For example, contractors cannot expect
    to have much influence from writing a report, then leaving. Successful
    projects have support from Russian counterparts and

    generally require contractors to have a close, long- term presence. The lack
    of political will and the difficulty in obtaining political consensus have
    been significant impediments to reform in Russia.

    The transition to a market economy and democratic society will take a long
    time- much longer than initially envisioned. In part this is because a
    sustainable transition to a market economy and democratic society requires
    broad, grassroots support; effective and stable institutions; and

    adequate laws and enforcement. The quality of individual consultants is
    central to project effectiveness. Russians are now more familiar with
    “how it is done” in the West. They

    need help in developing solutions that work within the Russian context.
    Within this context, the previous emphasis on knowledge transfer may require
    modification. Instead, TACIS implementers and their Russian partners should
    expect to share knowledge and information to develop joint solutions more
    frequently. For example, according to one EU official, about half of TACIS'
    ongoing projects in Russia use local experts.

    There is a clear understanding that TACIS could further improve the delivery
    of its assistance, both in terms of timeliness and impact. Many reports
    noted the lengthy delays between project approval and project

    implementation and found that these delays were rooted in (1) the complex EU
    tendering process, (2) critical understaffing of the program, and (3)
    political complications stemming from the requirement to obtain approval
    from 15 member states and the Russian government. The new

    regulation approved in December 1999 was designed to address some of these
    problems.

    Time Line of Key Economic and Political

    Appendi x VI

    Events in the Russian Federation, 1990- 2000 Year Economic events Political
    and social events

    1990 G7 asks for joint study of the Soviet economy Competitive local and
    republic level democratic elections held;

    Soviet output declines anti- Communist parties do well

    System of state orders begins to break down in face of Soviet constitution
    amended to remove Communist supremacy in growing strikes, interethnic
    strife, and creation of local political matters; new parties emerge and
    republic trade barriers follows

    Presidential guideline issued giving republics considerable freedom over
    pace of reform 1991 Gorbachev issues new economic anticrisis program

    Boris Yeltsin popularly elected Russian President Trade bloc with former
    East bloc dissolved; volume of Communist hard- liners' attempted coup fails,
    but episode trade quickly declines

    undermines the political authority of the Soviet Union and Yeltsin granted
    emergency powers to reform the

    Gorbachev Russian economy; calls for rapid, ambitious reform Yeltsin issues
    decrees declaring Russia's economic sovereignty including privatization,
    ending most wage and price

    and takes control of Soviet government agencies controls, and removing
    government controls on trade Yeltsin appoints pro- reform government and
    appeals for donor and foreign currency transactions

    assistance; Yegor Gaider named Deputy Prime Minister Inflation surges,
    output falls, deficit quickly grows due to Accord between Russia, Ukraine,
    and Belarus dissolves the Soviet low taxes and continued high government
    transfers to

    Union; Gorbachev resigns and the Soviet Union is formally households and
    enterprises dissolved

    1992 Ruble allowed to float freely Russian legislature tries to halt
    Yeltsin's reform efforts

    Most prices liberalized leading to increases five to Western nations
    announce $24 billion aid package sixteen fold in retail prices

    Acting Prime Minister Gaidar ousted and replaced by Viktor State trading
    monopoly abolished

    Chernomyrdin Mass privatization program adopted

    Gereschenko becomes head of the Central Bank of Russia, and Exchange rate
    unified

    proceeds to lend money directly to enterprises Voucher privatization begins
    Russia joins the IMF and World Bank

    1993 Treasury bills market started Legislature narrowly fails to impeach
    Yeltsin; passes resolution New ruble introduced

    limiting powers of government to implement reforms Ruble zone collapses

    President dissolves the Russian parliament and calls for elections
    Parliamentary forces attack a TV station and the mayor's office;

    government forces storm the parliament building Yeltsin introduces special
    presidential rule Federal elections for the new Duma result in victory for
    Communist

    and nationalist parties New constitution giving President greater power,
    approved in

    referendum 1994 Voucher privatization completed

    New federal Duma attempts to block the government's reform Cash- based
    privatization begins plans; Yeltsin responds by issuing decrees Speculators
    attack the ruble, causing a 20 percent drop Reformers brought back into
    government in value in one day�

    Russian troops invade Chechnya 1995 Currency bonds introduced

    Communist Party dominates Duma elections Federal Assembly bans loans from
    Central Bank to the Yeltsin's popularity rating falls below 10 percent
    government without Assembly approval

    Duma tries to impeach Yeltsin and fails Loans for shares auction begins

    Russian oligarchs agree to suspend their differences and unite to back
    Yeltsin's presidential campaign 1996 Foreign trade liberalized

    Yeltsin wins Presidential election, but is stricken with poor health Full
    current account convertibility introduced

    for much of the year Federal Eurobond sale begins

    Russian troops withdraw from Chechnya

    (Continued From Previous Page)

    Year Economic events Political and social events

    1997 Regional Eurobond sale begins Key reformers brought back into the
    government in March

    Paris Club admission Scandal over book royalties proves politically damaging
    to some London Club debt rescheduling

    key reformers Russia's first year of (barely) positive economic growth

    Duma tries to impeach Yeltsin and fails Financial crisis in Asia places
    pressure on the ruble

    1998 Interest rates on Russian bonds, securities rises as Reformers removed
    from key positions in government government attempts to finance growing
    deficit and

    Yeltsin fires Chernomyrdin, and Sergei Kiriyenko is confirmed as defend
    ruble Prime Minister $22.6 billion Western financial assistance package
    Yeltsin dismisses entire cabinet, and Yuri Primakov becomes announced

    Prime Minister Financial crisis: Russia defaults on government bonds, places
    moratorium on external debt service, widened exchange rate bands- ruble
    plunges, stocks plunge,

    GDP falls, prices soar 1999 New government fails to enact meaningful reform
    in Yeltsin dismisses cabinet again, including Primakov; Sergei response to
    crisis; but also does not turn back past

    Stepashin named new Prime Minister reforms

    Duma tries to impeach Yeltsin and fails New tax code enacted

    Vladimir Putin named prime minister after Stepashin is dismissed Exchange
    rate reunified after a brief dual exchange rate Russian troops enter
    Chechnya, launching second war there regime Duma elections result in pro-
    government majority for the first time New $4.6- billion IMF program
    announced; only $600 Yeltsin resigns and names Putin acting President
    million disbursed to date Economic growth, led by increased domestic
    production, resumes sooner than expected

    2000 Oil price increase, leads to large trade and balance of Putin is
    elected president payments surpluses

    New laws reduce political autonomy of the regions Economic growth
    accelerates

    Government cracks down on opposition media Russian government releases
    outlines of economic reform package

    Duma approves changes to tax laws

    Appendi x VII

    Additional Information on Economic Trends In this appendix, we sketch the
    key economic trends that have prevailed during Russia's economic transition.
    We have limited the discussion to trends in Russian output, poverty, debt,
    trade, foreign investment, and capital flight. Since the early 1990s, Russia
    has been described as having an “economy in transition;” that
    is, it is in the process of transforming the institutions,

    incentive systems, and economic structures of central planning into those
    appropriate to a market system of decentralized decision- making. Russia's
    economic transition faces the challenge of transforming the rigid production
    and social structures handed down to Russia by the former Soviet Union.
    Although Russia still has a long way to go to create a market economy, it
    has seen some success in overcoming the vestiges of the Soviet

    command economy. However, the transition has been, at times, accompanied by
    a substantial degree of macroeconomic instability in the form of declining
    economic output, soaring inflation, large government

    deficits, unsustainable debt, capital flight, and deteriorating living
    standards.

    Aspects of the Decline The fall of the former Soviet Union led to the
    collapse of Russia's trade with

    of Russian Output traditional partners as well as reduced flows of goods and
    services among

    the former republics. The Russian output began to slip as supply and
    distribution problems idled enterprises and as the economy deteriorated into
    barter. Also, as the government removed production subsidies, much of the
    capital capacity went out of use. Reductions in military expenditures
    further accelerated the fall in production.

    Figure 27 shows the severe drop in gross domestic production experienced by
    Russia since 1990, together with the even sharper contraction in investment
    and industrial output. The decline in consumption was less drastic,
    reflecting a correction in Soviet- era policies that discouraged

    consumption.

    Figure 27: Index of Russian Production, Consumption, Industrial Output, and
    Investment, 1990- 1999, 1990 = 100

    120 100

    80 60 40 20

    0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

    Real Gross Domestic Product Personal consumption Gross Investment in Fixed
    Capital Gross industrial output

    Source: PlanEcon.

    Measured economic output, however, may not accurately reflect Russian
    production, because many economic activities have been drawn away from the
    formal sector to the informal sector. Also, official statistics may have
    exaggerated the decline to some degree. 1 Furthermore, how the decline in
    output affected the welfare of Russian citizens is complex. The elimination
    of expensive military investments, downsizing of energy- intensive polluting
    industries, and closure of some industries that produced little actual value
    added had some beneficial effects.

    Russia achieved a positive nominal GDP growth in 1999, as industrial
    production grew by 8 percent. GDP grew by 3.2 percent in 1999, exceeding

    1 The extent of the decline in output in official statistics may be
    exaggerated, because expenditure data indicated a less severe downturn, and
    also because electricity consumption by industry had fallen far less than
    the reported decline in industrial production.

    western forecasts. This recovery was primarily attributable to the import
    substitution effect after the ruble devaluation of August 1998, the increase
    in prices of Russia's oil exports, and some industrial restructuring. As of
    September 2000, the IMF forecast GDP growth of 7.0 percent in 2000 and 4.0
    percent in 2001.

    Poverty and Living Russia has seen a surge in poverty and a deterioration of
    living standards

    Standards for a large number of its citizens. Most social indicators show
    significant worsening since the collapse of the Soviet Union in 1991.
    According to the latest United Nations human development report, Russia in
    1999 ranked

    71st among 173 countries. In 1991 based on data for 1985- 90, the United
    Nations had ranked the Soviet Union as 31st out of 160 countries. One
    measure for the extent of poverty in Russia is the trend of real GDP per

    capita and real average wages, which shows that by 1999 the average Russian
    citizen lost nearly 40 percent of his or her 1990 income. During the first
    quarter of 2000, 59.9 million Russians, or 41. 2 percent of the population,
    lived below the poverty line or subsistence level of 1,138 rubles ($ 40.21)
    a month. The average life expectancy in Russia has reflected the

    trend in poverty and living conditions (see fig. 28).

    Figure 28: Average Russian Life Expectancy at Birth, in Years

    70 68 66 64 62 60 58 56 54 52 50

    1991 1992 1993 1994 1995 1996 1997 1998 All Russians Males

    Source: IMF, Russian Federation: Recent Economic Developments.

    Much of the increase in poverty can be linked to the collapse of output and
    income, coinciding with very high rates of inflation early in the transition
    process. As a result of the increase in income inequality, the share of the
    population below the subsistence level does not necessarily improve with
    output growth. Other causes of the increase in poverty include reductions

    in state subsidies, and nonpayment and erratic payment of wages and
    pensions. 2 As can be seen from figure 29, after an initial surge during the
    early years of

    high inflation, the share of population below the subsistence level was
    relatively stable at around 20 percent from the end of 1995 to July 1998. In
    2 In 1997, overdue wages were estimated at 63 trillion rubles (equivalent to
    5 weeks' wages in the whole economy).

    September 1998, the share of population below the subsistence level surged
    due to the financial crisis and subsequent reduction in real wages. The
    traditional social support system has been severely affected by the budget
    crises of local, regional, and central governments; with health services,
    housing, and recreational and cultural facilities becoming increasingly
    inaccessible to those who are poor.

    Figure 29: Share of Russian Population Below Subsistence Level, December
    1991-June 2000

    60 50 40 30 20 10

    0 Dec- 91

    Jun- 92 Dec- 92

    Jun- 93 Dec- 93

    Jun- 94 Dec- 94

    Jun- 95 Dec- 95

    Jun- 96 Dec- 96

    Jun- 97 Dec- 97

    Jun- 98 Dec- 98

    Jun- 99 Dec- 99

    Source: Russian Economic Trends database, 2000.

    Foreign Trade The supply and distribution linkages within Russia and the
    former union fell apart when the former Soviet Union dissolved. In the
    absence of these

    linkages, the region lacked an effective payments system to facilitate
    trade. Russia, therefore, faced a collapsed demand for its traditional
    industrial

    exports and uncertain input supplies from domestic and former Soviet Union
    sources to produce its exports.

    Russia's exports have been concentrated in energy and raw materials, making
    export revenues highly sensitive to changes in commodity prices. Its imports
    were primarily consumer goods, foodstuffs, and machinery and equipment.
    Figure 30: Merchandise Trade of Russia, January 1992-December 1999 (Billions
    of U. S. dollars)

    10 9 8 7 6 5 4 3 2 1

    Jan- 92 May- 92

    Sep- 92 Jan- 93

    May- 93 Sep- 93 0

    Exports Jan- 94 Imports

    94

    Trends database, 2000.

    a May- Sep- 94 Jan- 95

    May- 95 Sep- 95

    Jan- 96 May- 96

    Sep- 96 Jan- 97

    May- 97 Sep- 97

    Source: Russian Economic Russia has generated Jan- 98 May- 98

    Sep- 98 Jan- 99

    May- 99 Sep- 99

    persistent trade surplus despite a very low level of trade for the size of
    the Russian economy. In mid 1993, both imports and exports began to
    increase, when higher oil and gas export prices prevailed and a depreciated
    ruble made exports more competitive. Imports of

    western goods and services were boosted by eased foreign exchange
    constraints. In 1998, oil prices fell and the Russian financial crisis
    caused a devaluation of the ruble and imports dropped sharply. In 1999, a
    further

    drop in imports helped to raise the merchandise trade surplus to a record
    $35 billion (see fig. 30).

    Figure 31: Composition of Russian Exports, 1994- 98

    Food and agricultural materials Others

    3% 3%

    Wood and paper products 5% Chemical products

    9% Machinery and equipment

    10% Mmineral products

    45% Metals and precious stones

    25%

    Note: “others” includes textiles, footwear, leather, and fur.
    Sources: Goskomstat: Russian Economic Trends, 1999.

    Figure 32: Composition of Russian Imports, 1994- 98

    Others Textiles, textile articles

    7% and footwear

    5% Mineral products

    6% Machinery, equipment Metals, precious stones

    and transport means and their products

    35% 8%

    Chemical products, rubber

    13% Foodstuffs and agricultural raw materials

    (excluding textile) 26%

    Note: “others” includes wood and paper products, leather, and
    fur. Source: Goskomstat: Russian Economic Trends, 1999.

    Debt of the The Russian government has substantial foreign debt, estimated
    at

    Government of Russian $146 billion (see fig. 33) at the end of 1999.
    Approximately $100 billion of Russia's foreign debt was inherited from the
    former Soviet Union. Russia Federation assumed all the debt of the former
    Soviet Union in exchange for the Soviet Union's foreign assets. The Russian
    government also has domestic debt, which was approximately $33 billion as of
    the end of 1999. 3

    3 A portion of the domestic debt is valued in foreign currency, which makes
    servicing the debt particularly burdensome to the federal budget when the
    ruble exchange rate depreciates, as was the case in 1998.

    Figure 33: Russia's Foreign Debt, 1990- 99 (Billions of U. S. dollars)

    160. 0 140. 0 120. 0 100. 0

    80.0 60.0 40.0 20.0

    0.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

    Russian era debt Soviet era debt

    Note: Soviet era debt = Debt inherited from the former Soviet Union Russian
    era debt = Debt of the Russian Federation contracted after January 1, 1992
    Source: 1990- 93 figures were calculated by GAO using World Bank, Global
    Development Finance, 1994- 99 figures are from IMF, Russian Federation:
    Recent Economic Developments. Russia's current payment obligations to
    creditors represent a significant expense in the federal budget. Debt
    service obligations in 1999 were $17.9 billion, or 29 percent of federal
    expenditures. In addition, servicing

    domestic debt amounted to another 11 percent of federal expenditures. Table
    8 shows the amount of external debt service due and paid in 1999. Russia
    paid all the debt service due on debt obligations incurred by the Russian
    federation, the majority of which was payments to multilateral institutions.
    In contrast, in 1999 Russia paid about $600 million on the

    $8. 9 billion debt service due on Soviet era debt owed primarily to Paris
    Club bilateral creditors. Furthermore, its payments on the debt of the

    former Soviet Union have been rescheduled several times. The rescheduling of
    the debt has generally postponed payments of interest. In February 2000,
    Russia's commercial creditors agreed to write off $11.6 billion in debt and
    to restructure the remaining debt over 30 years. Russia has argued that the
    high costs of market reforms call for lower debt repayments and has
    requested additional debt relief on its Soviet era debt

    from its official bilateral creditors. Between 1994 and 1999, Russia paid
    interest and principal of about $12 billion on loans it had received from
    international financial organizations. Russia expects to pay roughly $10
    billion in foreign debt payments in 2000. Also, from 2001 on, it will have
    to retire the Eurobonds it placed in 1997 and 1998. In addition, the grace
    period on debt repayment to the London and Paris clubs ends in 2002,
    boosting significantly annual foreign debt repayments. According to the
    World Bank, it is estimated that between

    2001 and 2008, a total of $117 billion in debt service will be due.

    Figure 34: Debt Components of the Russian Government, End 1999 (Billions of
    U. S. Dollars)

    Domestic $33 Commercial creditors

    18% $52 29%

    International Monetary Fund $15

    8% World Bank $7

    4% Other official creditors

    $30 17%

    Paris Club official creditors $43

    24%

    Source: Institute for Economies in Transition, 1999.

    Table 8: Foreign Currency Debt Service of the Russian Federation in 1999

    Billions of U. S. dollars

    Soviet era a Russian era b Due Paid Due Paid

    Principal 3.06 0.18 5.72 5.72 Interest 5.83 0.45 3.31 3.31

    Total debt service 8.89 0.63 9.03 9.03

    of which Multilateral 0. 00 0. 00 5. 54 5. 54 Official bilateral 8. 39 0. 40
    1. 56 1. 56 Bonds 0.00 0.00 1.64 1.64 Other commercial ** 0. 23 0. 29 0. 29
    Interest on arrears 0. 50 0. 00 0. 00 0. 00 a Debt service on debt of the
    former Soviet Union for which Russia has accepted responsibility. b Debt
    service on debt of the Russian Federation contracted after January 1, 1992.

    ** Data included in official bilateral creditors. Source: International
    Monetary Fund

    Foreign Investment The Russian federation presents a potentially lucrative
    opportunity for foreign investment due to its large domestic market, skilled
    and educated labor force, and valuable natural resources. Most foreign
    investment in Russia has been concentrated in the energy, food, and trade
    sectors with the United States and Germany as the leading foreign investors
    in Russia. Russia has, however, attracted little foreign investment compared
    to most other transition countries. Taxes, corruption, changing regulatory
    environments, bureaucratic processes, and underdeveloped property right and
    contract laws have been cited as deterrents to foreign investment to Russia.

    Figure 35: Gross Foreign Investment in Russia, 1993- 99 (Billions of U. S.
    dollars)

    8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00

    1993 1994 1995 1996 1997 1998 1999 Direct Investment Portfolio Investment

    Source: Business Information Service for the Newly Independent States
    (BISNIS), U. S. Department of Commerce, Washington, DC.

    According to the United Nations Economic Commission for Europe, cumulative
    net foreign direct investment in Russia from 1988 to1999 had amounted to
    $19.9 billion. On per capita basis, this is approximately $135 per capita
    (see fig. 36), far less than the Czech republic ($ 1612 per capita) and
    Poland ($ 527 per capita). Net foreign direct investment in Russia in 1999
    amounted to about $2 billion, out of a global total of $827 billion.
    Meanwhile, the average age of Russian manufacturing plant and equipment is
    on average three times older than that of countries in the Organization for
    Economic Cooperation and Development, implying that updating or replacing
    these items will take plenty of foreign investment.

    Figure 36: Per Capita Cumulative Foreign Direct Investment in Transition
    Economies (1988- 99)

    Tajikistan Uzbekistan Bosnia and Herzegovina

    Ukraine Belarus Kyrgyzstan Republic of Moldova

    Macedonia Georgia Armenia Russian Federation

    Albania Turkmenistan

    Romania Bulgaria Slovakia Kazakhstan

    Azerbaijan Lithuania

    Poland Slovenia

    Croatia Latvia Estonia Czech Republic

    Hungary $0 $250 $500 $750 $1,000 $1,250 $1,500 $1,750 $2,000

    Source: U. N. Economic Commission for Europe: Transition Report, 2000.

    Capital Flight Capital flight is broadly defined as all outflows of funds
    that occur in excess of those that would normally be expected as part of an
    international portfolio diversification strategy. Outflows of funds
    originating from truly criminal activities, outflows of legally earned funds
    that breach capital controls and taxes, and fully legal outflows that comply
    with existing

    regulations but are motivated by a desire on the part of the investor to
    flee the country owing to political uncertainty are regarded as capital
    flight. The economic consequences of capital flight are reduced investment
    in the economy, loss of productive capacity, lower government revenue for
    easing the less desirable aspects of economic adjustment, and loss of
    control of monetary policy.

    The transition process has caused Russia to confront a variety of problems
    that make it risky for its citizens to hold financial assets within Russia's
    borders. These problems include macroeconomic instability, unsettled

    political environments, corruption, poorly defined property rights, a
    fragile banking system, high and unevenly enforced taxes, and fraudulent
    managerial practices. As a result, capital flight has depleted financial
    resources needed for economic reform and revitalization. The main forms of
    capital flight from Russia include (1) understated export earnings, (2)
    smuggling or unreported exports of goods, (3) over- invoicing of imports,
    (4) advance payments for import contracts without subsequent deliveries, and
    (4) capital account transactions with nonresident (offshore)

    banks that are not regulated by Russian authorities. The channels of capital
    flight in Russia are mainly the foreign trade sector and the banking sector.
    In the export sector, revenues from the energy sector are the primary source
    of capital flight. Over- invoiced imports of foodstuffs are also alleged to
    be a channel for capital flight.

    Estimates of capital flight are limited by the inability to distinguish
    between legal and illegal capital flows. The Central Bank of Russia
    estimated that capital flight during 1994- 98 averaged $11 billion a year,
    or approximately $75 per capita (see fig. 38). Other estimates of capital
    flight from Russia range between $10 billion and $20 billion per year.
    According to the IMF, Russian authorities have sought to decrease capital
    flight through intensification of exchange controls, tightened tax
    administration and financial sector supervision.

    Figure 37: Estimate of Capital Flight From Russia, 1994- 98 (Billions of U.
    S. dollars)

    16 14 12 10

    8 6 4 2 0

    1994 1995 1996 1997 1998 Non reciept of export earnings Unredeemed import
    advances Nonequivalent barter 50- percent of errors and ommissions

    Source: Central Bank of Russia

    Comments From the Department of State and

    Appendi x VI II USAID

    Appendi x IX Comments From the Treasury Department

    Comments From the International Monetary

    Appendi x X Fund

    Appendi x XI Comments From the World Bank

    2 pages

    Comments From the European Bank for

    Appendi x XII Reconstruction and Development

    Appendi x XI II

    Comments From the European Commission GAO's comment supplementing those in
    the report text appears at end of this appendix.

    Now on p. 92. See comment 1.

    Appendi x XI V

    GAO Contacts and Staff Acknowledgments GAO Contacts Celia J. Thomas, (202)
    512- 8987 Barbara I. Keller, (202) 512- 9624 Acknowledgments In addition to
    those named above, Dave Maurer, Gezu Bekele, Eugene

    Beye, Nima Patel Edwards, Bruce Kutnick, Joy Labez, Jane Li, Rona
    Mendelsohn, and John Treanor made significant contributions to this report.

    Related GAO Products International Monetary Fund: Status of Efforts to
    Strengthen Safeguards Over Lending (NSIAD- 00- 211, Sept. 1, 2000).

    World Bank: Management Controls Stronger, but Challenges in Fighting
    Corruption Remain (NSIAD- 00- 73, Apr. 6, 2000).

    Foreign Assistance: Donation of U. S. Planting Seed to Russia in 1999 Had
    Weaknesses (NSIAD- 00- 91, Mar. 9, 2000).

    Foreign Assistance: Enterprise Funds' Contributions to Private Sector
    Development Vary (NSIAD- 99- 221, Sept. 14, 1999).

    International Monetary Fund: Approach Used to Establish and Monitor
    Conditions for Financial Assistance (GGD/ NSIAD- 99- 168, June 22,1999).
    Foreign Assistance: Treasury's Technical Assistance Program (NSIAD- 99- 65,
    Mar. 12, 1999).

    Foreign Assistance: Harvard Institute for International Development's Work
    in Russia and Ukraine (NSIAD- 97- 27, Nov. 27, 1996).

    Promoting Democracy: Progress Report on U. S. Democratic Development
    Assistance to Russia (NSIAD- 96- 40, Feb. 29, 1996). Former Soviet Union:
    Information on U. S. Bilateral Program Funding (NSIAD- 96- 37, Dec. 15,
    1995). Former Soviet Union: An Update on Coordination of U. S. Assistance
    and Economic Cooperation Programs (NSIAD- 96- 16, Dec. 15, 1995).

    Foreign Assistance: Assessment of Selected USAID Projects in Russia (NSIAD-
    95- 156, Aug. 3, 1995). Former Soviet Union: U. S. Bilateral Program Lacks
    Effective Coordination (NSIAD- 95- 10, Feb. 7, 1995). Former Soviet Union:
    Creditworthiness of Successor States and U. S. Export Credit Guarantees
    (GGD- 95- 60, Feb. 24, 1995).

    Former Soviet Union: Assistance by the United States and Other Donors
    (NSIAD- 93- 101, Dec. 30, 1992).

    (711548) Lett er

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    GAO United States General Accounting Office

    Page 1 GAO- 01- 8 Foreign Assistance to Russia

    Contents

    Contents Page 2 GAO- 01- 8 Foreign Assistance to Russia

    Contents Page 3 GAO- 01- 8 Foreign Assistance to Russia

    Contents Page 4 GAO- 01- 8 Foreign Assistance to Russia

    United States General Accounting Office Washington, D. C. 20548

    Page 5 GAO- 01- 8 Foreign Assistance to Russia

    Page 6 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 7 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 8 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 9 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 10 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 11 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 12 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 13 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 14 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 15 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 16 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 17 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 18 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 19 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 20 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 21 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 22 GAO- 01- 8 Foreign Assisstance of Russia

    Executive Summary Page 23 GAO- 01- 8 Foreign Assisstance of Russia

    Page 24 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1

    Chapter 1 Introduction

    Page 25 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 26 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 27 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 28 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 29 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 30 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 31 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 32 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 33 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 34 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 35 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 36 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 37 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 1 Introduction

    Page 38 GAO- 01- 8 Foreign Assistance to Russia

    Page 39 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 40 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 41 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 42 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 43 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 44 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 45 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 46 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 47 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 48 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 49 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 50 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 51 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 52 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 53 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 54 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 55 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 56 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 57 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 58 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 59 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 60 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 61 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 62 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 63 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 64 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 65 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
    Assistance

    Page 66 GAO- 01- 8 Foreign Assistance to Russia

    Page 67 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 68 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 69 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 70 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 71 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 72 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 73 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 74 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 75 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 76 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 77 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 78 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 79 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 80 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 81 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 82 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 83 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 84 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 85 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 86 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 87 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 88 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 89 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 90 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 91 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 92 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 93 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 94 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 95 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 96 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 97 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 98 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 99 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 100 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 101 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 102 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 103 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
    Objectives

    Page 104 GAO- 01- 8 Foreign Assistance to Russia

    Page 105 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 4

    Chapter 4 Conclusions and Lessons Learned

    Page 106 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 4 Conclusions and Lessons Learned

    Page 107 GAO- 01- 8 Foreign Assistance to Russia

    Chapter 4 Conclusions and Lessons Learned

    Page 108 GAO- 01- 8 Foreign Assistance to Russia

    Page 109 GAO- 01- 8 Foreign Assistance to Russia

    Page 110 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 111 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 112 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 113 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 114 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 115 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 116 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 117 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 118 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 119 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 120 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 121 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 122 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 123 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 124 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 125 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 126 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 127 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 128 GAO- 01- 8 Foreign Assistance to Russia

    Appendix I Additional Information on International Monetary Fund Programs in
    Russia

    Page 129 GAO- 01- 8 Foreign Assistance to Russia

    Page 130 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 131 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 132 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 133 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 134 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 135 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 136 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 137 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 138 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 139 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 140 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 141 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 142 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 143 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 144 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 145 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 146 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 147 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 148 GAO- 01- 8 Foreign Assistance to Russia

    Appendix II Additional Information on World Bank Assistance to Russia

    Page 149 GAO- 01- 8 Foreign Assistance to Russia

    Page 150 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 151 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 152 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 153 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 154 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 155 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 156 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 157 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 158 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 159 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 160 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 161 GAO- 01- 8 Foreign Assistance to Russia

    Appendix III Additional Information on European Bank for Reconstruction and
    Development

    Programs in Russia Page 162 GAO- 01- 8 Foreign Assistance to Russia

    Page 163 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 164 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 165 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 166 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 167 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 168 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 169 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 170 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 171 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 172 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 173 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 174 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 175 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 176 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 177 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 178 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 179 GAO- 01- 8 Foreign Assistance to Russia

    Appendix IV Additional Information on the U. S. Freedom Support Act Program
    in Russia

    Page 180 GAO- 01- 8 Foreign Assistance to Russia

    Page 181 GAO- 01- 8 Foreign Assistance to Russia

    Appendix V

    Appendix V Additional Information on the European Union's TACIS Programs in
    Russia

    Page 182 GAO- 01- 8 Foreign Assistance to Russia

    Appendix V Additional Information on the European Union's TACIS Programs in
    Russia

    Page 183 GAO- 01- 8 Foreign Assistance to Russia

    Appendix V Additional Information on the European Union's TACIS Programs in
    Russia

    Page 184 GAO- 01- 8 Foreign Assistance to Russia

    Appendix V Additional Information on the European Union's TACIS Programs in
    Russia

    Page 185 GAO- 01- 8 Foreign Assistance to Russia

    Appendix V Additional Information on the European Union's TACIS Programs in
    Russia

    Page 186 GAO- 01- 8 Foreign Assistance to Russia

    Appendix V Additional Information on the European Union's TACIS Programs in
    Russia

    Page 187 GAO- 01- 8 Foreign Assistance to Russia

    Appendix V Additional Information on the European Union's TACIS Programs in
    Russia

    Page 188 GAO- 01- 8 Foreign Assistance to Russia

    Appendix V Additional Information on the European Union's TACIS Programs in
    Russia

    Page 189 GAO- 01- 8 Foreign Assistance to Russia

    Appendix V Additional Information on the European Union's TACIS Programs in
    Russia

    Page 190 GAO- 01- 8 Foreign Assistance to Russia

    Appendix V Additional Information on the European Union's TACIS Programs in
    Russia

    Page 191 GAO- 01- 8 Foreign Assistance to Russia

    Appendix V Additional Information on the European Union's TACIS Programs in
    Russia

    Page 192 GAO- 01- 8 Foreign Assistance to Russia

    Page 193 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VI

    Appendix VI Time Line of Key Economic and Political Events in the Russian
    Federation, 1990- 2000

    Page 194 GAO- 01- 8 Foreign Assistance to Russia

    Page 195 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII

    Appendix VII Additional Information on Economic Trends

    Page 196 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 197 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 198 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 199 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 200 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 201 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 202 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 203 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 204 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 205 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 206 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 207 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 208 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VII Additional Information on Economic Trends

    Page 209 GAO- 01- 8 Foreign Assistance to Russia

    Page 210 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VIII

    Appendix VIII Comments From the Department of State and USAID

    Page 211 GAO- 01- 8 Foreign Assistance to Russia

    Appendix VIII Comments From the Department of State and USAID

    Page 212 GAO- 01- 8 Foreign Assistance to Russia

    Page 213 GAO- 01- 8 Foreign Assistance in Russia

    Appendix IX

    Appendix IX Comments From the Treasury Department

    Page 214 GAO- 01- 8 Foreign Assistance in Russia

    Page 215 GAO- 01- 8 Foreign Assistance to Russia

    Appendix X

    Appendix X Comments From the International Monetary Fund

    Page 216 GAO- 01- 8 Foreign Assistance to Russia

    Page 217 GAO- 01- 8 Foreign Assistance to Russia

    Appendix XI

    Appendix XI Comments From the World Bank

    Page 218 GAO- 01- 8 Foreign Assistance to Russia

    Page 219 GAO- 01- 8 Foreign Assistance to Russia

    Appendix XII

    Appendix XII Comments From the European Bank for Reconstruction and
    Development

    Page 220 GAO- 01- 8 Foreign Assistance to Russia

    Page 221 GAO- 01- 8 Foreign Assistance to Russia

    Appendix XIII

    Appendix XIII Comments From the European Commission

    Page 222 GAO- 01- 8 Foreign Assistance to Russia

    The following is GAO's comment on the European Commission letter dated
    October 25, 2000.

    GAO Comment 1. Our summary view of TACIS effectiveness in Russia is based on
    the findings in the EU's own evaluations and the information collected from
    discussions with several EU, Russian, and private officials. EU evaluations

    of TACIS programs in Russia over the years have painted a generally mixed
    picture of the success of individual projects. However, Russian and private
    officials concerns about the design and implementation of the program

    over the period. We have attributed these views to the officials and not the
    GAO.

    Page 223 GAO- 01- 8 Foreign Assistance to Russia

    Appendix XIV

    Page 224 GAO- 01- 8 Foreign Assistance to Russia

    United States General Accounting Office Washington, D. C. 20548- 0001

    Official Business Penalty for Private Use $300

    Address Correction Requested First Class

    Postage & Fees Paid GAO Permit No. GI00 PRIORITY
    *** End of document. ***