19413 Russian Federation: December 1 1998 Country Assistance Strategy (CAS) Progress Report A. Introduction 1. Now in its seventh year of transition, Russia is in the midst of a serious economic crisis. The prospect of the first per capita economic growth in nearly a decade, which just six months ago seemed to be within reach, has now receded again. Short-term measures to localize the extent of the crisis and mitigate its impact have become the immediate priority. A new Government came to office in mid-September 1998, following the domestic debt default and devaluation in August. It reflects a wide range of political and economic views and faces the daunting tasks of stemming a widespread loss of confidence and arresting the crisis, ensuring minimally adequate supplies of food, medicine and heat to carry the country through the hard Russian winter, and forging a workable consensus and clear future policy direction for the country. 2. The last full CAS for the Russian Federation was discussed by the Bank's Executive Directors on June 5, 1997.1 This report (a) briefly summarizes recent developments, and (b) outlines an interim plan in the present highly uncertain environment for Bank Group operations during the next 6-9 months. It is expected that a full CAS will be discussed with the Board in the summer of 1999, or sooner if changes in the environment so warrant. B. Recent Developments 3. The events of the period since the 1997 CAS was discussed by the Board have been dominated by the fallout from unanticipated global economic and domestic political developments. Starting in late 1997, the rapidly spreading financial crisis in emerging markets and declining world market prices for oil gas and metals, superimposed on Russia's underlying unsustainable fiscal/debt fundamentals, tipped the Russian economy into a series of crisis episodes. During the ensuing six months, investors started to exit the government securities market (GKOs and OFZs), driving interest rates sharply higher and depleting Russia's foreign exchange reserves in the process. By May 1998, it became increasingly clear that a massive effort would be needed to defuse the crisis and begin the restoration of investor confidence. During May-July 1998, the Central Bank of Russia (CBR) defended the exchange rate corridor under conditions of weakening investor confidence, vulnerability of the banking system and rapid growth of GKO debt service costs. 4. Following intensive negotiations which began towards the end of June, the Government announced an enhanced package of fiscal and far-reaching structural reforms on July 13, backed by $22.6 billion dollars in financing from the IMF, the Bank, and the Governnent of Japan. Of this sum, $14.8 billion was to be disbursed between end-July and December 31, 1998, and the balance over 1999. 5. The program envisaged prompt Duma action on key fiscal measures as a strong signal to the market. The Duma's subsequent rejection of several of these measures raised questions about govermnent's ability to meet the program's fiscal targets, undermining the credibility of the program. As a result, the IMF reduced the first tranche under the program approved July 20 to $4.8 I Report No. 16549-RU, May 6, 1997. billion (down from $5.6 billion originally planned). Heightened investor sensitivities to unsettling developments in East Asia and the consequent impact on global markets also complicated the policy picture. 6. Following IBRD Board approval on August 6, the Bank disbursed $300 million as the first tranche of a three-tranche, back-loaded $1.5 billion SAL 3 negotiated as part of the enhanced package. SAL 3 focused on a substantial acceleration and deepening of reforms relating to infrastructure monopolies, the environment for the private sector, fiscal management and the banking sector. 7. In the event, the Fund/Bank/Japan supported package failed to restore investor confidence. Interest rates, after declining temporarily to roughly the levels of mid-June 1998, rose rapidly again and remained far above levels consistent with sustainability given the degree of fiscal adjustment envisaged by the program. At the same time, the ruble remained under considerable pressure, as the Central Bank of Russia lost over $4 billion of reserves (from July 10th to August 14th) in defense of the exchange rate. 8. These events culminated, on August 17, 1998, in decisions to widen the exchange rate corridor to Rb 6.0 - Rb 9.5 per dollar, restructure domestic debt obligations falling due to end-1999, and a 90-day moratorium on foreign debt principal payments to non-residents by commercial banks and companies, as well as on obligations stemming from currency forwards and margin calls related to collateralized loans. One week later, on August 24, the Kiriyenko Government was dismissed. Following protracted political negotiations, including the rejection of Mr. Chemomyrdin's candidacy as Prime Minister, a broad political consensus emerged which resulted in the Duma strongly endorsing Mr. Primakov as Prime Minister on 11 September. 9. In the immediate aftermath of the events of 17 August, the payments system was largely frozen, imports declined precipitously, and, despite heavy intervention by CBR entailing a substantial further loss of reserves, the exchange rate depreciated beyond the newly announced corridor. The ruble was floated on September 2, and subsequently reached a low of Rb 22 - Rb 23 per dollar around September 7. Over the last few weeks, the exchange rate has oscillated in the range of Rb 15 to Rb 18 per dollar with a depreciating trend, supported so far primarily by a more restrictive currency trading regime and a partial freeze on domestic bank deposits. The monetary base as of end-November has grown by about 20 percent since mid-August. A major recession is now underway: after declining by 4.5 percent in July, real GDP collapsed in August and September, falling by 8.2 and 9.9 percent vis-a-vis the corresponding periods of 1997; cumulative inflation over August - October was of the order of 50 percent; federal tax revenue collections (excluding non-tax revenue and revenues of extra-budgetary funds) declined from Rb 18.4 billion in July, to Rb 15 - Rb 16 billion per month in August and September; imports during September were down 42.6 percent from August levels (down by 51.6 percent compared to September 1997); and, although a basic payments system has been partially restored, a banking crisis, in the making for several months, is in full bloom. The impact is also severe at the sub-national level, where local governments have now widely defaulted on debt, payments arrears are rapidly accumulating, and a sharp rise in unemployment is evident. 10. The social impact of these developments is still unfolding but is likely to be profound. The immediate impacts fell primarily on employees in the financial sector (unemployment), household deposit holders (loss of the real value of deposits), and employees of budget sector organizations 2 and pensioners (arrears). The burst of inflation and sharp decline in output that ensued hit much wider segments of the population. Imports of foods and medicines have dropped dramatically, however, and localized shortages are already appearing in import-dependent regions in the Northern and Far Eastern parts of the country. Municipal utilities are also short of cash to purchase fuel, and localized outages of heat and power are also beginning to occur. If the crisis were to persist and further erode funding for basic services in health and education, Russia's human capital base would be at risk, diminishing the country's prospects for years, or even decades. Subnational governments face the brunt on this front too, since virtually all social assistance and social services program are financed from their budgets, while fiscal pressures at the federal level have led to a sharp cut in budget transfers to the regions. 11. The Government's plans and policies for dealing with the crisis have been set forth recently, in preliminary form, in an anti-crisis program adopted on October 31. The plan, while setting forth moderate (approximately 30%) inflation as a goal, is not yet underpinned by a coherent financing plan. It presents a broad overview of the Government's proposed economic direction, rather than an elaboration of a specific set of proposed policy measures. The program, which Prime Minister Primakov has indicated will be under continuing review and subject to adjustment as needed, does appear to signal a shift in policies from those embraced by the previous government. In addition to a number of measures intended to strengthen social protection for the winter months (e.g., a freeze of utility rates at "the lowest possible levels", establishment of a food reserve, imposition of price controls on selected medicines, commitment to pay wages on time in cash), and more fundamental reforms to social protection (e.g., stricter targeting of social assistance benefits, indexation of certain minimum benefit levels), the plan envisages a return to more activist industrial and trade policies (e.g., government-led restructuring of failing enterprises, allocation of subsidies and credit to maintain failing enterprises, made-to-measure tariffs to protect domestic producers), a less liberal foreign exchange regime (e.g., significantly more stringent export surrender requirements, de facto multiple exchange rates) and a reversion to the use of offsets as a government finance mechanism. The Prime Minister has stated that the plan is a living document, and that these elements of the plan do not signal a fundamental shift in the direction of policy, but rather a set of temporary crisis intervention measures. 12. While Russia's near-term prospects are marked by extreme uncertainty, it is clear that its immediate options are tightly constrained. The fiscal situation will be exceedingly difficult, as the Government copes with (a) repayment of arrears to pensioners, wage earners, and suppliers, (b) expenditures to mitigate the social impacts of the crisis, (c) expenditures to restructure at least a minimal, core banking system, (d) difficulty in maintaining tax revenues and a rising trend in resort to offsets, and (e) the heavy burden of public debt service due. The range of plausible near-term (one-to-two years) scenarios is thus centered on relatively unattractive prospective outcomes. Only a few broad parameters are clear at this point: (a) a deep recession, with GDP down 6% or so this year and 5-15% in 1999; (b) inflation ranging from moderate (30% +) to high or hyper; (c) a very difficult financial situation, with default or restructuring of debt inevitable (see paragraph 13); and (d) a substantial increase in the prevalence of poverty. How, within these parameters, the economy evolves will depend critically upon the decisions made with regard to fiscal adjustment, the amount of monetary financing, accommodations reached with external creditors, progress on structural reforms and developments in international financial and commodity markets. 13. Russia's debt situation is critical and its creditworthiness for additional lending on non- concessional terms at best marginal. Payments on external and domestic debts of the federal 3 government for 1999 (including service due on recently rescheduled GKO's and OFZs) are likely to be in excess of the federal budget capacity. The Government has stated publicly, however, that it intends to request a rescheduling of its Paris and London Club debt, and that it would, with such a rescheduling and with gross disbursements from multilateral and/or bilateral donors of $5-7 billion, be able to maintain its reserves at approximately their current level (roughly $13 billion) and honor its commitments to other creditors, including the IFIs. C. Immediate Crisis Response 14. With the eruption of a full-blown crisis in August, the operating environment facing the Bank Group changed dramatically. First, there was clear demand for Bank support in areas, such as banking sector restructuring and crisis emergency response, not envisaged in the 1997 CAS. Second, it was also clear that the Bank's ongoing portfolio would need to be carefully reviewed in light of the crisis, which had an immediate, significant deleterious impact on project implementation - for example through freezing of Special Accounts and lines of credit, reduced repayment capacity of final borrowers, including local governments, and weakened availability of counterpart funds. It also raised issues for the design of projects under preparation, such as sustainable levels of cost recovery. Implementation and investment prospects confronting IFC also deteriorated markedly, causing IFC to put its pipeline on hold (see Annex C). MIGA is awaiting clarifications on economic policies before proceeding with new guarantees (see Annex D). Third, overall progress on the structural reform program supported by the three ongoing adjustment loans (SAL 3, Coal 2 and SPAL) slowed significantly. While some technical work has continued, implementation of key policy measures is lagging seriously, particularly in the areas of infrastructure monopolies, private sector development, fiscal management, financial sector reform, coal sector restructuring, and social safety net reforms. It is not yet clear to what extent the general policy directions indicated by the Government so far (paragraph 11) could generate specific policy actions that would run counter to the ongoing reforms agreed earlier with the Bank, and would, therefore, make it difficult to proceed with disbursement of financial support under the ongoing adjustment loans. 15. Several initiatives to support the Govermment's efforts to arrest the crisis and to respond to these changes in environment have been undertaken in parallel with efforts to sustain the broad momentum of the program outlined in the 1997 CAS. First, at the invitation of the Central Bank of Russia and jointly with the IMF, an intensive effort has been undertaken to support development of a strategy and implementation plan for bank restructuring (Annex E). Implementation of portions of the plan is ongoing, although the authorities have not yet clearly indicated the extent to which they intend to implement the recommendations of the partnership team. The * Bank has also been working to ensure coordination amongst donors, notably EBRD and EU, which have expressed an interest in providing support to bank restructuring. * Second, assessments of the evolution of the crisis, its potential social impacts, and appropriate responses to arrest the crisis and mitigate its social impacts were initiated and shared with the Government. The Bank also helped foster a sharing of information within the donor community on banking issues, and food and drug availability. 4 * Third, an assessment of ways in which the Bank Group's efforts might be expanded or redirected to help address social impacts arising from the crisis was initiated. * Fourth, staff from concerned core ministries and the Bank have just completed a Special Country Portfolio Performance Review (CPPR). The Review concluded that, as a result of the crisis, overall performance of the portfolio (percent of projects rated "satisfactory") has slipped to 54% in early November from 78% at end July; and proposed a schedule of actions to be taken immediately and over the course of the next few months to complete project restructuring and improve the portfolio. Actions recommnended at the working level include: (i) steps to restructure projects, either because they are most directly affected by the devaluation of the ruble and the collapse of the banking sector, or to accommodate appropriate additional activities to respond to the crisis; (ii) immediate cancellation of about $200 million from ten projects where it is unlikely the loans can be fully disbursed or where beneficiaries no longer desire the original amounts in full, with possible further cancellations in the New Year; and (iii) ongoing monitoring of critical issues emerging as the result of the crisis, such as the increasing risk of regional and municipal governments being able to service project related debt or to provide counterpart funds necessary to Bank projects on-lent to them. The results of this work have now been submitted to the Government for approval. In addition, to allow project implementation to resume, the Bank has responded to a request from the Ministry of Finance to establish new Special Accounts to replace those frozen by the collapse of the banking sector. 3 Fifth, we have been working with the Government to assess progress in implementing the reform programs that underpin the three ongoing adjustment loans: SAL 3, Coal 2 and SPAL. For SAL 3 and Coal 2, so far there have been significant delays in implementing the agreed programs, and as mentioned above, there is some question about the consistency of the relevant reform program with the broad policy directions of the new Government. For SPAL, it now appears certain that the conditions of the release of the third tranche, especially those relating to balance in the Pension Fund, cannot be met in the near future. It is therefore likely that the third tranche will need to be cancelled or the related reform program revised and linked to a delayed tranche release. D. Interim Operating Plan 16. As of the end of November, the new Government's future policy directions are still unclear, both as concerns macro-economic management and structural reform. In consequence, the appropriate interim strategy for the Bank over the next few months is to work with the Government to better understand its strategy and to maintain readiness to respond, through both lending and non-lending services, to a range of contingencies. In this posture, we would monitor the social situation to facilitate a response to any emergencies that might develop over the winter months with respect to food, fuel and critical medicines. We would position ourselves to strengthen support to basic social assistance and social services. We would continue efforts to ensure high quality preparation of projects for possible future financing. We would continue with TA efforts on public debt management and other high priority crisis management issues. And we would, through supervision, ESW and EDI conferences/workshops, intensify the structural reform policy dialogue 5 and continue to encourage the Government to resume an accelerated, if perhaps reformulated, program of reforms. The key elements of this approach will be as follows: * Policy advice and technical assistance on financial sector restructuring. Although the Government and the Central Bank have not yet committed to some of the key principles (e.g., support the re-capitalization of a minimal core banking system, public funds injected only after owner's and non-household depositors' funds exhausted) of the bank restructuring strategy recommended by the IBRD/IMF team, the team will continue its dialogue with the authorities and will support restructuring activities that are consistent with the IBRD/IMF-recommended strategy. Advice and assistance, financed in part by restructuring the Financial Institution Development Project, will be provided with regard to the establishment of a legal framework that is conducive to sound future development of banking, and for audits of banks to ascertain their condition and suitability for restructuring. The Bank would also continue to coordinate with EU, EBRD, and bilateral donors. In the event the authorities adopt a strategy consistent with the principles/strategy advocated by the IBRD and IMF, appropriate support would be considered for the new bank restructuring agency that would be created to deal with debt resolution, through the ongoing FIDP. * Addressing Social Issues. The Government has suggested that, to assist in responding to the crisis, the Bank: (i) continue with the Social Protection Implementation Loan (SPIL) and, in particular, accelerate the extension of targeting tools piloted under that project to more regions of the country; (ii) cancel or recalibrate the third tranche of the Social Protection Adjustment Loan (SPAL), (iii) develop a new operation that would provide targeted assistance to the most needy under crisis conditions; (iv) finance an emergency purchase of essential drugs; (v) accelerate the preparation of four new projects (Pension Reform Implementation, Health Reform, Northern Migration Pilot, and Education Reform). Work is underway to assess the most helpful response in each of these areas. 3 Intensive follow up to the results of the Special CPPR Once agreement is reached with the Government on the results of the CPPR, the focus will be on ensuring expeditious implementation of the agreed actions over the coming months. * Revisiting the Agenda for Structural Reform As mentioned above, there has been slippage in the reform agendas supported by SAL 3, Coal 2 and SPAL, and there is uncertainty about the specifics of the new Government's reform plans in these areas. Accordingly, the Bank has proposed that a series of discussions be organized in the coming weeks to review in detail reform options covered by these operations, and attempt to revise (and, where necessary, extend to end-1999) the relevant reform agendas, taking into account their original thrust, the new Governnent's policies, and the impact of the financial crisis. To the extent that significant changes are proposed, these would be submitted to the Board for its consideration. On the other hand, significant reversals in the thrust of the reforms supported by ongoing adjustment operations, and/or a protracted hiatus in re-establishing a satisfactory macroeconomic framework would lead to an evaluation of these operations for possible cancellation of remaining tranches. 6 * Continue preparation of projects currently in pipeline. At the time the crisis struck, apart from the Second Highways Project, five investment project loans/guarantees were under preparation for possible presentation to the Board during the balance of FY 99, (equivalent to maximum total investment lending/guarantees of about $500 million). These are being reviewed in consultation with the government to determine any modifications to project concepts to meet crisis needs and/or to ensure sustainability in a crisis/post-crisis environment. Preparation of a possible additional FY99 operation to deal with social impacts of the crisis has also been initiated. Provided that progress on preparation remains satisfactory, the Region will continue to invest preparation resources in preparing the pipeline for FY99 and beyond. This posture will, however, be revisited during the preparation of the full CAS, at which time investment in project preparation would be adjusted, if necessary, to prospective future operating levels. * Maintain readiness to resume adjustment lending. Preparation activities for a Subnational Adjustment Loan (SNAL) and Agriculture Sector Adjustment Loan (AgSECAL) - which were under preparation at the time of the onset of the crisis - will be maintained unless developments indicate that they should be abandoned. If appropriate, a possible further SAL would be prepared during the second half of CY 1999. * Emphasize strengthening of public resource management. A diagnostic, survey analysis will be undertaken to document current practices, identify weaknesses in systems for ensuring that public funds management and public administration are conducted honestly and efficiently, and propose remedies in current policies, systems and procedures to eliminate these weaknesses. Remedial actions could in time be supported through lending or provision of further technical assistance. This will also be a principal topic of the public expenditure analysis and management analytical work now beginning. The Government has also requested a loan to strengthen the Treasury management system, on which work is now beginning. In view of serious concerns about the efficiency and transparency of use of public sector resources, work in this area is expected to feature prominently in the Bank Group's Russia program for the foreseeable future. 17. These activities will be developed cooperatively in the framework of a high level Government/Bank working group supervised by Deputy Prime Minister Maslyukov and World Bank Group President Wolfensohn. As the working group reaches understandings about Russia's future policy directions and priorities for Bank support, the Bank would be prepared to consider a modest amount of additional investment lending (beyond the Highways II Project being discussed in conjunction with this Progress Report) in FY 1999. However, such additional Bank lending in FY 1999 would need to be based on a satisfactory assessment of developments in a number of key areas: (i) formal agreement on the outcome of the recent CPPR and satisfactory progress in its implementation; (ii) agreement on any revised program of structural reforms under SAL 3, and on a revised reform program in the area of social protection, and progress in implementation; (iii) agreement on and satisfactory implementation of joint efforts by the Government and the Bank to strengthen the management of public resources; (iv) implementation of a cooperative approach to resolution of debt service problems; and (v) management of the macro-economic situation and 7 outlook, including in particular for avoiding hyperinflation. Priority would be given in any additional lending undertaken this FY to socially targeted operations and operations supporting development of basic institutions, and with due attention to the risks assumed by the Bank. E. Perspectives on A Future Bank Group Strategy 18. The events of the last six months - indeed the last six years - have to be viewed with profound concern. Growth has been long deferred and, due to the crisis, lies still further in the future. It would be easy, but wrong, to conclude that the intended reforms were wrong or that the reform efforts of the last years have entirely failed. Viewed from the perspective of the coping and resilience that have emerged after the outbreak of the crisis (e.g., nascent democratic institutions have survived, widespread shortages have not emerged - in large part due to a growing number of entrepreneurs - as they did during earlier crises, inflation - after an early spurt - was quickly if perhaps temporarily reigned in, and social unrest and disruption have so far been averted, reversals of reforms have been limited, and in some instances - e.g., illegal imposition of price controls by the regions - have been re-reversed), a great deal has been accomplished. Nonetheless, it is clear from the speed and depth with which the crisis has afflicted the country that too little progress has been made in addressing the pervasive "non payments culture", fiscal and financial indiscipline, institutional weakness, corruption and deterioration of the social safety net. Deep policy and institutional problems remain to be addressed in virtually every sector, including downsizing and restructuring in health and education, fundamental restructuring of agricultural enterprises, and cleaning up the environment to name but a few. 19. The situation over the coming 2-3 years and perhaps beyond will be fraught with risk, and the years beyond will be difficult. With Russia's very high debt levels and financing options narrowly constrained, all plausible development scenarios balance on a razor's edge. In the near term, the authorities will find it extraordinarily difficult, and most likely, impossible, to meet all obligations - domestic and external - as originally scheduled; even relatively small unfavorable shocks would be difficult to accommodate. Over the longer term difficult but fundamental questions need to be addressed: How might sustainable real per capita growth be attained and what sorts of policies and other interventions would be most conducive to this outcome? Is there a role for a more active state role in industrial policy? What would be the instruments by which this policy could be effected. How would this growth be financed? Is there a politically, socially and financially feasible growth path? 20. These are the issues facing the Russian Federation and its development partners today. How best the Bank can help find answers and support whatever new approaches may be required - will be further explored in a full CAS. Intensive work in close cooperation with the Government (in connection with the working group mentioned in paragraph 17 above) and with other multilateral and bilateral partners will precede the preparation of the next CAS. James D. Wolfensohn President by Caio K. Koch-Weser 8 Annex Al Page 1 of 1 Russia: Key Economic & Program Indicators - Change from Last CAS Forecast in Last CAS Actual Revised CAS Forecast Economy (CY) 1997b 1998b 1999b 2000b 1995c 1996" 1997C 1998a 1999b 2000b Growth rates (%) GDP 0.0 4.0 6.0 6.0 -4.1 -3.5 0.8 -6.0 -7.0 0.0 Exports 2.2 2.5 3.0 3.5 5.9 2.2 5.1 2.5 3.0 3.5 Imports 5.0 6.6 6.6 6.6 .. .. 12.0 -14.3 -3.8 3.2 Inflation (period average, %) 18.0 12.0 9.0 7.0 170.7 43.9 17.3 34.0 78.0 40.0 National accounts (% GDP) Current account balance 1.5 0.3 -1.0 -1.6 1.9 2.1 0.6 -0.1 0.3 -0.3 Gross investment 22.7 22.3 22.9 23.7 22.5 22.6 22.0 20.0 ... ... Public financed (% GDP) Fiscal balance -6,4 -4.9 -3.7 -2.5 -5.8 -8.7 -7.9 -6.5 -1.8 1.4 Foreign financing 1.9 1.8 2.5 1.3 2.1 2.7 2.0 4.5 -2.6 -4.1 International reserves (as months of imports) 2.5 3.3 3.1 3.1 2.4 1.9 2.1 1.9 1.7 1.6 Programn (Bank's FYJ FY97b FY98b FY99b JYOOQ pY95c FY96c F'J97c FY98c pygga pyoQo Lending ($ million)e 1,610 2,012 2,700 2,650 1,741 1,816 1,816 1,629 1,900 Gross disbursements 1,518 2,034 2,110 1,990 142 981 2,085 2,172 750 500 ($ million) a. Estimated year. b. Projected year. The revised projections presented here and in Annex B6 are subject to an exceptionally high degree of uncertainty and should not be construed to represent a most-likely scenario. See text paragraph 12. c. Actual outcome. d. General government. e. Including guarantees. OIS template updated on 12/01/98 c:\winnt.EN\profiles\ ...\R\CAS\KE&PIClO.doc Russian Federation at a glance 9116198 Europe & Lower- POVERTY and SOCLAL Russian Central middle- Federation Asia Income Developmnt diarmoond* 1997 Population. midkar (miliions) 147.3 476 2.285 Life exectancy GNP per caprta (Atas mneho4 US$) 2,740 2,320 1,230 GNP (Atlas melhodo uSs billions) 403.5 1,106 2,818 Average annual growth, 1991-97 Population ( -0.2 0.2 1.2 Labor force (XJ 0.1 0.5 1.3 GNP Gross per primary Most recent estimate (latest year available, 1991-97) capita enrollment Poverty (% ofpopulaton below nathonal pove.ly line) 31 Urban population (% of total population) 77 67 42 Life expectancy at birth (years) 67 69 69 Infant mortality (per 1,000 IWo births) 17 25 36 Child malnutrition (% of children unlrer5) 3 .. .. Access to safe water Access to safe water (% of population) .. .. 84 Illiteracy (% of populatfon age 15+) .. .. 19 Gross primary enrollment (% oftschoodage population) 91 92 111 Russian Federafton Male .. .. 116 Lower-rn7r#e-income gtrup Female .. .. 113 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1976 1986 1996 1997 Economic ratios GDP (USS billions) .. .. 429.7 492.8 Gross domestic investment/GDP .. .. 22.6 21.8 Trd Exports of goods and services/GOP .. .. 24.1 22.7 rade Gross domestic savings/GDP .. .. 26.6 24.5 Gross national savings/GDP .. .. 24.7 22.4 Current account balance/GDP .. .. 2.1 0.5 Dot Interest payments/GDP .. .. 0.8 0.7 mescestent Total debVGDP .. .. 29.1 25.1 Savings n Total debt servicelexports .. .. 6.7 6.5 Present value of debt/GDP .. .. 21.3 Present value of debt/exports .. .. 87.5 Indebtedness 1976-86 1989-97 1996 1997 1998-02 (average annual growth) GDP .. .. -3.5 0.8 - Russian Federation GNP per capita .. .. -3.5 0.6 .. Lower-m*klJe-income group Exports of goods and services .. .. 2.3 5.1 .. STRUCTURE of the ECONOMW 1976 1986 1996 1997 Growthratssofoutputandlnveslznent(%) (% of GDP) 40 Agricufture .. .. 7.3 8.0 D Industry .. .. 39.1 36.5 o nufacturing e.. .. 3. 5. Services .. . 536 55.5 Private consumption .. .. 61.9 63.6 92 93 94 95 9e 97 General government consumption .. .. 11.5 11.9 5D1 GOP Imports of goods and services .. .. 20.1 20.0 1976-86 1989-97 1996 1997 Growft rates of exports and Imports(%) (average annual gn79vth7)2 Agricuhure .. .. -9.0 0.1 0 Industry .. .. -6.5 0.3 Manufaduring .. .. .. .. 0 Services .. .. 1.5 0.2 5 97 Private consumption .. .. 11.5 3.4 -20 General government consumption .. .. -27.3 4.7 Gross domestic investment .. .. -21.6 -2.8 -40 Imports of goods and services .. .. 0.2 12.0 - Exports : Imports Gross national product .. .. -3.8 0.3 Note: 1997 data are preliminary estimates. The diamonds show four key indicators in the country tin bokid compared with its income-group average. If data are missing, the diamond will be incomplete. Russian Federation PRICES and GOVERNMENT FINANCE 1976 1986 1996 1997 Inflation (%) Domestic prfcr# oo (% change) 47.5 1 Consumer prices 47.5 148 Implicit GDP defator 43.9 17.3 . o Govemment flnance SW4 (% or GDP. includes cun'ent grants) o CurTent revenue 29.5 30.6 92 93 94 aS g 97 Current budget balance -3.8 -3.3 -GDP deflator CPI Overall surplus/defcit -8.7 -7.6 TRADE (US$ rillions) 1976 1986 1996 1997 Export and import levels (USS millions) Total exports (fob) 90,513 88,676 joo ooo Crude oil 15,976 14,773 rJ Natural gas 15,814 16,419 . Manufactures 9,100 9,450 o0.000 Total imports (cit) 70,020 74,451 40000 FM Food 11,500 12,970 W11111 Fuel and energy 1,848 2,135 20,00 go Capital goods - 14,400 18,447 o - 2 91 92 92 94 95 96 97 Export price index (1995=100) Import price index (1995=100) . Exports U Imports Terms of trade (1995=100) BALANCE of PAYMENTS 1976 1986 1996 1997 Current account balance to GDP ratio () (US$ -tlibns) Exports of goods and services 103,459 102,196 3 Imports of goods and seNiceS 86s216 90,065 Resource balance 17,243 12,131 Net income -8,171 -9,200 Net current transfers 24 -362 Current account balance 9,096 2,569 Financing items (net) . .. -13.957 -1,471 Changes in net reserves 49861 -19098 | 92 93 94 95 7 Memo: Reserves including gold fUSS nilllons) .. .. 15,324 17,908 Conversion rate (DEC, locarUSS) - 5.1 5.3 EXTERNAL DEBT and RESOURCE FLOWS 1976 1986 1996 1997 (USS millions) Total debt outstanding and disbursed 125,044 123,500 IBRD 2.509 S 53 Compositdon of total d9,t 57 (USS millions) IDA 0 0 | C. 13231 | Total debt service 7,002 6,746 IBRD 121 178 0:413 IDA 0 0 F: 34.200 Composition of net resource flows Ofricial grants 459 Ofricial creditors 2029 1,725 Private creditors 968 3,981 Foreign direct investment 2.478 6,241 800 Portfolio equity 5.008 . . Worild Bank program Commitments 1.923 3344 A - IBRO E - Bilateral Disbursements 1.097 2,691 | - IDA 0- Other mutsatrai F - Private Principalrepayments 0 0 C-IMF G-Shor-termi Net flows 1.097 2,691 Interest payments 121 178 Net transfers 976 2.513 Development. Economics 9116J98 CAS Annex B2 Generated: 11/30/98 Russian Federation - Selected Indicators of Bank Portfolio Performance and Management Indicator 1996 1997 1998 1999 PorMfoIio Assessment Number of Projects under implementation' 27 34 35 35 Average implementation period (years)b 1.33 1.81 2.71 3.09 Percent of problem projects"' by nunber 37.04 17.65 17.14 22.86 by amount 35.12 20.46 12.42 21.53 Percent of projects at risk" d by number 65.38 34.38 32.35 38.24 by amount 68.27 41.79 27.66 33.86 Disbursement ratio (%)' 11.58 16.24 20.03 4.47 Poryfolio Management CPPR during the year (yes/no) Supervision resources (total US$) 2,957.82 4,488.44 4,979.54 1,533.67 Average Supervision (US$/project) 109.55 132.01 142.27 43.82 Memorandum item Since FY80 Last five FYs Projects evaluated by OED by number 2 2 by amount (US$ millions) 1200.00 1200.00 Percent rated U or HU by number 0.00 0.00 by amount 0.00 0.00 a. As shown in the Annual Report on Portfolio Performance (except for current FY) b. Average age of projects in the Banks country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: investment projects only. Generated by the Operations Infornation System (OIS) CAS Annex B3 Russian Federation - Bank Group Program Summary, FY 1999 Proposed IBRD Lending Program, FY 1999a Strategic rewardsb Implementationb FY Project US$(M) (HIM/L) risks (HIM/L) 1999 HWY REHAB & MAINT II 400.0 SAL III 1,500.0 Total FY 1999 1,900.0 a. This table presents the proposed program for the current fiscal year. b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate (M), or low (L). Generated by the Operations Information System (OIS) on 11/30/98 CAS Annex B3 Russian Federation - IFC and MIGA Program, FY96-99 Past Category 1996 1997 1998 1999 IFC approvals (US$m)a 0.00 0.00 140.65 0.00 Sector (%/6) 0.00 0.00 0.00 0.00 Cement & Construction 0.00 0.00 1.00 0.00 Financial Services 0.00 0.00 16.00 0.00 Food & Agro-Business 0.00 0.00 1.00 0.00 Indust &,Consumer Svcs 0.00 0.00 26.00 0.00 Inftastructure 0.00 0.00 41.00 0.00 Manufacturing 0.00 0.00 11.00 0.00 Timber, Pulp & Paper 0.00 0.00 5.00 0.00 TOTAL 100.00 100.00 100.00 100.00 Investment instrument (%/O) Loans 0.00 0.00 74.00 0.00 Equity 0.00 0.00 26.00 0.00 Quasi-Equity b 0.00 0.00 2.00 000 Other 0.00 0.00 0.00 0.00 TOTAL 100.00 100.00 100.00 100.00 MIGA guarantees (US$m) 0.00 0.00 0.00 0.00 MIGA commitments (US$m) 0.00 0.00 0.00 0.00 aExcludes AEF projects. "Includes quasi-equity types of both loan and equity instruments. Generated by the Operations information System (OIS) on 11/30/98 Annex B6 Page 1 of 3 RUSSIAN FEDERATION Table 1: Key Economic Indicators Actual Estimate Projected* Indicator 1993 1994 1995 1996 1997 1998 1999 2000 National accounts (as % GDP at current market prices) Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculturea 7.6 6.1 7.1 6.9 7.5 Industrya 40.5 41.2 40.4 36.7 33.3 Servicea 46.4 49.7 45.6 50.3 52.2 Total Consumption 69.1 69.7 73.8 73.4 75.3 74.6 75.7 75.6 Gross domestic fixed 20.4 21.8 20.3 20.5 19.4 20.0 15.6 16.2 investment Government investment .. 6.1 5.4 4.5 4.3 4.4 0.4 0.5 Private investment .. 19.4 17.1 18.1 17.7 17.6 17.2 17.7 (includes increase in stocks) Exports (GNFS)b 35.5 27.7 26.4 24.1 22.9 25.8 36.6 34.9 tmports (GNFS) 31.6 22.9 22.7 20.1 20.1 22.5 30.0 28.7 Gross domestic savings 30.9 30.3 26.2 26.6 24.7 25.4 24.3 24.4 Gross national savingsC 28.5 28.7 24.4 24.7 22.5 21.9 17.9 17.9 Memorandum items Gross domestic product 183,780 277,025 347,466 429,259 446,982 334,789 245,600 270,508 (US$ million at current prices) Gross national product per 2,770 2,330 2,240 2,400 2,740 capita (US$, Atlas method) Real annual growth rates (%, calculated from 1996 prices) Gross domestic product at -8.7% -12.6% -4.1% -3.5% 0.8% -6.0% -7.0% 0.0% market prices Gross Domestic Income -10.1% -12.6% -4.4% -3.3% 1.0% -9.6% -7.4% -0.5% Real annual per capita growth rates (%, calculated from 1996 prices) Gross domestic product at -8.6% -12.5% 4.0% -3.2% 1.1% -5.8% -6.9% 0.6% market prices Total consumption 8.1% -3.0% -0.3% 3.2% 3.9% -10.7% -1.5% -1.3% Private consumption 7.3% 13.2% -0.5% 11.8% 3.5% -12.6% -1.5% -1.4% (Continued) p:\Russia\PREM\macro\1cp\victor\US\FY99\Ruscasbk.xls Bs 12/1/98 9:32 AM Annex B6 Page 2 of 3 Table 1: Key Economic Indicators (Continued) Actual Estimate Projected* Indicator 1993 1994 1995 1996 1997 1998 1999 2000 Balance of Payments (USSm) Exports (GNFS)b 65244 76667 91610 103459 102196 86538 90007 94351 Merchandise FOB 58422 67716 81552 90513 88676 76521 79559 83260 Imports (GNFS)b 58110 63448 78885 86216 90065 75193 73564 77644 Merchandise FOB 44219 48005 60084 67557 71350 58762 57294 60635 Resource balance 7134 13219 12725 17243 12131 11344 16443 16707 Net current transfers -112 39 24 -362 193 206 220 (including official current transfers) Current account balance 5477 9523 6086 8633 1773 -178 694 -847 (after official capital grants) Net private foreign direct 386 637 2017 2478 6241 3300 1500 1500 investment Long-term loans (net) -10780 -12904 -10479 -2434 -3947 7615 -4839 -10439 Othercapital (net, including 8317 -1325 7305 -13538 -2969 -16658 2931 10764 errors and omissions) Change in reservesd -3400 4069 -4929 4861 -1098 5921 -287 -978 Memorandum items Resource balance (% of 3.9% 4.8% 3.7% 4.0% 2.7% 3.4% 6.7% 6.2% GDP at current market prices) Real annual growth rates (1996 prices) Merchandise exports .. .. .. .. 5.1% 2.5% 3.0% 3.5% (FOB) Primary .. .. .. .. 4.5% 2.5% 3.0% 3.5% Manufactures .. .. .. 9.4% 2.5% 3.0% 3.5% Merchandise imports .. .. .. .. 12.0% -14.3% -3.8% 3.2% (CIF) (Continued) p:\Russia'PREM'tnacro\1cp\victor\US\FY99ERuscasbkxis B6 12V1/98 9:32 AM Annex B6 Page 3 of 3 Table 1: Key Economic Indicators (Continued) Actual Estimate Proj ected* Indicator 1993 1994 1995 1996 1997 1998 1999 2000 Public finance (as % of GDP at current market prices)e Current revenues 38.6 36.7 33.6 29.5 34.8 27.5 30.0 31.2 Current expenditures 42.6 40.7 3411 33.3 35.8 29.2 31.1 28.9 Current account surplus(+) -4.1 -4.1 -0.5 -3.8 -1.1 -1.7 -1.2 2.3 or deficit (-) Capital expenditure 4.8 7.4 6.2 5.2 8.4 5.0 1.0 1.1 Foreign fmancing 3.2 1.3 2.1 2.7 2.0 4.5 -2.6 -4.1 Monetary indicators M2/GDP (atcurrentmarket 23.9 21.2 17.4 16.7 17.9 18.1 6.8 11.0 prices) GrowthofM2(%) 286.6 216.5 112.6 33.1 26.1 27.7 -38.0 126.5 Private sector credit growth / .. .. .. .. .. 84.8 111.0 94.1 total credit growth (%) Price indices ( 1996 =100) Merchandise export price .. .. .. 100.0 93.2 78.5 79.3 80.2 index Merchandise import price .. .. .. 100.0 94.9 90.6 91.8 94.2 index Merchandise terms of trade .. .. .. 100.0 98.3 86.7 86.4 85.2 index Realexchangerate 35.9 59.7 74.4 100.0 97.8 81.0 63.1 67.7 (US$/LCU)f Consumer price index 895.3% 303.2% 188.7% 47.5% 14.8% 33.8% 78.4% 40.0% (% growth rate) GDP deflator 888.1% 307.3% 170.7% 43.8% 16.6% 34.1% 78.0% 40.0% (% growth rate) * The projections presented in this Annex are consistent with those revised forecasts in Annex Al, and are subject to an exceptionally high degree of uncertainty. See text paragraph 12. a. Sectoral GDPs are measured at factor cost. b. "GNFS" denotes "goods and nonfactor services." c. Includes net unrequited transfers excluding official capital grants. d. Includes use of IMF resources. e. Data refer to general government. f. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation. p:\Russia1PREM\macro\1cpMictor1USFY99\Ruscasbk.xIs B6 12/11/98 9:32 AM Annex B7 Page 1 of I RUSSIAN FEDERATION Table 2: Key Exposure Indicators Actual Estimate Projected Indicator 1993 1994 1995 1996 1997 1998 1999 2000 Total debtoutstanding and 112940 121921 120461 125044 123500 142778 144743 145302 disbursed (lDO) (IJS$m)3 Net disbursements (US$m)ae 4334 1089 4619 6082 8292 20659 540 -550 Totaldebtservice(TDS) 2333 3674 6303 7168 7190 9374 18359 18510 (US$m)a d Debt and debt service indicators (%/6) TDO/XGSb 171.7 157.3 129.7 119.4 119.0 163.9 159.8 153.2 TDOIGDP 61.5 44.0 34.7 29.1 27.6 42.6 58.9 53.7 TDS/XGS d 3.5 4.7 6.8 6.8 6.9 10.8 20.3 19.5 IBRD exposure indicators IBRD DS/public DS (%)d 0.5 1.0 0.9 1.7 2.7 5.7 4.2 5.1 Preferred creditorDS/public 11.5 13.7 13.6 18.8 23.9 24.9 30.9 29.3 DS (%) d IBRD DS/XGS(%) 0.0 0.0 0.1 0.1 0.2 0.6 0.9 1.0 IBRD TDO (US$m) 367 684 1524 2509 5266 6786 7185 7295 Share of I13RD portfolio (%) 0.4 0.6 1.4 2.3 5.0 5.6 5.7 5.7 a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Debt service paid (after rescheduling). e. Amortization paid (after rescheduling). q:NR\US%1998\SAL3\Ruscasbk.)ds B7 11/30198 4:03 PM CAS Annex Bg Generated: 11/30/9X Status of Bank Group Operations in Russian Federation Operations Portfolio Difference Between expected original Amount in US$ Millions and actual Last PSR Fiscal disbursements a/ Supervision Ratitng b/ Project ID Year Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd Dev Obj Imp Prog Number of Closed Projects: 6 Active Projects RU-PE-8822 1993 GOVERNMENT OF RUSSIA EMPLOYMENT SERV. & SOCIAL PROT 70.00 0.00 10.00 26.09 36.07 15.64 S S RU-PE-8810 1993 GOVT OF RUSSIA PRIVATIZATION 90.00 0.00 0.00 12.96 12.96 12.96 S S RU-PE-8809 1993 RUSSIAN FEDERATION OIL REHAB. 610.00 0.00 183.75 14.48 198.22 14.47 U S RU-PE-34579 1994 REP OF RUSSIAN FED LAND REFORM IMPL. SU 80.00 0.00 D.00 61.36 55.37 0.00 S S RU-PE-8839 1994 GOVT. OF RUSSIA ENTERPRISE SUPPORT 200.00 0.00 D.00 173.75 148.44 0.00 S S RU-PE-8828 1994 MOF FINANCIAL INSTITUTIO 200.00 0.00 0.00 135.97 135.98 70.58 s s RU-PE-8811 1994 REP.OF RUSSIAN FED. AGRIC. REFORM IMPL. 240.00 0.00 80.00 104.80 171.48 52.77 U U RU-PE-8808 1994 RUSSIAN FEDERATION HIGHWAY REHAB & MAIN 300.00 0.00 0.00 46.02 22.06 0.00 S S RU-PE-8805 1994 RUSSIAN FEDERATION OIL REHAB. II 500.00 0.00 4.72 171.03 175.75 171.03 S S RU-PE-40409 1995 RUSSIAN FEDERATION EMERG. OIL SPILL MIT 99.00 0.00 0.00 21.07 21.06 0.00 s S RU-PE-38572 1995 GOVT. OF RUSSIA TAX ADMINISTRATION 16.80 0.00 0.00 9.26 9.28 8.62 S S RU-PE-8827 1995 RUSSIAN FEDERATION HOUSING 400.00 0.00 0.00 258.07 184.27 0.00 S S RU-PE-8826 1995 RUSSIAN FEDERATION MANAGEMENT AND FINAN 40.00 0.00 0.00 11.32 9.42 0.00 S s RU-PE-8823 1995 COVERNMENT OF RUSSIA PORTFOLIO DEVELOPMEN 40.00 0.00 0.00 29.69 29.68 11.29 S S RU-PE-8821 1995 RUSSIAN FEDERATION ENVIRONMENT MANAGEME 110.00 0.00 0.00 70.99 6.80 0.00 S U RU-PE-8806 1995 RUSSIAN FEDERATION URBAN TRANSPORT 329.00 0.00 0.00 101.22 66.22 0.00 S S RU-PE-8803 1995 RUSSIAN FEDERATION RUSSIA ENERGY EFFICY 106.50 0.00 36.50 66.93 91.83 30.93 U S RU-PE-45622 1996 RUSSIAN FEDERATION COAL IAP 25.00 0.00 0.00 19.42 8.27 0.00 S S RU-PE-42622 1996 GOVT. OF RUSSIAN FEDERATI CAPITAL MARKET DEV. 89.00 0.00 0.00 83.45 25.45 3.81 S S RU-PE-38571 1996 GOVERNMENT OF RUSSIA MEDICAL EQUIPMENT 270.00 0.00 0.00 122.63 47.62 0.00 S S RU-PE-36973 1996 RUSSIAN FEDERATION ENTP.HOUSING DIVESTI 300.00 0.00 0.00 288.65 26.98 0.00 S S RU-PE-35764 1996 RUSSIAN FEDERATION BRIDGE REHABILITATIO 350.00 0.00 0.00 312.85 121.54 0.00 S S RU-PE-35761 1996 GOVT. OF RUSSIA COMM4UNITY SOCIAL INF 200.00 0.00 0.00 187.91 30.60 0.00 S S RU-PE-8837 1996 GOVT OF RUSSIA STANDARDS DEVELOP. 24.00 0.00 0.00 17.65 11.03 0.00 S S RU-PE-8831 1996 GOVT. OF RUSSIA LEGAL REFORM PROJECT 58.00 0.00 0.00 51.47 22.97 0.00 S S RU-PE-50891 1997 RUSSIAN FEDERATION ELECTR. SECTOR REFOR 40.00 0.00 0.00 40.00 17.50 0.00 U U RU-PE-44200 1997 RUSSIAN FEDERATION BUREAU OF ECON.POLIC 22.60 0.00 0.00 18.78 -2.22 0.00 S S RU-PE-42720 1997 RUSSIAN FEDERATION ST. PETERSBURG REHAB 31.00 0.00 0.00 28.28 7.16 0.00 HS s RU-PE-38573 1997 RUSSIAN FEDERATION SOC. PROTECT. ADJ. 800.00 0.00 0.00 250.00 250.00 0.00 S S RU-PE-8825 1997 GOVT. OF RUSSIA EDUCATION INNOVATION 71.00 0.00 0.00 69.46 .14 0.00 S U RU-PE-8814 1997 GOVERNMENT OF RUSSIA HEALTH REFORM PILOT 66.00 0.00 0.00 64.38 7.68 0.00 5 S RU-PE-50486 1998 RUSSIAN EEDERATION COAL SECAL II 800.00 0.00 0.00 400.00 200.00 0.00 5 U RU-PE-46496 1998 GOVERNMENT OF RUSSIA SOC. PROTECT. IMPL. 28.60 0.00 0.00 26.94 4.43 0.00 S S RU-PE-55137 1999 RUSSIAN FEDERATION SAL III 1,500.00 0.00 0.00 1,200.00 -300.00 0.00 Total 8,106.50 0.00 314.97 4,496.88 1,854.04 392.10 Active Projects Closed Projects Total Total Disbursed (IBRD and IDA): 3,294.64 3,100.00 6,394.64 of which has been repaid: 9.71 29.30 39.01 Total now held by IBRD and IDA: 7,781.80 3,070.70 10,852.50 Amount sold : 0.00 0.00 0.00 Of which repaid : 0.00 0.00 0.00 Total Undisbursed : 4,496.88 0.00 4,496.88 Generated by the Operations Informnation System (OIS) Page I CAS Annex R8 Generated: 11/30/98 a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. b. Following the FY94 Annual Review of Portfolio performance (ARIP') , a letter based system was introduced (HS = highly Satisfactory, S = satisfactory, U = unsatisfactory, HU - highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901) , August 23, 1994. Notes: Disbursement data is updated at the end of the first week of the month. Status of the portfolio does not yet reflect preliminary agreements reached during the special CPPR. Portfolio status will be updated once the Government confirms the agreements reached. Generated by the Operations Infonnation System (OIS) Page 2 CAS Annex B8 Russian Federation STATEMENT OF IFC's Committed and Disbursed Portfolio As of 3 1-Oct-98 (In US Dollar Millions) Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1993 Polar Lights 18.93 0.00 0.00 0.00 18.93 0.00 0.00 0.00 1993 Vasyugan .94 0.00 1.50 0.00 .94 0.00 1.50 0.00 1994 Framlington Fund 0.00 8.00 0:00 0.00 0.00 8.00 0.00 0.00 1994 Russia Registry 0.00 1.50 0.00 0.00 0.00 1.50 0.00 0.00 1994 RTDC 0.00 7.50 0.00 0.00 0.00 7.50 0.00 0.00 1995 A.O. Volga 26.77 11.00 0.00 34.87 26.77 11.00 0.00 34.87 1995 Depsona Z.A.O. 5.30 1.50 0.00 0.00 0.00 1.50 0.00 0.00 1995 First NIS Fund 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 1995 Russ Tech Fnd 0.00 2.00 0.00 0.00 0.00 1.00 0.00 0.00 1995 SCF 0.00 4.53 0.00 0.00 0.00 4.53 0.00 0.00 1996 Pioneer First 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.00 1996 UNEXIM Bank 13.93 0.00 0.00 0.00 6.43 0.00 0.00 0.00 1996/98 Alpha Cement 0.00 15.59 0.00 0.00 0.00 15.59 0.00 0.00 1997 Aminex RUS 17.00 5.49 0.00 0.00 0.00 5.49 0.00 0.00 1997 PBCM 25.00 0.00 0.00 15.00 18.75 0.00 0.00 11.25 1997 PLM Eastem Hold 0.00 5.50 0.00 0.00 0.00 5.50 0.00 0.00 1998 Borsteklo 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 1998 DreVo 0.00 .90 0.00 0.00 0.00 0.00 0.00 0.00 1998 Mosenergo 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 Toribank 0.00 12.24 0.00 0.00 0.00 12.24 0.00 0.00 Total Portfolio: 127.87 109.75 1.50 49.87 71.82 107.85 1.50 46.12 Approvals Pending Commitment Loan Equitv Ouasi Partic 1996 ALPHA CEMENT 20.00 0.00 0.00 0.00 1998 DEPOSITORY CLEAR .50 .05 0.00 0.00 1997 DEPSONA B LOAN 0.00 0.00 0.00 5.20 1998 ELCOTEQ 0.00 .10 0.00 0.00 1998 GARANTI MOSCOW 5.00 3.00 0.00 0.00 1997 INTL. BOTTLERS 0.00 5.00 0.00 0.00 1998 PAKENSO 6.00 1.50 0.00 0.00 1997 POKROVSKIY MINE 16.00 0.00 0.00 32.30 1998 RAMSTORE 36.00 0.00 0.00 0.00 1997 RUSSIAN IT FUND 0.00 15.00 0.00 0.00 1998 SEVERSTAL POWER 25.00 0.00 0.00 67.00 1997 ZOLOTO MiNING 0.00 4.00 0.00 0.00 Total Pending Comutitment: 108.50 28.65 0.00 104.50 Generated by the Operations Infornation System (OIS) on 11/30/98 Annex C IFC Operations Pre-crisis Environment: * Prior to the onset of the Russian financial crisis, the investment climate in Russia was difficult and presented many challenges including: (i) the high prevalence of barter throughout the economy; (ii) depressed demand throughout many sectors owing to Russia's limited economic growth; (iii) the distorted overall tax structure and arbitrary tax and customs administration; (iv) lack of corporate governance, transparency and effective management at the enterprise level; and (v) rampant crime and corruption. * In light of the difficult business climate, IFC's pre-crisis strategy consisted of a number of components: (i) mobilizing FDI by working with investors in sectors which were financially viable and had strong developmental impact; (ii) working with Russian companies that met or were willing to meet IFC's criteria concerning corporate governance, transparency and accounting standards; (iii) assisting in the structuring of venture capital funds to provide equity investments in medium-sized private sector projects; (iv) providing credit lines to banks for on- lending to medium-sized private sector companies; and (v) supplying technical assistance in privatization and capital markets development through the use of donor funds. l The Director and Department responsible for Russia were formally relocated to Moscow on July 1, 1997. This transfer has improved IFC's effectiveness in working with clients and identifying projects. Results: * As of end-September 1998, IFC's held and pending commitment portfolio in Russia (excluding B loan participants and risk management and guarantee facilities) totaled US$366 million in 29 projects. Of these 29 projects, 11 projects are financial markets projects amounting to $84.8 million and eight projects are general manufacturing projects amounting to $157.0 million. The remaining projects are in the oil, mining, infrastructure and agribusiness sectors. US$181.2 million in 18 investmnents was disbursed and outstanding. In addition, there were US$202.4 million of held and pending B loans of which US$46.1 million in two investments is disbursed and outstanding. * In FY98, IFC approved 11 projects in Russia, totaling US$123 million for IFC's account and US$115 million for the account of participant banks. Of the approved projects, three projects were in financial markets totaling US$22.1 million, five projects were in general manufacturing totaling US$55.2 million and the remainder were in power and agribusiness. At this point, six projects are pending commitment (including all of the US$115 million in syndicated amounts), of which US$25 million for IFC's account (in the Severstal power project) is suspended and pending further negotiations related to the market changes. Projects in FY98 included: . To facilitate the mobilization of FDI, the Corporation approved a US$30.5 million investment in Ramstore, a high-volume food distribution and retailing company sponsored by Turkey's largest conglomerate. In addition, a US$15 million equity investment was Annex C approved for Borsteklo, a flat glass manufacturing project, which included significant foreign investment. Commensurate with IFC's strategy of working with domestic partners, the Corporation also approved a US$20 million loan to Mosenergo, a domestic energy utility. * To promote the development of market infrastructure institutions, IFC approved an equity investment in the Depository Clearing Company, a provider of clearing, settlement and depository services. In addition, IFC approved its first direct equity investment in a Russian bank. * FY98 technical assistance results included: (i) completing land privatization advisory work by reorganizing nearly 500 farms and establishing four Russian NGOs; (ii) working to improve the legal and regulatory framework governing leasing; (iii) providing support to an IFC investment in a yogurt plant by clarifying the legal status of farms; and (iv) establishing third party arbitration courts to resolve contract disputes. Present Crisis: * On August 17, 1998, facing unsustainable market pressures, contracting foreign exchange reserves, a large fiscal deficit and growing public debt service payments, the Russian Government announced the abandonment of its pegged exchange rate regime, a ninety day moratorium on principal payments to non-residents by banks and corporates and the restructuring of domestic government debt obligations. * The effects of the August policy decisions have reverberated throughout the economy. The ensuing crisis has resulted in a breakdown of the payments system, blocked bank accounts, a dramatic decline in real GDP and the resurgence of inflation. * The immediate impact of the Russian crisis on IFC's portfolio is in the financial sector. IFC has approximately US$30 million in four equity funds and US$20 million in three Russian banks: Tokobank, Unexim Bank and Toribank. All three bank investments are in jeopardy. Equity funds' net asset values have plummeted and the prospects of investee companies remain unclear. * IFC's investments in the general manufacturing sector are at risk for various reasons, including the immediate impact of frozen bank accounts and the near to medium term consequences of the expected decline in the domestic market. * IFC's other large Russian investments are generally in export-based projects, where medium term vulnerability is lower, but where issues of credit access and availability of inputs are immediate issues. Post-Crisis Operating Strategy: Based on the current environment, it is difficult to maintain anything more than a short-term operating strategy. This strategy, which will be adjusted as the situation becomes clearer, currently consists of the following elements: Annex C . IFC is reviewing its existing portfolio to determine which project companies might be candidates for additional investment through restructuring. The Corporation is analyzing all approved but uncommitted projects to see if IFC should proceed and, if so, on what basis. * IFC's credibility and umbrella may enable it to perform a catalytic role in mobilizing FDI and to help the Government to restore investor confidence. If a suitable reform strategy emerges, IFC will continue to work with foreign investors who have long-term interests in Russia. The Corporation will focus on a number of sectors with high development impact including: banking, manufacturing, oil, gas, mining, and other sectors with export potential. * IFC's ongoing support to financial institutions in Russia has been an effective means to assist domestic companies. IFC will continue its close cooperation with IBRD concerning the restructuring of the financial industry. If a realistic market-oriented plan for reviving the banking sector is implemented, the Corporation will consider participating in the restructuring of a commercial bank and/or retail bank alongside strategic foreign partners. The Corporation will continue to support key capital market institutions and may pursue trade finance programs with foreign banks. * IFC will continue to seek to work with Russian partners in projects where IFC can encourage high standards of governance, transparency, accounting and management. * Technical assistance will continue to play an important role in IFC's development strategy. Technical assistance will be provided in those areas where the new Government has demonstrated a commitment to reforrn, and where donor financing remains available. Projects in FY99 may include the following: (i) continuing advice on leasing legislation and investment prospects; (ii) identifying investment opportunities in the forestry sector; (iii) restructuring industrial enterprises, where appropriate, in the context of potential IFC investtnents; and (iv) assisting in institution building to support housing finance. * Given the current crisis and the need to repair investor confidence, FIAS tentatively plans (depending on the availability of financing) to expand its program of assisting sub-national govermnents in improving the FDI climate. This may begin with a workshop for several oblasts and municipalities in northwest Russia on the subject of oblast-level investment policies and investment promotion, followed by more intensive work in interested sub-national Governments later in the year. * At this point, projects in the pre-crisis pipeline have been cancelled or are on hold, and it is not possible to determine the Corporation's program for this fiscal year. Annex D MIGA's exposure in the Russian Federation MIGA's total gross exposure in Russia is US$305.7 million, including Currency Transfer coverage of US$175.6 million, Expropriation of US$305.7 million, and War and Civil Disturbance of US$145.7 million. MIGA's net exposure is US$142.0 million, including US$48 million in Currency Transfer coverage. MIGA has received a large number of guarantee applications. As of October 31, 1998 MIGA had 96 preliminary applications with a total investment potential of US$12 billion. Although many of the applications will not result in guarantees, the volume of MIGA's business in Russia has great potential for growing in the coming years. MIGA aims to diversify its portfolio to include new sectors of industry and new regions of Russia. MIGA is currently accepting new applications for Russia, but is awaiting further clarifications on economic policies before proceeding with new guarantees. The Russian Federation also has been an active beneficiary of MIGA's technical assistance activities. Delegations from the Russian Federation have participated in five workshops on strategies and techniques for investment promotion and two workshops on information technology for investment promotion. More than 150 organizations in Russia are active users of MIGA's Internet-based information clearinghouse (IPAnet). A Memorandum of Understanding (MOU) has also been signed with Russia to cooperate on MIGA's Internet-based privatization marketing, PrivatizationLink. Annex E Banking Sector Developments Joint IMF/WB missions have visited Moscow three times during the last two months. These missions have coordinated closely with other donors, particularly EBRD and EU, and will continue to do so. The missions have also proposed to the CBR to establish a coordination committee to be chaired by the CBR to coordinate the efforts of the donors. Considerable progress has been made during these missions in reaching a common strategic vision for bank sector restructuring. This vision is embodied in a well-formulated, comprehensive banking sector restructuring strategy developed by the Central Bank of Russia. The main elements of the CBR's strategy are the following: * General principles: protection of household creditors, equal treatment of foreign and domestic corporate creditors, losses to be absorbed by private shareholders and to a large extent by corporate creditors, participation of current shareholders, corporate creditors and potential new investors in the re-capitalization of the banks to be rescued; * Immediate steps: calculation of the solvency hole in the banking sector by undertaking comprehensive due diligence of the largest banks and preparing prudential reports on the other banks, estimation of the cost of possible public support and development of an institutional framnework to guide the restructuring process; * Classification of banks: based on the analysis mentioned above, the banks will be put into one of four categories: group one banks are (marginally) insolvent banks which are able to re-capitalize using private contributions and do not need public support; group two includes the regional banks with extensive branch network or with "social value" -- these banks are to be supported by public money either from the federal and/or the regional budgets; group three banks are those large, systemic, insolvent banks selected for rehabilitation; group four banks are to be closed and liquidated; * Bank restructuring agency: a new institution (called ARKO by its Russian acronym) is to be established jointly by the CBR and the government (State Property Fund and/or MOF) to provide capital to banks under rehabilitation, to acquire bank shares, manage bank operations, manage bad assets, arrange for mergers and acquisitions, initiate and oversee liquidations, etc. This progress notwithstanding, there remain some difficult implementation issues to be addressed and some fundamental policy issues to be resolved. Among the more important of these are the following: * Despite repeated assurances and public announcements that the deposits of private individuals will be fully protected, no transparent, reliable, equitable and efficient mechanism has been put in place to achieve this aim. Annex E * The strategy with respect to large state-owned banks has not yet been clarified. The joint IMF/WB mission will continue to provide continuous advice to the Russian authorities on designing and implementing the various components of the comprehensive restructuring of the banking sector. This must be considered to be an on-going activity. Apart from the above, the World Bank will undertake the following tasks in the near future in restructuring the Financial Institutions Development Project: * Financial Institutional Development Project (FIDP) - suspension of several components. The CBR and MOF (as represented on the Task Force for the FIDP) have suspended the accreditation of all banks participating in this project. In addition, all payments for twinning arrangements and IT procurement were halted except in exceptional cases where project completion can be justified due to the size of the "sunken costs". Participating banks are expected to continue to collaborate with the FIDP Bank Review Unit (BRU) in order to ensure proper administration of the MOF's Subsidiary Loan Agreements, the monitoring of the financial conditions of the banks, and to facilitate review for any FIDP participation in the future. * Due diligence of major banks. At the request of the CBR a reallocation of FIDP-funds will be made to carry out comprehensive due diligence of major banks by the end of the calendar year. The BRU has worked intensively with the CBR in compiling the terms of reference for these audits and contacted the Moscow offices of the international auditors of the banks to contract them for the realization of this project. The intention is that the findings of the audit reports will contribute to the final definition of the selection criteria to be used by the newly established bank restructuring agency so as to identify the banks to be rescued. As of this week the CBR wrote to 14 banks initiating the due diligence process. * Improving banking legislation. As already mentioned, at the request of the Banking, Finance and Tax Committee of the State Duma, legal experts financed by the Bank are participating in the work of the joint Duma/CBR/MOF working group to redraft necessary legislation to facilitate smooth rehabilitation/restructuring and bankruptcy/liquidation of Russian banks. Funding for the legal consultants is being provided using the govermnent executed PHRD-grant for the FIDP. The consultants (foreign and local) are expected to work with the working group in Moscow for several months. Their work will be guided and closely monitored with support from FSVC and by the Legal Departments of the World Bank and the IMF as well as the joint IMF/WB mission on a regular basis.