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
Kï¿½hler, 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 dayï¿½

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).

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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

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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Chapter 1 Introduction

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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

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Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
Assistance

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Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
Assistance

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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

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Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
Assistance

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Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
Assistance

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Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
Assistance

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Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
Assistance

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Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
Assistance

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Chapter 2 Donors Have Adopted Different Strategies and Means for Providing
Assistance

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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

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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Chapter 3 Institutions and Donors Have Had Limited Success in Meeting Their
Objectives

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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

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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

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Page 110 GAO- 01- 8 Foreign Assistance to Russia

Appendix I

Appendix I Additional Information on International Monetary Fund Programs in
Russia

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Appendix I Additional Information on International Monetary Fund Programs in
Russia

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Appendix I Additional Information on International Monetary Fund Programs in
Russia

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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

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Appendix I Additional Information on International Monetary Fund Programs in
Russia

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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

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Appendix I Additional Information on International Monetary Fund Programs in
Russia

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Appendix I Additional Information on International Monetary Fund Programs in
Russia

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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

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Appendix I Additional Information on International Monetary Fund Programs in
Russia

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Appendix I Additional Information on International Monetary Fund Programs in
Russia

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Appendix I Additional Information on International Monetary Fund Programs in
Russia

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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

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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Appendix II Additional Information on World Bank Assistance to Russia

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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

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Appendix IV Additional Information on the U. S. Freedom Support Act Program
in Russia

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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

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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

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Appendix IV Additional Information on the U. S. Freedom Support Act Program
in Russia

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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

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Appendix IV Additional Information on the U. S. Freedom Support Act Program
in Russia

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Appendix IV Additional Information on the U. S. Freedom Support Act Program
in Russia

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Appendix IV Additional Information on the U. S. Freedom Support Act Program
in Russia

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Appendix IV Additional Information on the U. S. Freedom Support Act Program
in Russia

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Page 181 GAO- 01- 8 Foreign Assistance to Russia

Appendix V

Appendix V Additional Information on the European Union's TACIS Programs in
Russia

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Appendix V Additional Information on the European Union's TACIS Programs in
Russia

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Appendix V Additional Information on the European Union's TACIS Programs in
Russia

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Appendix V Additional Information on the European Union's TACIS Programs in
Russia

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Appendix V Additional Information on the European Union's TACIS Programs in
Russia

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Appendix V Additional Information on the European Union's TACIS Programs in
Russia

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Appendix V Additional Information on the European Union's TACIS Programs in
Russia

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Appendix V Additional Information on the European Union's TACIS Programs in
Russia

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Appendix V Additional Information on the European Union's TACIS Programs in
Russia

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Appendix V Additional Information on the European Union's TACIS Programs in
Russia

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Appendix V Additional Information on the European Union's TACIS Programs in
Russia

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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

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VII Additional Information on Economic Trends

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Appendix VIII

Appendix VIII Comments From the Department of State and USAID

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Appendix VIII Comments From the Department of State and USAID

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Appendix IX

Appendix IX Comments From the Treasury Department

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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

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Appendix XII

Appendix XII Comments From the European Bank for Reconstruction and
Development

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Appendix XIII

Appendix XIII Comments From the European Commission

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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.

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Appendix XIV

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