COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT 2007-2009 by World Bank Russia

The World Bank Russia Country Unit

COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT RUSSIAN FEDERATION FY07 – FY09 July 30, 2009

Document of the World Bank FOR OFFICIAL USE ONLY Report Number: 49119-RU

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION MULTILATERAL INVESTMENT GUARANTEE AGENCY

COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT FOR THE RUSSIAN FEDERATION FOR THE PERIOD FY07 – FY09

July 30, 2009

Russia Country Unit Europe and Central Asia Region

This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

The date of the last Country Partnership Strategy was December 14, 2006 CURRENCY EQUIVALENTS (as of July 1, 2009) USD1 = 31.12 RUB FISCAL YEAR (January 1 to December 31) WEIGHTS AND MEASURES Metric System

ABBREVIATIONS AND ACRONYMS AA AAA ACS AIDS APG BBB BEEPS

Agency Agreement Analytic & Advisory Activities Activity Completion Status Acquired Immunodeficiency Syndrome Associated Petroleum Gas Better Business Bureau Business Environment and Enterprise Performance Survey BHPP Bratsk Hydro Power Plant BOP Balance of Payment CBR Central Bank of Russia CCA Central Customs Administration CIDA Canadian International Development Agency CIF Cultural Investment Facility CIS Commonwealth of Independent States CPPR Country Program Portfolio Review CPS Country Partnership Strategy DAC Development Assistance Committee DFID UK Department for International Development DIA Deposit Insurance Agency EBRD European Bank For Reconstruction and Development ECA Europe and Central Asia ECD Early Childhood Development EE Energy Efficiency EMP Environmental Management Project ERPA Emission Reduction Purchase Agreement ERUs Emission Reduction Units ESMAP Energy Sector Management Assistance Program ESW Economic and Sector Work EU European Union EurAsEc Eurasian Economic Community EXT External Affairs Vice Presidency FBS Fee Based Services FC Finance Committee FM Financial Management FMS Financial Management Specialist FIAS Foreign Investment Advisory Service

FOB FSAP FTP FTS FY GDLN GDP GHG GoR GPP GVEP HCS HE HEIs HIPC

Free on Board Financial Sector Assessment Program Federal Targeted Program Federal Tariff Service Fiscal Year Global Development Learning Network Gross Domestic Product Greenhouse Gas Government of Russia Gas Power Plant Global Village Energy Partnership Housing and Communal Services Higher Education Higher Educational Institutions Enhanced Heavily Indebted Poor Countries Initiative HIV Human Immunodeficiency Virus HPP Hydro Power Plant HRIP Health Reform Implementation Project IBRD International Bank for Reconstruction and Development ICR Implementation Completion Report ICT Information and Communication Technology IDA International Development Association IFC International Finance Corporation IFIs International Financial Institutions IFRS International Financial Reporting Standards IPO Initial Public Offering IT Information Technology JSDF Japanese Social Development Fund KIA Kazan International Airport MDRI Multilateral Debt Reduction Initiative MFC Multifunctional Service Center MIGA Multilateral Investment Guarantee Agency MOED Ministry of Economic Development MOES Ministry of Education and Science MOF Ministry of Finance MOHSD Ministry of Health and Social Development

FOR OFFICIAL USE ONLY

MOT MWWP NPAF NPLs NW NWCA ODA OECD PER PIRLS PISA PPP PR R&D RER RSEFP RTA RUB

Ministry of Transport Municipal Water and Wastewater Project National Pollution Abatement Fund Non-Performing Loans North West North-West Customs Administration Official Development Assistance Organisation for Economic Co-operation and Development Public Expenditure Review Progress in International Reading Literacy Study Programme for International Student Assessment Public Private Partnership Progress Report Research and Development Russian Economic Report Russia Sustainable Energy Finance Program Reimbursable Technical Assistance Ruble

SD SEZs SFD SMEs SVET TA TB TF TI TIMSS UES USD VEB

VET WBG WBI WHO WTO

Social Development Special Economic Zones Southern Federal District Small and Medium Enterprises Secondary Vocational Education and Training Technical Assistance Tuberculosis Trust Fund Transparency International Trends in International Mathematics and Science Study Unified Energy System of Russia United States Dollar Vnesheconombank (State Corporation Bank for Development and Foreign Economic Affairs) Vocational Education System World Bank Group World Bank Institute World Health Organization World Trade Organization

Vice President: Country Director:

IBRD Shigeo Katsu Klaus Rohland

IFC Jyrki Koskelo Snezana Stoiljkovic

Task Team Leader:

Marsha McGraw Olive

Lisa Kaestner

MIGA Izumi Kobayashi Frank Lysy (Director and Chief Economist) Daniel Villar

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT RUSSIAN FEDERATION

TABLE OF CONTENTS I.

INTRODUCTION AND OVERVIEW .............................................................. 1

II.

RECENT POLITICAL AND ECONOMIC DEVELOPMENTS ................... 2

III.

PROGRESS IN THE PARTNERSHIP PROGRAM ....................................... 5

IV.

THE DEVELOPMENT AGENDA IN FY10-11 ............................................... 9

PROPOSED BANK GROUP ASSISTANCE IN FY10-11............................. 12

VI.

RISKS.................................................................................................................. 13

VII.

CREDITWORTHINESS................................................................................... 14

ANNEXES: Annex A1: Annex A2: Annex A3: Annex A4: Annex A5: Annex A6: Annex A7: Annex A8: Annex B1: Annex B2: Annex B3: Annex B3: Annex B4: Annex B5 Annex B6: Annex B7: Annex B8: Annex B8:

Progress in Russia during the CPS Period Russian Federation: Summary of the Government’s “2020 Development Strategy” Russia as a Donor Summary of WBG Contributions by CPS Pillar CPS Results Matrix Fee-Based Service Activities Russian Federation: Subnational Lending Russian Federation: Carbon Finance Country at a Glance Selected Indicators of Bank Portfolio Performance and Management IBRD lending program IFC Program and MIGA Guarantees Summary of Non-lending Services Russian Federation Social Indicators Key Economic Indicators Key Exposure Indicators IFC Portfolio IBRD Portfolio

MAP: IBRD 33470

COUNTRY PARTNERSHIP STRATEGY PROGRESS REPORT RUSSIAN FEDERATION

INTRODUCTION AND OVERVIEW

1. The Country Partnership Strategy (CPS) developed a new framework for cooperation based on innovative delivery mechanisms. Completed on June 30, 2009, the CPS remains valid and is proposed for extension to June 30, 2011. The strategy aimed to expand the relationship between the Russian Federation and the World Bank Group (WBG) through a significant shift in traditional approaches. •

First, demand increased for IBRD analytical and advisory activities (AAA). Given Russia’s strong macroeconomic fundamentals and significant international reserves, the Government refocused the partnership strategy away from finance to global knowledge services. In the context of a constructive dialogue between IBRD and the Russian Government, joint AAA aimed to modernize public finance and administration, prepare public-private partnerships (PPPs) in infrastructure, and improve social service delivery.

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Second, delivery mechanisms more appropriate to an advanced middle-income country were devised. At the federal level, the Government and IBRD are designing a framework for a new mechanism of project implementation, without recourse to sovereign borrowing, that could be supported by fee-based advisory and analytical services by IBRD. At the subnational level, the Government encouraged the WBG to develop cooperation programs directly with regions, where development needs are greatest. Accordingly, the WBG initiated a regional program of fee-based services and subnational lending without a sovereign guarantee to support regional development strategies.

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Third, the WBG used these mechanisms to meet regional development objectives, primarily in education, health, social assistance, public administration, and infrastructure. The International Finance Corporation (IFC) also focused on frontier regions to reach small and medium enterprises (SMEs) through its financial sector clients and to lay the foundations for new products, such as mortgage and energy efficiency finance. Joint IFC-Bank subnational loans enabled several regions to finance critical social infrastructure.

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And fourth, in response to Government interest in capacity-building, substantial progress was achieved in raising Russia’s profile as a donor through joint initiatives to address global issues, such as diseases (malaria), the food price crisis, educational quality, financial literacy, and more recently, the financial crisis.

2. The global recession altered Russia’s growth outlook. As in many other countries, the economic and social consequences in Russia are severe. Real Gross Domestic Product (GDP) growth swung from positive 8.1 percent at the end of 2007 to possibly negative 7.9 percent in 2009. The fiscal deficit may exceed 7 percent of GDP, and international reserves may be significantly lower by end CY09. These changes have created new requirements in the short-term to overcome the crisis. In the context of a recovery program, the Government in CY10 may finance the fiscal deficit through its Reserve Fund and external borrowing. At the same time, the recession revealed long-standing weaknesses that the Government must address in the structure of the economy, the structure and efficiency of public expenditures, and dependence of the banking sector on external financing. 3. Uncertainty in global and national economic conditions requires flexibility in responding to the rapidly changing environment. We propose to extend the CPS until the end of FY11. If conditions change, we will come back to the Board of Executive Directors earlier with a new CPS. Until such time, we conclude that, overall, the strategy as outlined in the CPS provides sufficient flexibility to pursue long-standing structural and social objectives while adjusting to new conditions. 1

4. Going forward, WBG activities will advance the objectives in the current CPS pillars while simultaneously meeting new needs stemming from the crisis. In response to Government demand, the WBG will use traditional as well as new instruments developed during the CPS period (budget-financed investments with fee-based implementation services, fee-based knowledge services, subnational lending, and carbon finance). •

Should global economic conditions and oil price developments result in a decision by the Government to borrow in CY10 from IBRD, we would be ready to respond with an appropriate combination of lending operations (guarantees, investment, fast-disbursing). These may support anti-crisis programs to improve the efficiency of public and social expenditures, particularly to protect the most vulnerable, as well as longer-term investments to diversify and modernize the economy, including infrastructure. To be prepared for this possibility, we propose a CPS envelope of up to USD4 billion phased over the CPS period. Individual lending operations would be agreed, contingent on IBRD's financial capacity at the time.

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Similarly, the crisis has decreased access to long-term debt for the private sector, raising demand for IFC financing. IFC has an integrated investment and advisory approach with an immediate priority to assist existing clients with crisis management, meeting liquidity needs with trade finance and working capital, and providing tools to manage non-performing loans (NPLs) and improve competitiveness. IFC’s selective longer-term strategy is to contribute to climate change mitigation, support development of infrastructure (transport, logistics and municipal) and increase access to finance, in particular to SMEs, with an overall focus on reaching poorer regions of Russia. Subject to capital constraints, IFC expects to commit up to USD1.4 billion in FY10-11.

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IBRD and IFC will cooperate on analytical, technical and/or financial support to the banking sector as well as on subnational lending.

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The Multilateral Investment Guarantee Agency (MIGA) will take a prudent and selective approach to providing political risk guarantees in priority sectors in view of its current high level of exposure. In principle, based on the merits of the case, MIGA can support foreign direct investments into Russian majority-owned corporations operating on a commercial basis.

5. The importance of Russia as a donor will grow, despite fiscal constraints in Russia. Russia is committed to expanding its aid program markedly, drawing on IBRD expertise in establishing development institutions and delivering assistance. As a donor and the regional engine of growth, it may rely on WBG experience in creating a cooperation framework for Central Asia and in developing mechanisms for the USD10 billion Eurasian Economic Community (EurAsEc) anti-crisis facility. In cooperation with the Organisation for Economic Co-operation and Development (OECD), IBRD will support Russia in preparations for the 2010 conference of emerging donors in Russia. II. RECENT POLITICAL AND ECONOMIC DEVELOPMENTS 6. Presidential elections in 2008 went smoothly; the new political leadership has confirmed the economic development strategy. The political transition was accompanied by organizational changes and responsibilities of governmental agencies and reshuffling of ministers. The new political framework is stable and the division of responsibilities between the head of state and head of government has been established. In November 2008, the Government spelled out its vision for the country in 2020, linked to widely-tracked indicators (see Annex A2). Three overarching priorities for 2012 are: growth and economic diversification, improvements in human development, and regional development. 2

7. With robust economic growth, Russian citizens enjoyed gains in living conditions until autumn 2008. The economy grew briskly during the CPS period at about 7 percent annually on the heels of high oil prices, robust domestic demand, sound fiscal management and strong macroeconomic fundamentals (see Table 1). The Russian Federation advanced to become a top-ten world economy in terms of dollar GDP. International reserves peaked at USD584.4 billion in August, 2008 (about USD400 billion in July 2009), the third highest in the world, nearly equal to the total external debt. Strong growth raised employment, wages and income for most of the population. Unemployment reached a record low of 5.4 percent, while the national headcount poverty rate was nearly cut in half from 2002 to 2007, bringing a better life to 12.5 million people. Not surprisingly, therefore, the Life in Transition Survey in 2006 found Russians had a more optimistic outlook than at any time since 1991. Table 1. Main macroeconomic Indicators in Russia, 2004-08 2004 7.2 8.0 13.7 4.3 11.7 58.6 8.2 124.5

GDP growth, % Industrial production growth, y-o-y, % Fixed capital investment growth, %, y-o-y Federal government balance, % GDP Inflation (CPI), % change , e-o-p Current account, billion USD Unemployment, % (ILO definition) Reserves (including gold) billion USD, e-o-p

2005 6.4 5.1 10.9 7.5 10.9 84.2 7.6 182.2

2006 7.7 6.3 16.7 7.4 9.0 95.6 7.2 303.7

2007 8.1 6.3 21.1 5.5 11.9 76.6 6.1 478.8

2008 5.6 2.1 9.8 4.0 13.3 98.9 6.3 427.1

Sources: Rosstat, CBR. 8. Behind this performance were policies that created more certainty for the macro-economy and business. A vibrant and pragmatic technical debate in government, public institutions and academia framed major policy decisions. These built on lessons from the 1998 financial crisis. In particular: •

Sound policies contributed to maintaining macroeconomic stability. Russia has saved large oil windfalls in a Reserve Fund (capped at 10 percent of GDP) and a Fund for Future Generations (accumulating oil surpluses beyond the Reserve Fund) to help avoid the ‘Dutch disease’ dilemma that plagues many oil-rich countries. The Ministry of Finance (MOF) managed to maintain healthy fiscal surpluses against pressures for larger spending and lower tax rates. And Russia repaid a significant portion of its external debt, thereby reducing external vulnerabilities.

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Fiscal reforms improved budget planning and execution. Federal and regional executive agencies prepared medium-term budgets with performance targets. Local self-government was adopted. Municipalities received budgetary autonomy, and public participation in decision-making increased.

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Transparency and client service improved in tax collection and customs administration upon adoption of e-government and new service performance standards.

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The Central Bank of Russia (CBR) made progress in strengthening the banking sector by upgrading prudential regulations, introducing risk-based supervision, and increasing transparency of bank ownership. In early 2008, Russia’s banks enjoyed relatively sound financial indicators, with strong solvency (average capital adequacy ratio of 15.5 percent), high profitability (return on equity of 22.7 percent), low non-performing loans (2.5 percent of total loans)1 and adequate liquidity (short term liquidity ratio of 72.9 percent).

9. Since mid-2008, three channels transmitted the global crisis to Russia. Strong macroeconomic fundamentals helped policymakers deal with the impact. First, oil prices collapsed by 70 percent from 1

Note, however, that NPLs in Russia are defined as debt-service charges overdue by more than 60 days, excluding refinanced and restructured loans.

their peak in July 2008 to December 2008. This, along with high-profile corporate disputes, undercut confidence in the energy-dominated stock market. Along with other markets around the world, it crashed in September 2008, losing about USD1 trillion in wealth. Second, capital inflows that were largely directed to the oil and gas sector reversed, leading to capital outflows of about 14 percent of GDP between 2007 and 2008-09. Third, liquidity tightened dramatically in emerging markets. Russian banks, which relied on external debt and petro dollars for financing, faced sharply higher repayment and rollover risks. Smaller regional banks in particular suffered from limited access to international capital markets and Central Bank funds. The size of these shocks were much larger than during the 1998 crisis, but Russia’s fiscal and macroeconomic policy fundamentals this time were stronger and policymakers were better prepared to deal with the new crisis (Figure 1). Figure 1. The Macroeconomic Impact of the Crisis 8

2008

2009 (Estimate)

4 2 0 -2 -4 -6 -8 -10 Real GDP Growth, %

Net Capital Flows, % GDP

Fiscal Balance, % GDP

Sources: Rosstat, CBR, World Bank staff calculations 10. The impact on the real economy was swifter and deeper than expected. The decline in global demand, the fall in commodity prices, and the tightening of credit have accelerated Russia’s economic slowdown since the fourth quarter of 2008. A deep recession began in 2009 with an across-the-board negative output growth. With few exceptions, all sectors reported declines in output in the first quarter of 2009 (construction, manufacturing, and transport each contracted by more than 18 percent). Many of Russia’s regions, including those relying on heavy industry and exports, are facing sharply lower revenues and leaner budgets. According to current World Bank estimates, Russia’s economy is likely to contract by 7.9 percent in 2009. The recovery is likely to be slow, with only a modest 2.5 percent growth in 2010 from a significantly reduced base and in the context of sluggish global demand. Current growth projections suggest that real GDP in Russia will reach the pre-crisis high level only at the end of the third quarter of 2012 (Figure 2). 11. Households are feeling the crisis through job and wage cuts. The speed of adjustment in Russia’s rather flexible labor markets has been dramatic. Unemployment increased from a record low of 5.4 percent in May 2008 to 9.9 percent in May 2009. World Bank estimates suggest that aggregate unemployment will increase to 13 percent and real wages will fall by 4.1 percent in 2009. The poverty impact will be significant. The number of poor in Russia may rise to 24 million (headcount poverty of 17.4 percent), wiping out part of the gains in reducing poverty in recent years. 12. Broadly successful crisis management staved off a run on banks, prevented a currency crisis, and eased impact on households and the real sector. After the stock market collapsed, authorities responded swiftly and massively by reversing the earlier monetary tightening and committing substantial fiscal resources to shore up the banking system and ensure liquidity in financial markets. The Central Bank was willing to spend considerable internal reserves to have a smooth transition to a new equilibrium level of the exchange rate that reflected the changed fundamentals. International reserves went down by about USD200 billion from early September to about USD380 billion by end-January. In the process, the CBR has made exchange rate policy more flexible and by February 2009, the ruble regained stability and international reserves stabilized with CBR limiting its interventions in the foreign exchange market. CBR’s interest rate policy also played a key role in stabilizing the exchange rate. Importantly, this difficult period was managed with no currency crisis. No major banks failed, and most banks managed to 4

repay external short-term obligations. Deposit withdrawals from the banking sector stopped and the CBR has now significantly restricted its interventions. More recently, with oil prices beyond USD60 per barrel at end-June, international reserves increased above the USD400 billion mark as CBR began to accumulate reserves to ease appreciation pressures on the ruble. Figure 2: The impact of the crisis on the long-term development objectives in Russia: dynamics of GDP level in Russia 2007-2020, (q1-2006=100)

Source: World Bank projections. Strategy 2020, Government of Russia. 13. Russiaâ&#x20AC;&#x2122;s early fiscal policy response has been larger than that of many other G-20 countries and greater than the internationally-recommended 2 percent of GDP. The total fiscal cost of measures implemented in 2008 and planned for 2009 amounts to over 2.9 trillion rubles (around USD90 billion), or about 7 percent of GDP. Overall, the size of anti-crisis measures seems appropriate given Russiaâ&#x20AC;&#x2122;s much larger growth deceleration compared to other G-20 countries, relatively weaker automatic stabilizers and large fiscal reserves accumulated in the Reserve Fund, which makes it possible to finance even a larger fiscal deficit emerging in 2009. The fiscal policy response has so far largely focused on supporting the financial sector and (large) enterprises. But there was rather limited support to households or SMEs relative to the scale of social dislocation. With deeper unemployment and poverty impact, additional fiscal stimulus directed to support households, SMEs, and infrastructure is now being considered. 14. Going forward, the major problem for the Russian banking system appears to be rising credit risk, NPLs and possible bank insolvencies. To address the problem, the CBR introduced programs to recapitalize banks through a combination of direct capital injections to state banks and government subordinated loans to private banks when matched by private equity increases. However, nontransparency of credit risk across the banking sector makes it hard to judge real solvency. Furthermore, the increasing credit risk premium is being reflected in the rising cost of finance and difficulties for corporates and households to service their debt. The need to rollover debt is especially large for corporates as their borrowing is typically very short-term, between 6 to 12 months maturity. There has been a significant drop in lending to corporates and households in early 2009. While the government has not announced any program for corporate loan restructuring, a program to restructure distress mortgage loans of lower-income households has been introduced through the State Agency for Home Mortgage Loans. It is expected that economic activity will be low throughout 2009 and that NPLs will increase substantially. The Government has allocated in the 2009 budget 540 billion rubles (USD18 billion; equivalent of about 1.3 percent of GDP) for additional support to the banking sector. III. PROGRESS IN THE PARTNERSHIP PROGRAM 15. With the exception of economic diversification and targeting of social assistance, Russia was making good progress in its medium-term development strategy prior to the crisis. Annex A1 details thematically the progress in Russia during the CPS period. Living standards, human development 5

indicators, and regional development all exhibited positive gains. The Russian Federation considerably enhanced its global role by doubling its commitment to the International Development Association (IDA), embracing multilateral principles for development assistance in a new national strategy, and acceding to the Kyoto Protocol (see Box 1). Nevertheless, strong economic growth and the concomitant growth in prosperity from 2000 to 2008 weakened the focus on structural reforms and diversification of the economy through promotion of entrepreneurship. Efforts to improve the investment climate notwithstanding, corruption continues to be a serious impediment and administrative barriers in public governance remain substantial. Moreover, lax accounting and provisioning rules, among other regulatory and supervisory shortcomings, contributed to excessive foreign borrowing in the banking sector. Social assistance is poorly targeted. The Government is intent to strengthen the federal policy framework and regional implementation in each of these areas in light of the crisis. Box 1. Russia’s Role as a Donor In 2007, the Government adopted a strategy that aims to develop an Official Development Assistance ( ODA) system along the lines of internationally recognized principles as established by the Development Assistance Committee (DAC) of the OECD. Since then, Russia increased its assistance to IDA and supported a number of global development initiatives by contributing to the IBRD-managed Trust Funds. These Trust Funds support the quality of education through the Education for All Fast Track Initiative program (READ Trust Fund), the Malaria Booster Program in Africa, access to clean energy in Africa, global financial literacy initiatives, and the Global Food Crisis Response Program (See Annex A3). Despite the financial crisis, Russia intends to increase its assistance through pledges to multilateral (World Bank Rapid Social Response Program) and regional support mechanisms (Eurasian Economic Community USD10 billion Anti-Crisis Fund), for which the World Bank will provide advice and assistance. IBRD is cooperating to provide advisory services at the request of the Government to help Russia develop an effective national ODA system. Policy workshops informed the design of the National Concept of Development Cooperation and assisted in the identification of capacity gaps. In conjunction with OECD, IBRD will advise the Government on the preparation of a conference for emerging donors to be convened in Moscow in early 2010. Among other topics, the conference will examine the role of emerging donors in addressing the decline in private capital flows to developing countries in the wake of the financial crisis.

16. The CPS selectively targeted key development needs in the Government’s three overarching priorities: economic growth and diversification, human development, and regional development. Annex A4 summarizes the WBG contributions by CPS pillar. IBRD, IFC and MIGA2 maintained modest programs in relation to Russia’s sizeable economy (USD1 trillion in 2007). By focusing on policy and institutional advice with broad macro and microeconomic impact, regional investments with strong demonstration effect, mobilization of other funds, and new markets underserved by the private sector, the WBG was more catalytic than the size of financial transfers may suggest. 17. Overview by Portfolio. As anticipated in the CPS, the IBRD portfolio wound down from 22 to 14 projects for total commitments of USD1.391 billion. New federal borrowing was limited to support for judicial reform and state statistics.3 In contrast, demand for fee-based services exceeded expectations and, as expected, both IFC and MIGA expanded their portfolios, keeping Russia in their top exposures4. WBG portfolios are complementary. IBRD is devoting 60 percent by lending volume to public 2

IBRD disbursements for active loans totaled USD552.45 million against a portfolio of USD1.39 billion. IFC invested more than USD1.8 billion in 60 projects in Russia’s private sector during the CPS period. As of May 31, 2009, IFC’s outstanding portfolio was USD1.9 billion in 111 projects. As of May 31, 2009, MIGA’s outstanding gross exposure in Russia was USD924 million. Besides, the Board approved in May and June 2009 new guarantees in the financial and manufacturing sectors of up to USD150 million, which have not been signed yet. 3 The Housing and Communal Services loan, approved by the Board in February 2008, has been cleared for signature by Government. 4 As of May 31, 2009, Russia is IFC’s second largest outstanding country exposure. As of May 31, 2009, Russia was MIGA’s second largest country exposure.

administration reforms and 20 percent to social and communal services that support better institutions and services for citizen welfare and business growth. IFC targeted about half (USD835 million) of the investments during the CPS period to banks, which in turn increased access to finance for entrepreneurs, particularly for SMEs and in underserved regions. IFC’s remaining portfolio represents investments in private enterprise across real sectors with a focus on infrastructure and value-added manufacturing, often paired with advisory services and supporting energy efficiency and cleaner production. MIGA issued nearly USD581 million in new guarantees during the CPS period. In particular, MIGA supported various investments of global financial institutions into their banking, mortgage and leasing subsidiaries in Russia. MIGA focused on financial institutions committed to expanding their operations at the regional level and to improving the range and quality of their financial products, including to consumers and SMEs. 18. Risk ratings increased in IBRD’s portfolio. Reasons varied by project. Fundamentally, however, implementation delays derived from a slow-down in decision-making prior to the parliamentary and presidential elections and to agency restructuring thereafter. Project age did not correlate with performance rating. Several older projects continued to deliver important developmental benefits (e.g., Capital Markets Development Project) while those that did not are being closed down (e.g., Sustainable Forestry). Procurement was protracted in a few projects with information technologies, and these required more intensive supervision. Joint Working Group meetings will be held more frequently in the next two years to bring portfolio issues to the attention of senior officials. With respect to financial management (FM) issues, the residual FM risk in the portfolio remained acceptable according to supervision mission reports of the country Financial Management Specialist (FMS). 19. The CPS introduced six distinctive features to WBG engagement. Given Russia’s vast territory and strong financial position, the CPS developed the following new engagement approaches (see Box 2). •

Regional focus. With encouragement from the Federal Government, IBRD selectively served several of Russia’s 83 regions. Instruments and thematic priorities are customized by region. Similarly, IFC prioritized poorer frontier regions for investment and advisory services, increasing the proportion of annual commitments in frontier regions from 24 percent in FY07 to 54 percent in FY09.

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Fee-based services. All services were provided on a demand-driven basis in line with Bank guidelines, quality control procedures, and support from network anchors. Full cost recovery will be achieved. The projects require IBRD to be highly flexible and timely in delivering services. Demand covers a wide range of activities that are well-aligned with Russia’s development challenges, from human development to social assistance, to PPPs and to capacity-building for ODA. Total contract values of all 21 completed and signed projects for the period from FY07 through FY10 are approximately USD9.5 million. In December 2008, a fee-based service agreement between the Russian Federation and IBRD of USD3.0 million went into effect to increase capacity for Russian donor assistance in education quality. Results from recently completed activities are in Annex A6.

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Capacity-building for donor aid. By helping Russia to adopt international principles and best practices, IBRD is contributing to a unified approach on development cooperation. The importance of Russia’s support increased during the global food price crisis and the global recession, for which Russia has committed approximately USD1.9 billion for hard-hit developing countries, with a focus on Central Asia.

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Joint realization of projects on the basis of new cooperation mechanisms. As expected, beginning in CY10, it will be possible to put in practice a new mechanism for project implementation, without sovereign borrowing, based on IBRD advisory and technical services. The first example will be the Financial Literacy Project at the federal level. Regulations are under development by Russia and IBRD to enable this process. Several other 7

projects (Microfinance, PPP TA, Cultural Heritage and the Southern Okrug Local Initiatives Project) are ready to be appraised for implementation through this new modality but may also be considered for implementation through traditional IBRD lending, depending on Government’s decision at the time of negotiations. •

Subnational lending without sovereign guarantees under the joint IFC/Bank facility. These loans (see Annex A7) meet a vast, heretofore unmet demand for essential investments in infrastructure services in regions with limited access to long-term commercial finance. Endorsed by the IBRD and IFC Boards in 2006 as a three-year pilot (FY07-09), the program created a successful operational partnership in Russia by combining IFC financial analysis and Bank sector expertise. In Russia, six operations for a total investment of USD116 million are completed or disbursing; several others are in the pipeline. By qualifying for these commercially-priced loans, subnational authorities become increasingly creditworthy and financially self-reliant. In most cases the qualifying regions were beneficiaries of previous Bank assistance to strengthen fiscal and financial management.

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IFC and MIGA supported a growing private sector through significant investment, complemented by advisory activities. IFC also played a catalytic role, mobilizing additional private investment – including USD674 million in loan syndications – into priority areas. IFC also significantly increased the proportion of equity in its portfolio in order to strengthen its role in client relationships.

Box 2. New Initiatives in the Russian Federation: What Have We Learned? Early lessons from three initiatives – fee-based services, IFC/Bank subnational lending without sovereign guarantees, and donor capacity-building – carry institutional connotations for future development work in advanced economies. Fee-Based Services. Though processed like standard AAA, teams working on fee-based services see several critical differences: response time is shorter, recommendations are more specific, cooperation between Network Anchors and Regions is more critical, and client expectations for quality are higher. The result is an entirely new product, unique to the client, yet rich with insights for broader sector policy. For example, the request for advice on how to build a world-class university generated the development of a benchmarking tool by the education anchor, which was then applied to several universities in Tatarstan. While recommendations are specific to the university, analysis of findings suggests new strategic directions for education policy at both the regional and federal level. Bank teams engaged in these knowledge services are highly motivated to see development impact, delivered efficiently. Subnational Lending. Test cases of non-sovereign lending illustrate the challenges and benefits of marrying the institutional strengths of IFC and the Bank into one project team. IFC brought expertise in financial due diligence and pricing and structuring deals while the Bank contributed operational strengths in appraising and supervising sector investments. After overcoming differences in institutional culture and bureaucratic processing, the teams have developed an efficient working protocol and on-the-ground cooperation. The beneficiaries are subnational entities. By qualifying for these commercially-priced loans, subnational authorities become increasingly creditworthy and financially self-reliant. In most cases the qualifying regions were beneficiaries of previous Bank assistance to strengthen public financial management (PFM) or sector policy. Both were present in the Chuvash Republic: the first subnational loan exclusively for health care capital expenditures followed successful implementation of PFM reforms and the Health Reform Implementation Project. Russia as a Donor. This is the first example of fee-based knowledge services for developing donor capacity following DAC principles. Cooperation follows a learning-by-doing approach. By channeling development assistance through WBG instruments, Russian specialists become active participants in addressing urgent human development needs in Africa (malaria control, access to energy, quality of primary education), reducing the risks of infectious disease in Central Asia, and in producing tools for public policy analysis. Over the medium-term, trust funds managed by the World Bank for Russia will contribute new international methods to measure education quality and financial literacy. These products will contribute in turn to the effectiveness of Russian Government and World Bank programs in sectors that underpin development prospects globally.

20. In response to the changed environment, the WBG adjusted its strategy and provided just-intime support for the Government and private sector clients. •

First, IBRD stepped up crisis-related macroeconomic monitoring, policy analysis, and response options including increasing public expenditure effectiveness, primarily through Russian Economic Reports and the upcoming Public Expenditure Review (PER). Russian Economic Reports have been put on a quarterly cycle and are widely read and commented upon by policy-makers and the general public, internal and international. The March 2009 report, for example, called for a shift in anti-crisis policy focus from banks and firms to households and recommended spending one percent of GDP to top-up some existing, social assistance instruments that are known to better target assistance to poor and vulnerable households (i.e., low-end pensions, unemployment benefits, and child allowance).

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Second, at the federal level, IBRD initiated a dialogue on social assistance targeting, labor market monitoring, and active labor market programs that will provide additional resources and information for policy-makers in selecting cost-effective interventions.

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Third, IBRD began a new dialogue with federal and regional governments to support infrastructure finance under constrained conditions, including through guarantees and bond issuance, and to help maintain and accelerate the momentum on structural reforms.

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Fourth, IFC is responding on multiple levels. •

At the outset of the crisis, IFC conducted stress tests of each client and customized support to improve client adjustment to current conditions. IFC is providing short-term liquidity, in particular trade finance, as well as guarantees, quasi-equity and subordinated debt to its investment clients across sectors and is assisting the banking sector with the management of NPLs and risk management through investment and advisory services. Crisis-related advisory programs have already reached more than 220 private and public sector participants through seminars on crisis management. In FY09, IFC provided USD200 million to 7 banks in Russia in the form of trade finance (USD80 million), equity (USD43 million), and senior and subordinated loans. In addition IFC mobilized USD545 million in syndications through partner banks.

•

IFC advisory and investment programs in energy efficiency and cleaner production increased cost competitiveness to help businesses weather the crisis. IFC advisory programs currently under development will assist real sector companies with crisis management.

•

Jointly with the Foreign Investment Advisory Service (FIAS) and IBRD, an IFC advisory team is also reviewing the legal framework for distressed assets management in order to make policy recommendations. IFC’s technical assistance programs to the banking sector are providing a wide range of risk management services and expertise in managing real estate and construction exposures. IV. THE DEVELOPMENT AGENDA IN FY10-11

21. Russia’s economic recovery and subsequent growth is vital to the regional and global economy. Russia is the regional engine of growth, both as the major destination of exports and migrant labor from the Commonwealth of Independent States (CIS) countries.5 Russia is also among the top five remittance5

Russia is the largest migrant destination after the United States, with over 12 million immigrants accounting for about 8 percent of the population.

sending countries, most of which are destined to CIS countries (remittances from Russia account for about half of annual GDP of Tajikistan, a third in Moldova and a fifth in the Kyrgyz Republic). With unemployment surging in Russia, jobs for migrants are now at risk. The pace of growth in total remittance receipts for the CIS region had already decelerated to only 7 percent in 2008, compared with record growth of 75 percent in 2007, with further decline expected this year. Russia is also a major player in the global economy as the world’s largest exporter of natural gas, the second largest oil exporter, and the third largest wheat exporter. Finally, pristine territory in Russia’s vast landmass represents about 22 percent of the world’s undisturbed ecosystems. These have global value and significance for biodiversity protection, carbon sequestration and other environmental functions. At the same time, Russia is the world’s third largest emitter of greenhouse gases. As a result, how Russia responds to the crisis and invests in sustainable development is critical to regional economic recovery and growth. 22. The Government is intent upon improving social systems and modernizing the economy in line with its 2020 goals.6 There is general agreement in Government that policy actions during the crisis should also aim to modernize the Russian economy for the post-crisis period.7 The WBG may provide support in all these areas. •

Broadly, the Government aims to increase the effective use of public expenditures, with a specific focus on the social sectors (health finance, pensions, and families) and protection of vulnerable groups.

•

A second major area would be actions to diversify the economy and increase competitiveness, especially through greater energy efficiency.

•

A third area would be infrastructure investments to remove bottlenecks for longer-term growth.

23. Improvements in the effectiveness of public expenditures, especially social expenditures, are necessary for recovery and longer-term economic growth. Demographic trends project the workforce will decline by one million persons per year from 2011 to 2020, dampening economic activity and growth. The net effect of demographic trends is that public expenditures on pensions, health and education are likely to increase significantly by 3-4 percent of GDP under any long-term economic scenario. As expenditures rise, comprehensive policies are vitally needed to: i) improve targeting of social assistance to the most needy; ii) improve health status and life expectancy; iii) develop globally competitive skills for productivity from a smaller labor force; iv) develop effective migration policies; and v) secure the pensions of retirees, who will form a significant proportion of the population of Russia. IBRD is developing a work program in response to Government requests for assistance in these areas based on recent long-term fiscal analysis, technical workshops on social assistance targeting pension system options, and sector work on demographic policy. 24. To modernize the economy, Russia must employ its energy wealth more efficiently and open space for innovative entrepreneurs. According to a joint IFC-Bank study, Russia is the most energyintensive country among the ten largest economies, and can save as much energy annually as is consumed by France. Without better energy conservation and investment in more cost-effective production, transportation, and consumption, Russia may soon have to choose between exporting oil and gas and using it domestically. Infrastructure investments will need to incorporate more energy efficient technologies for the economy to become more competitive and less energy intensive. Outside of the immediate crisis response, IFC’s top priority in Russia will remain commercial and residential energy 6

The Government has already revised substantially its 2009 budget to reflect much lower oil prices and dramatically worse international environment. It is also expected to revise its medium term growth outlook. 7 In November 2008, prior to the full onset of the crisis in Russia, the Government issued its vision for the country in 2020 (see Annex A2). In April 2009, the Duma approved the Government’s anti-crisis agenda and revised budget, which identifies seven priorities, including protecting vulnerable groups, increasing economic diversification, reducing barriers to SME development, and maintaining sound macroeconomic policies.

efficiency and cleaner production, in order to increase the efficiency of the Russian economy and to alleviate effects on climate change. Based on a joint study, IBRD and IFC are collaborating on advisory and financial services to expand adoption of energy efficient technologies (see Box 3). In response to demand from regional authorities, IBRD will provide technical advisory services on early-stage innovation so that start-ups and small enterprises can conduct more R&D (research and development) for a broader base of potentially marketable innovation. 25. Infrastructure investments serve anti-crisis and longer-term growth objectives. The Ministry of Transport (MOT) indicated that lack of sufficient transport infrastructure constrains economic growth while also resulting in disproportional development in regions8. Bottlenecks result from limited access both to all-season roads and rail service. In 2008, the Government announced plans for a large 7 year spending package valued at cumulative 13.9 trillion rubles (USD570 billion or about 4.8 percent of GDP annually) to revamp transportation infrastructure across the country. Fiscal constraints will delay this strategy. Likewise, several PPPs to close the investment gap are now on hold due to private capital constraints and growing government deficits. IBRD is developing a range of financial options for railways and transport and is offering advisory services to help restructure PPPs, develop and prioritize projects to better respond to the crisis, increase the efficiency of services, and attract private investment when the situation improves. In particular, IBRD is continuing its close relationship with the City of St. Petersburg on four major PPP projects that were initiated prior to the financial crisis. IFC will continue to support private participation in infrastructure, particularly where IFC can play a strong catalytic role, including mobilizing investment from other International Financial Institutions (IFIs), private sources, and the Russian government. In June 2008, the WBG signed a memorandum of understanding with the VEB for broad cooperation on infrastructure development, among other objectives. In FY09, IFC invested with VEB and others in a USD500 million infrastructure fund focused primarily on Russia and Kazakhstan. Box 3: Energy Efficiency for Climate Change Mitigation for the Public and Private Sectors Russia, a signatory of the Kyoto Protocol, has significant potential to reduce greenhouse gas (GHG) emissions and is thus a potentially important market for carbon finance. Russian oil major Rosneft and the World Bank signed an Emission Reduction Purchase Agreement in 2008 to reduce GHG emissions resulting from gas flaring by 5.3 million tons, by selling these emission reduction units (ERUs) to the European Union (EU)-based funds for trading in compliance with the Kyoto Protocol or the EU Emissions Trading Scheme. The World Bank will formalize the transactions with ERUs and monitor and control compliance. IFC has done one carbon finance project in Russia (purchasing ERUs from destruction of nitrous oxide in a fertilizer plant) and is considering developing specific Carbon Delivery Guarantee transactions. The Russia Sustainable Energy Finance Program (RSEFP), a joint IFC/ IBRD initiative, works with private sector banks, energy auditors, project developers and vendors to develop a marketable energy efficiency product for the industry. Building on the methodology and successful outcomes of the energy efficiency study, which increased political and commercial awareness of Russiaâ&#x20AC;&#x2122;s energy efficiency potential, the RSEFP team is also helping regional authorities improve energy efficiency through private and public investments in energy efficient (EE) projects. IFC has committed USD150 million to Russian banks for EE lending to date, generating an annual reduction of 500,000 tons of CO2 emissions and energy cost savings of USD60 million annually for companies. IFC has also launched a Cleaner Production Advisory Program whose key activities will engage financial institutions, real sector clients and policy-makers in generating at least USD200 million in cleaner production investments in industry, resulting in reduction of emissions and cost and energy savings. IFC also promotes renewable energy and cleaner technologies through direct investments; for example, in FY09 IFC provided financing to Nitol Solar, which produces components for solar panels. Finally, IFC and IBRD are jointly developing programs to enable sustainable markets in renewable energy and residential energy efficiency.

Reported by the Minister of Transport in a Government meeting on April 24, 2008.

V. PROPOSED BANK GROUP ASSISTANCE IN FY10-11 26. The four pillars in the current CPS are broadly relevant for FY10-11, with results to be monitored in the context of specific operations. The four objectives are to: (a) diversify the economy for sustainable development and growth (formerly, “Sustaining Rapid Growth”); (b) improve public sector management and performance; (c) improve the delivery of communal and social services; and (d) enhance Russia’s global role. At this stage, it is not possible to be more specific in designing a results matrix for FY10-11. Consequently, outcomes will be monitored by: i) program actions under fast-disbursing operations (should the Government wish to opt for such instruments); ii) results in specific investment projects and guarantee operations; and iii) the quality, relevance and sustainability of analysis and policy options in knowledge services. Fee-based services will be subject to standard quality and evaluation reviews. 27. The Government has already stated its desire to extend the current program through more intensive use of new instruments that leverage the WBG’s knowledge, project management skills, private sector expertise and its AAA rating. In particular, the use of guarantees is expected to support borrowing by selected entities in capital markets for public financing of infrastructure. Discussions with VEB (State Corporation Bank for Development and Foreign Economic Affairs) and Russian Railways are already taking place in this regard. The Federal Government also proposes to avail itself of fee-based Bank support throughout key phases of the project cycle, namely for appraisal and supervision according to IBRD’s operational policies, for Government-financed projects. 28. New IBRD assistance will be selective, with choice of instruments aligned with the Government’s modernization priorities and external position. In this uncertain environment, IBRD must remain flexible to respond quickly, according to client needs. In 2009, the Russian Federation will use the Reserve Fund to finance its budget. Should the global crisis continue to exert pressure on Russia’s fiscal reserves and external position beyond 2009, the Government may wish to access IBRD funds as part of an international borrowing strategy. Government decisions to this effect will be made in light of further development on revenues, especially from oil. To be prepared for this eventuality, we propose a CPS envelope of up to USD4 billion phased over the CPS period. Should there be a request to borrow from IBRD to finance the budget, individual lending operations would be agreed contingent upon IBRD’s financial capacity at the time. In consultation with the Government, operations would be identified in line with the stated priorities to modernize the economy, increase the efficiency of public expenditures, and strengthen the position of Russia in the post-crisis period. 29. Subject to capital constraints, IFC expects to commit between USD1.0-1.4 billion in Russia over the next two fiscal years. Given capital constraints, IFC will take a selective approach to new investments, maximizing mobilization from other IFIs as well as private and other sources. Priority areas include climate change mitigation, infrastructure (transport, logistics, municipal), and access to finance, particularly for SMEs, with an overall focus on less developed regions and economic diversification. MIGA will take a prudent and selective approach to new operations in Russia, given its already existing high level of exposure and depending on the availability of capacity in the reinsurance market. MIGA expects to issue in early FY10 new guarantees of up to USD120 million supporting long-term shareholder loans of a foreign financial institution to its banking subsidiary in Russia. These facilities will strengthen the subsidiary’s liquidity and capitalization. 30. The WBG is in a strong position to help the authorities address fundamental weaknesses in the banking sector, including: i) excessive discretion by banks in determining their levels of loan provisioning; ii) high lending concentration, especially with respect to extractive industry and construction sectors; iii) large related-party lending (despite recent efforts of the CBR to curb such lending); iv) weak risk management capacity in the banks and at the CBR; v) weak corporate governance, including lenient credit underwriting standards; (vi) poorly functioning and inefficient credit reporting systems; and vii) a large unbanked population with limited access to modern financial services. The WBG can help Russia address these weaknesses while adding depth and breadth to public and private 12

capital markets. Deeper capital markets, through development of the bond market, would channel Russian savings towards Russian development, particularly in support of infrastructure financing, while creating an essential building block for Russia's long-term goal to become an international financial center. 31. The regional focus will remain. Substantial development challenges remain in a large number of Russian regions. As in the previous CPS, the Federal Government has asked the WBG to deepen its direct involvement in the regions. Correspondingly, a central focus of the extended CPS will continue to be in select regions, including economic analysis (growth and business environment diagnostics), regional development strategies, migration, and more effective use of social expenditures. Demand for subnational borrowing and new fee-for-service arrangements for investment and policy advice will depend on fiscal and liquidity constraints in specific regions. Encouragingly, however, recent developments demonstrate continued interest in these instruments. Subnational lending will focus on relatively small but highly developmental investments, with significant replication potential, in less economically developed regions. IFC and MIGA will support financial institutions interested in regional expansion throughout the country and in the provision of consumer and SME credit and services. 32. Our support to Russia’s ODA system will continue as Russia expands its aid program markedly. IBRD will focus on three priorities: i) preparation and implementation of a broader framework agreement for Russian development cooperation with Central Asia; ii) together with OECD, support for Russia at the February 2010 conference of emerging donors in Moscow; and iii) capacity and institution-building for Russia’s emerging development aid institutions. VI. RISKS 33. The main risk to the Russian economy would be a prolonged slowdown and protracted economic recovery in the wake of the global economic and financial crisis and its attendant social, financial and economic impact. This risk stems from uncertainty about the timing and shape of global recovery of demand and capital flows, and, specifically, the demand for Russia’s export products, including oil. However, given Russia’s very low debt, large international reserves, and strong fiscal management, such risk is deemed moderate. In particular, three specific risks arise in the context of the crisis environment over the next 2-3 years; the Government is aware of these risks and is taking corresponding measures in each area. 34. First, the deeper and more prolonged economic crisis is likely to have a major social impact with increases in associated social tensions. Unemployment and poverty are expected to rise rapidly and some regions with already high unemployment and poverty will be particularly hard hit. The unemployment rate could exceed 13 percent compared with average of 6.3 percent in 2008. Poverty is estimated to increase to 17.4 percent by end-2009 from 13.2 in 2007. The high level of decentralization, combined with low implementation capacity in some regions hardest hit by the crisis, increases the chances that social tensions are not addressed in a timely manner, thus undermining the credibility of the overall policy response. The Government is mitigating this risk through a series of measures, including recent increases in unemployment benefits and pensions, and commitment to ensure full payment of social obligations during the crisis despite fiscal pressures. 35. Second, the financial sector remains vulnerable to second-round effects of adjustments in the real economy. A sharp rise in the NPLs, combined with limited access to external financing and low liquidity, is likely to raise the risk of specific bank failures. In addition, the deterioration of the banking system might require additional government support measures resulting in a further worsening of the government’s fiscal position. The revised 2009 budget contains an allocation of 540 billion rubles (USD18 billion) that could be used to finance such additional needs, but there is a risk that such costs could increase and put additional strain on the budget.

36. Third, there are policy risks associated with the departure from strong macro fundamentals and delay in the implementation of the anti-crisis fiscal measures. Russia faces a balancing act of limiting the social impact of the crisis while not losing control of public finances. While Russia’s large fiscal reserves provide a financial cushion during the crisis that many other countries do not have, there is a possibility of weakening macro policy stance under expenditure pressures during the crisis. Although policy response is likely to remain flexible and timely, there is also risk of increased protectionist measures that give preferential treatment to select market participants. A delay in the World Trade Organization (WTO) accession could undermine benefits for Russia from a rules-based international trading regime, as well as postpone improvements in policies and institutional capacity that come with integration into the world economy. 37. Finally, Russia also faces external risks arising from a prolonged depression of global demand and reduction in commodity prices. The global outlook remains extremely uncertain, with declines in world global output and trade, and very limited capital flows to developing countries in 2009. World oil prices are likely to remain in the USD56-63 range during 2009-10. Structural weaknesses in the banking sector, reliance of the private sector on external financing, and a limited economic base make Russia vulnerable to highly correlated, multiple shocks of a decline in oil price, a sudden reversal in capital flows, and a drop in the market sentiment. A further drop in oil prices would renew pressures on the ruble. In these two areas—risk of macro policy easing and the implications of a prolonged depression in global demand—the Government’s experience with sound macroeconomic management so far suggests that the authorities would aim to counter those risks with appropriate policy adjustments under a difficult external scenario. For example, the federal budget for 2009 was prudently based on USD41/barrel oil price. 38. In each of these areas, the Government has taken various policy steps to mitigate these risks, however, should such risks materialize, IBRD would reassess its strategy with a view to formulating and implementing appropriate mitigation measures in collaboration with the authorities. VII.

CREDITWORTHINESS

39. Russia is creditworthy for IBRD lending and will remain so under short- to medium-term scenarios. In contrast to many developing countries hard hit by the crisis, it also has maintained an investment grade sovereign debt rating (BBB by S&P). Reflecting the government’s prudent fiscal strategy, the foreign debt exposure of the Federal Government has decreased in recent years and currently stands at less than 2 percent of GDP (USD27.2 billion at Q1 2009) and less than 6 percent of total exports (total exports in 2008, USD471 billion free on board (FOB)). Combined with a sizable foreign exchange reserves at 23 percent of GDP (USD404 billion at the end of May 2009), the Russian government, with flexible monetary-exchange policy, will be able to meet its debt obligations even with a significant oil price shock. 40. Non-sovereign external debt, on the other hand, has increased very significantly over the last few years, reaching 25 percent of GDP in Q1 2009 (USD426.3 billion at Q1 2009). Although the overall debt appears low compared with the economy’s size, the large buildup of external debt of private financial corporations remains a concern. In particular, the rollover risk is expected to be high in 2009 because of a much weaker real economy and extremely tight liquidity. At the same time, this debt has been declining in the past two quarters as Russian banks and enterprises increasingly repaid their debt in the context of tighter access and new borrowing conditions. 41. From the external debt perspective, the proposed indicative CPS envelope of up to USD4 billion does not pose any significant burden on the country’s repayment capacity. Russia’s outstanding debt to the World Bank (USD3.6 billion) is currently less than 0.2 percent of GDP, less than 0.8 percent of total external debt, and less than 13 percent of total sovereign debt. 14

Annex A1: Progress in Russia during the CPS Period 1. This summary highlights progress against three overarching Government goals for 2012: growth and economic diversification, human development, and regional development. WBG contributions follow in each area. Annex A4 summarizes WBG contributions by pillar. The CPS Results Matrix is at Annex A5. 2. Russian Progress: Growth and Economic Diversification. Strong economic growth and the concomitant growth in prosperity from 2000 to 2008 weakened the focus on structural reforms and diversification of the economy through promotion of entrepreneurship (see Figure 1). Russia’s international indicators on corruption (e.g., Transparency International (TI) and the Business Environment and Enterprise Performance Survey (BEEPS)) and on ease of doing business have deteriorated since 2007.9 Corruption continues to be a serious impediment even after many attempts since 2002 to improve the investment climate, particularly for SMEs. Administrative barriers in public governance remain substantial, especially related to protecting and enforcing property rights, facilitating competition, and strengthening judicial independence and transparency. Without better incentives for market entry and research aimed at technology commercialization, the high tech sector—a key area of Government focus to help diversify the economy—faces uncertain prospects. Authorities intensified efforts in 2008 at a series of reforms to streamline public administration, including federal laws “On Protection of Rights for Entrepreneurs”, “On Combating Corruption”, and “On Access to Information about BusinessGovernment Relations.” Figure 1: Russia’s Increased Oil Dependence of the Budget (A) and Export Revenues (B) (A)

(B)

3. WBG Contributions: Growth and Economic Diversification. IBRD has contributed to policy debates and capacity building, evidence-based analyses of policies (e.g., Russian Economic Reports, Country Economic Memorandum on growth and Poverty Assessment) and technical support that helped strengthen sound macroeconomic policies and structural reforms. Notable contributions include advice and joint work with the MOF on long-term fiscal stability and economic diversification. IBRD, IFC, and FIAS helped promote private business development by strengthening the financial sector through lending 9

Similar to the situation presented in the BEEPS 2005, the recently released BEEPS 2009 survey identifies tax rates, access to finance, inadequately-educated work force, and corruption in business-government interactions as the top constraints for firm investment in Russia. According to BEEPS 2009, half of the business community in Russia identifies corruption as a major constraint to investment, compared to a regional average of about 33 percent.

2007

1994

2006

Russian Oil price in US$ per bbl (right scale)

2005

Oil revenue as % of total GG Revenues

2004

2003

2002

2001

10%

2000

1999

20%

65% 60% 55% 50% 45% 40% 35% 30% 1998

1997

30%

Oil Dependence (O&Gexp/TotalEXP)

1996

1995

40%

and advisory services for securities market regulation, financial sector strategy, insurance and banking sector supervision, SME finance, housing finance, and energy efficiency finance. The WBG also helped develop land and property markets (See Box 1). IFC contributed directly to economic diversification and international competitiveness through investment in infrastructure, value-added manufacturing, cleaner production and energy efficiency. IBRD shared best practices on methods to deepen the innovation sector in regional workshops. Box 1: Development of Real Estate Markets: WBG Contributions In the 1990s, Russia carried out the world’s largest property and land reform. Millions of new owners received public land parcels and real estate at nominal cost. Yet to turn this new private property into a source of wealth required the creation of land and real estate markets – everything from land laws, cadastral mapping, land titling and registration, tax assessments, collateral and credit, and mortgage banking to consumer and judicial protections for land tenure security. Each of these legal, institutional and investment needs were supported by expertise and financing from IBRD, FIAS and IFC. To embed secure legal rights, IBRD and FIAS have supported the Government’s goal of reducing barriers and increasing the efficiency and transparency of registration process by institutional improvements and promotion of competition. The time required to register real estate objects declined from 4 months in 2004 to 20 days for individuals and 15 days for companies in pilot regions in 2008. Based on more secure titles, IFC contributed to the growth of the mortgage industry, from a USD1.5 billion market in 2005 to USD40 billion in 2008, by helping to develop 11 legal and regulatory amendments adopted by the Russian authorities, 9 standard mortgage products used by 43 percent of the market, public information on mortgage lending and consumer rights, and by providing advisory services and lending to individual banks. As of end-2008, mortgage portfolios of IFC advisory project pilot banks consisted of 77,496 loans for a total of USD5.9 billion. Delinquent mortgage loan levels are 1.5 percent on average in IFC project banks; in the market overall, levels range from 1-5 percent depending on the institution. As the crisis continues, IFC is helping lenders preserve portfolio quality through seminars on portfolio management and through stress testing and diagnostics of client banks. IFC has also designed tools and informational materials to educate borrowers about loan restructuring options and help banks optimize restructuring scenarios. Building on this platform, IFC and IBRD are developing programs to address supply and demand-side barriers to realizing energy savings potential of Russia's housing sector.

4. Russian Progress: Human Development. As Russia’s population shrinks and ages, putting pressure on growth and social expenditures, the Government is taking measures to increase life expectancy through better health and to increase the productivity of the population through more globally competitive educational institutions. Since 2005, life expectancy increased impressively from 65.5 in 2005 to 68 years in 2008, primarily due to the reduction of premature death in males and females. Moreover, educational scores on international comparators increased markedly10. These positive trends notwithstanding, health and education expenditures are significantly lower, and outcomes weaker, than in other G-8 and MICs. Life expectancy lags G-8 countries by 16-19 years for men and 13-14 years for women. Higher and vocational education need significant reforms to provide more globally competitive skills. Moreover, the Government recognizes that social assistance programs remain poorly targeted and are committed to increase their impact on the most vulnerable segments of the society.11 Yet policy solutions to improve human development indicators also lie outside the social sectors. For example, poor environmental quality plays a large role in the health and productivity of 60 percent of Russians, which in turn reduces GDP by an estimated four to six percent. Air pollution in particular cuts average life

PIRLS: significant progress from 12th place (out of 37 participating countries) in 2000 to first place in 2006 (40 countries). 11 The World Bank’s 2009 Poverty Assessment for Russia notes that although noncontributory spending accounted for at least 2.6 percent of GDP in 2006, only a small part of the subsidies go to the poorest 20 percent of the population.

expectancy by one year and up to four years in the most polluted cities12. And almost 220,000 road accidents in 2008 carried a death toll of nearly 30,000 people.13 5. WBG Contributions: Human Development. The WBG contributed to favorable trends in adult mortality and educational performance at both the federal and regional levels using the full range of its instruments; thereby addressing demographic pressures via higher labor productivity. The Education Innovation Project helped improve reading scores by modernizing curricula for primary school children, while the E-Learning Project resulted in Information and Communication Technology (ICT) competencies for rural children that are comparable to urban areas. The results tested in both projects were adopted nation-wide. Diagnostic studies and policy reports, prepared jointly with local experts, recommended new strategic approaches and built capacity for better early childhood, vocational and higher education in several regions. Lessons from across these projects are being assessed for application in other regions. The Health Reform Implementation and TB-AIDS projects both had systemic impacts on health services and reduced mortality from infectious and non-communicable diseases. National and regional health and finance officials benefited from widespread dissemination of the lessons from both projects at several World Bank Institute (WBI) and Global Development Learning Network (GDLN)supported events. The outcomes are being incorporated into national targeted health programs. The WBG also tested new approaches to improving social assistance at the regional level, but in the absence of demand at the federal level, systemic impact of these pilots was limited. 6. Russian Progress: Regional Development. The Government aims to adopt policies that can provide a more even distribution of social welfare as growth leads to a more uneven landscape of economic activity. 14 Through better regional policies, including internal migration, more effective public administration that is responsive to citizens, and increased reliance on PPPs to finance vital infrastructure networks, the Government seeks to improve agglomeration economies and social and communal services throughout Russiaâ&#x20AC;&#x2122;s vast territories. By some estimates the infrastructure backlog is about USD1 trillion over the next decade, or about 8 percent of GDP annually, for basic essential infrastructure: utilities (water, heating, sanitation, waste management, electricity) and transport (roads, bridges, airports, ports). The Government established the legal and regulatory framework for PPPs and the city of St. Petersburg championed PPPs at the subnational level, putting forward the first candidates for concessions. However, prior to the crisis, yearly PPP investment in Russia was much lower than in India, China, Mexico, South Africa and Chile15. With respect to social services, access to health and educational services has improved in rural areas, in part due to better performance in different regional health systems and expansion of high quality e-learning. Performance management tools are used at the federal and regional levels, and budget authority is decentralized to the local level, where public hearings are required. To underscore high-level commitment to address spatial disparities, Prime Minister Putin chairs the new Commission on Regional Development while Mr. Medvedev chairs the Council for the Development of Local Government. 7. WBG Contributions: Regional Development. Bank ESW, particularly the World Development Report 2009 on Reshaping Economic Geography and the Country Economic Memorandum, contributed to policy debates on regional policy. Lending supported the migration of poor residents out of underdeveloped northern territories. IFC helped develop the mortgage market in Russia, which is essential for labor mobility. Subnational finance, a joint IFC-Bank product, helped repair and upgrade 12

Russia Environmental Management System: Directions for Modernization, World Bank 2009 (forthcoming) According to the National Inspection of Security of Road Traffic 14 In 2007, gross regional product per capita ranged from USD1,218 in the Ingush Republic in the Southern Federal Okrug to USD33,774 in Tyumen, a mineral-rich region in the Urals Federal Okrug. Source: Rosstat 2009. 15 Russian yearly annual PPP investments as a share of GDP from 2000-2006 averaged 0.11 percent compared to Chile (1.09 percent), China (0.34 percent), India (0.75 percent), Mexico (0.33 percent) and South Africa (0.52 percent). The financial crisis significantly reduced the private sectorâ&#x20AC;&#x2122;s ability to raise long-term financing, resulting in most Russian projects being delayed or restructured. 13

regional and municipal water/wastewater infrastructure and road networks in four regions. IFC also prioritized poorer frontier regions for its investments. In FY09 to date, 54 percent of IFCâ&#x20AC;&#x2122;s committed investment volume in Russia was in frontier regions, compared to just 24 percent in FY07. A notable IFC milestone was the completion of an advisory project in Magadan, a very remote region in the Far East, which extended the benefits of an IFC mining investment to the local SME community through increased access to finance and markets. WBG lending for municipal heating, water and wastewater raised the quality of services in participating cities while improving financial management and reducing housing subsidies in place of targeted social assistance. On the removal of infrastructure bottlenecks, demand was limited at the federal level but was developing at the regional level for PPPs and finance. In St. Petersburg, four fee-based service agreements prepared the legal and institutional framework for the countryâ&#x20AC;&#x2122;s first concessions in the transport sector. More broadly, IBRD helped reorient public administration to serve citizen needs through support for performance-based management and budgeting, development of multi-service centers (one-stop shops), and fiscal and administrative decentralization to the municipal and village level. 8. Russian Progress and World Bank Contributions: Russiaâ&#x20AC;&#x2122;s Global Role as a Donor. In June 2007, Russia adopted a new policy on ODA explicitly based on the principles of international cooperation as developed in the framework of DAC. Since then, Russian development aid increased to USD220 million annually, much of which is implemented jointly with international agencies. The World Bank has been involved in policy advice and capacity building for Russia development aid since the 2006 G-8 Summit in St. Petersburg. Cooperation follows a learning-by-doing approach. By channeling development assistance through IBRD instruments, Russian specialists become active participants in addressing urgent human and development needs in Africa (malaria control, access to energy, quality of primary education), reducing the risks of infectious disease in Central Asia, and in producing international tools for public policy (learning assessments tools and international methodology for measurement of financial literacy). The Government has signed a USD3 million fee-based service agreement with IBRD to build capacity for providing development assistance in education. With support from the UK Department for International Development (DFID), IBRD is also helping the Government develop critical policies and functions for effective donor assistance, such as monitoring and evaluation, statistical reporting, and communications. Annex A3 lists current contributions of the Russian Federation under administration by IBRD.

Annex A2: Russian Federation: Summary of the Government’s “2020 Development Strategy” “From a raw material export-oriented economy towards an innovative, diversified, and socially-oriented economy based on three factors: entrepreneurial freedom, social justice, and national competitiveness” In November 2008, the Government of Russia approved the “2020 Development Strategy”, which identifies a series of performance criteria and development targets to ensure sustainable economic growth and strengthen national security.16 This strategy defines six main directions to move Russia towards an innovative, socially-oriented type of economic development: • Develop Russia’s human potential through major improvements in education, housing, pensions, environment protection, among other areas • Create a competitive institutional environment that stimulates entrepreneurial activity and attracts capital • Diversify the economy through innovative technological change • Strengthen Russia’s global competitiveness in traditional economic sectors (energy, transport, agriculture) and reduce the depletion of raw materials • Promote spatial development to decrease regional inequalities in living standards • Strengthen Russia’s external economic status as a main financial center and a contributor to global public goods The Government of Russia has committed to take the necessary measures as appropriate to ensure the achievement of specific targets in these areas. Diversifying the Economy for Sustainable Development and Growth 1) Authorities are committed to maintaining fiscal discipline in the long-term, recognizing its importance for achieving higher savings and retaining investor confidence. The government aims to strengthen the role of the tax system by promoting economic diversification and increasing the tax base. The 2020 Strategy identifies five priority targets for macroeconomic policy: i) reduce inflation gradually to an annual average of 3 percent; ii) meet money demand by increasing liquidity (the Central Bank will help refinance commercial banks); iii) expand the tax base; iv) increase public expenditures to reduce infrastructure bottlenecks; and v) improve the efficiency of public expenditures (see further below). Growth and Diversification 2) Traditional economic sectors (oil, gas, raw materials, agriculture, and transport) will remain the leading contributors to economic growth by 2020. In addition, the 2020 Strategy indicates that a new “economic sector” will emerge, called the “knowledge and high technologies sector”. In 2007, this sector contributed to about 10-11 percent of GDP. The objective is that it will be a leading source of grow, and the government expects it to contribute to 17-20 percent of GDP by 2020. The share of hi-tech products and knowledge services in Russia will reach 5-10 percent of GDP, and this production will be diversified across 5-7 productive activities. To promote innovation, public expenditures for research and development activities will increase from 1.1 percent of GDP in 2007 to 2.5-3 percent of GDP by 2020. 3) Regarding economic diversification, the government envisions investments in fixed capital formation to growth 4 times by 2020 compared to their 2007 level. Most of this growth will take 16

The government’s strategy is divided into two stages. The first stage (2008-2012) focuses on innovation in nontraditional economic sectors. The second stage (2013-2020) focuses on high-technology markets.

place in non-traditional sectors. The share of investments in the extracting sector (oil and gas) will fall from 15.2 percent in 2007 to 11.2 percent by 2020. The Government will promote investments in transportation with the aim of decreasing inter-regional income inequality, expand trade markets, and promote economic mobility. The government will also study the development of regional clusters for economic development through investments in transport infrastructure. Strengthening Public Sector Management and Performance 4) The Government is committed to reducing administrative barriers, improving regulation of businesses, and promoting public-private partnerships in leading economic sectors in order to achieve greater efficiency and attract capital. According to the 2020 Strategy, changes in the structure of the public budget (at the federal, regional, and municipal levels) will play a key role in increasing the efficiency of public expenditures. The government will raise transparency in the preparation, allocation, and execution of public budgets at all levels. In addition, budget decentralization efforts will continue. The government’s view is that decentralization of the decision-making process will lead to better-informed decisions on the use of financial resources. Particular focus will be put on developing municipal budget monitoring systems, and enlisting private companies to monitor target indicators of public programs. Improving Delivery of Social and Communal Services: Social Sector Reforms and Financing to Protect Vulnerable Groups Social Well Being 5) The 2020 Strategy sets outs ambitious targets for poverty and inequality. The headcount poverty level will fall from 13.4 percent of the population in 2007 to 6-7 percent by 2020. Income inequality between the top 10 percent and the bottom 10 percent of the income distribution will fall from a ratio of 16.8 in 2007 to a ratio of 12 by 2020. The share of the middle class is expected to increase to 52-55 percent of the population (up from 18 percent in 2006). Social allowances will reach the entire poor population (currently 70 percent of the poor participate in public social programs). Education 6) Improvements in education will be crucial to achieve economic diversification and to raise value added through innovation. The government’s objective is to have 60-70 percent of the population with higher education by 2020 (up from 50 percent in 2007). Education expenditures will increase from 4.8 percent of GDP in 2007 to 6.6 percent of GDP by 2020. 7) The Government has identified a series of policies aimed at raising both the provision and quality of education. First, the government will create new public universities and research centers, and increase financing for research programs as well as teachers salaries. Second, the government will modernize the educational system by promoting early-childhood educational development, and providing financial support to talented young students (educational credits). Third, the Government will create a modern system of extended studies (continuing education) and create a system of professional accreditation. Finally, the government will implement measures to attract larger numbers of foreign students into Russian education institutions. 8) Targets in education include the following: i) increase the share of off-budget funds for professional education to no less than 25 percent of total expenditures in education; ii) increase the share of pupils that qualify for “modern standards” by 70 percent; iii) increase international baccalaureate programs by 15 percent; iv) create a nation-wide system for ranking educational institutions; v) support at least 100 organizations to implement best practices in continuing education programs; vi) create at least 1012 modern student-cities and centers; vii) raise international accreditation for at least 15 percent of professional education programs; viii)

increase the level of educational credit to cover at least 12 percent of the student population; and ix) increase the share of foreign students to 5 percent. The achievement of these targets will help Russia to reach education ratings similar to those found in OECD countries. Health 9) Compared to other areas, improvements in health care systems in Russia in the past decade have been modest. The 2020 Strategy aims to improve the extent and quality of medical aid. The Government envisions the development of the pharmaceutical industry as an important pillar in this regard. Public expenditures in health are expected to increase from 3.6 percent of GDP in 2007 to 6.7-7 percent of GDP by 2020, close to the level of health expenditures found in OECD countries. 10) As part of a “National Health Project”, the 2020 Strategy identifies the following priority tasks for health care delivery: i) provide free medical aid to the entire population; ii) create a system of mandatory medical insurance on the basis of a unified tariff for all employers and individual entrepreneurs; and iii) strengthen systems of disease-prevention by improving sanitation in hospitals and increasing the ratio of beds to patients. 11) By 2020, death rates as a result of cardiovascular disease will be reduced by 1.4 times compared to its 2007 level. Death rates due to accidents, poisoning, and trauma will be halved. Child mortality and maternity mortality will be reduced to the level of OECD countries, and morbidity will be decreased by 1.5 times by 2020. The average mortality rate due to violence will be halved. Pensions and Housing 12) Public expenditures in social policy, including pensions, will increase from 0.7 percent of GDP in 2008 to 1.3 percent of GDP by 2020. The use of the Reserve Fund might be necessary to achieve this target. The average labor pension in 2020 will exceed the cost of living for pensioners by 3 times. The level of disabled employment will reach 40 percent of the total number of disabled. 13) The average availability of housing will reach 30 sq. meters per person (about 100 sq meters per family). The share of the population located in unfavorable climate conditions will decrease from 43 percent in 2007 to 14 percent by 2020. Meanwhile, the share of investments into real estate will increase from a share of 17.3 percent of fixed capital investments in 2007 to a share of 21 percent by 2020. Enhancing Russia’s Global Role Main Economic and Financial Center 14) Russia’s goal is to become a leading world power by 2020, among the top five nations. The development of financial markets is a top priority in this regard. Russia’s objective is to become a world financial center, and the 2020 Strategy identifies the following targets: i) increase the share of banking credits from 40 percent of GDP in 2007 to 70-75 percent of GDP by 2015, and to 80-85 percent by 2020; ii) increase the size of banking sector financing for fixed capital formation from 9.4 percent of GDP in 2007 to 20-25 percent of GDP by 2020; iii) increase the level of capitalization of Russian companies to 150-200 percent of GDP by 2020; and iv) increase the ratio of Russian corporate bonds value (in circulation) from 3.8 percent of GDP in 2007 to 2225 percent of GDP by 2020. Global Public Goods: Energy Efficiency and Environment Protection 15) Russia’s long-term growth sustainability and world economic status as a contributor to global public goods depends on its ability to become energy efficient. Potential energy savings to the Russian economy are estimated to be around 360-430 million tons of standard coal. The

government will promote the use of renewable energy sources and the development of more environmentally-friendly technologies for energy production. Tax policy measures will be adopted to reduce energy intensity. 16) By 2020, the Government aims to reduce the degree of power intensity to about 60 percent of its 2007 level. Gas intensity will be reduced to 40-50 percent of its 2007 level by 2020, and to 35 percent by 2030. Furthermore, the consumption of power will decrease by 1.6-1.8 times compared to its level in 2007. 17) The Government has identified the following measures to reduce energy intensity by 40 percent by 2020: i) prohibit the use of energy-wasteful technologies; ii) introduce technical regulations and new norms of energy efficiency; iii) implement policies to ensure an equal profitability of energy and gas supply on domestic and international markets; and iv) promote the expansion of energy consulting activities. 18) Environmental protection is a critical milestone in the 2020 Strategy. Currently about 56 percent of the urban population in Russia live in cities with high levels of pollution. The Governmentâ&#x20AC;&#x2122;s target is to reduce the number of towns with high pollution by 5 times, and reduce the number of people living in â&#x20AC;&#x153;unfavorable ecological conditionsâ&#x20AC;? (e.g., high pollution) by 4 times by 2020. To this end, the Government will develop rules for environmental audits, and public expenditures aimed at protecting the environment will reach at least 1-1.5 percent of GDP by 2020.

Russia in 2020

Минэкономразвития России, 2008

2007

GDP per capita (thous. $)

2020

13,9

Annual average growth of GDP, %

6,5

Average lifetime, years

66,5

72-75

> 52 - 55

The share of population with money income below povertyline (cost of living), %

10,4

6-6,5

The share of hi-tech sector and knowledge economy in GDP, %

10,9

17-20

The share of innovative products in the total industrial output, %

5,5

25 - 35

The share of industrial enterprises with innovative activity, %

9,5

40 - 50

Total expenditures for research and exploring, % of GDP

1,1

2,5 -3

Middle class share, %

Exports, billion $

354

>900

Machinery exports, billion $

19,7

110 – 130

2,6

Growth of productivity, 2020 to 2007 г. Decline in energy-output ratio, %

100

Russia’s share in the world economy, %

3,2

4,3

Financial System Indicators, % of GDP

2007

2020

Credit financing of economy from banks

80-85

Fixed capital investments received from banks

10.8

20-25

Value of Russian corporate bonds in circulation

3.8

22-25

Collected insurance premiums

2.4

7-9

Development of banking system

Development of capital market and creation of International Financial Center

Insurance market development

Annex A3: Russia as a Donor IDA Contributions Basic (USDM)

% of Total

Suppl (USDM)

Basic (USDM)

% of Total

Suppl (USDM)

Basic USDM

% of Total

Suppl (USDM) 10.48

Initial

0.00

FY84

0.00

IDA11

15.34

0.20

IDA1

0.00

IDA7

0.00

IDA12

4.01

0.03

IDA2

0.00

SFA

0.00

IDA13

10.12

0.08

IDA3

0.00

IDA8

0.00

IDA14

26.79

0.14

IDA4

0.00

IDA9

126.00

0.86

MDRI

33.85

0.09

IDA5

0.00

IDA10

69.15

0.38

2.73

IDA15

108.86

0.35

IDA6

0.00

ITF

9.11

0.20

3.04

15.18 31.76 b/

IDA14 and IDA15 Contributions, if any, may include HIPC costs and arrears clearance. MDRI amount represents latest cost update a/ Represents subscriptions from Initial Subscription to IDA9 which were released when Russia joined IDA b/ Includes a credit of USD15.5 million due to accelerated payments.

Bank-Managed Trust Fund Contributions US$ millions as of June 10, 2009 Trustee Fund TF020131 TF050676 TF051051 TF051061 TF054402 TF069001 TF070515 TF070712 TF070783 TF050576 TF071069 TF071154 TF071232 TF070957 *** TF071223 Grand Total

Program Name MISCELLANEOUS ONE GLOBAL FUND FOR AIDS, TB AND MALARIA HEAVILY INDEBTED POOR COUNTRIES EDUCATN FOR ALL-FAST TRACK INITIATIVE EFA FTI EDUCATION PROGRAM DEVELOPMENT F GLOBAL FUND FOR AIDS, TB AND MALARIA AVIAN AND HUMAN INFLUENZA TRUST FUNDS COMMERCIAL DEBT REDUCTION FACILITY FREE STANDING - COFINANCING AFGHANISTAN RECONSTRUCTION TRUST FUND FINANCIAL LITERACY AND EDUCATION TF RUSSIA EDUCATION AID FOR DEVELOPMENT GLOBAL FOOD CRISIS RESPONSE PROGRAM ENERGY SECTOR MANAGEMEN ASSISTANCE PROG ENERGY SME SUPPORT TO SSA

Total Contribution Paid-In 7.8 7.5 25.0 4.0 3.2 194.1 3.0 5.0 12.0 2.0 5.0 5.0 7.0 10.0 290.6

* This represents the amount in the signed AA. ** Contribution data has not been recorded for this trust fund. *** The AA has not been signed. **** As of June 10, 2009, the Donor Balance/Income Accounts (TF070785) has a fund balance of $1 mil.

Total Commitment*

Type of Trust Fund

7.8 n.a.** 25.0 10.0 3.2 257.0 3.0 5.0 15.0 4.0 15.0 32.0 15.0 30.0 422.0

Multi-donor Multi-donor Single Multi-donor Multi-donor Multi-donor Multi-donor Multi-donor Single Multi-donor Single Single Single Single Single

Annex A4: Summary of WBG Contributions by CPS Pillar 1. Sustain rapid growth. Progress was significant in maintaining macroeconomic stability, modest in promotion of private sector development, infrastructure financing, and energy efficiency; limited in reducing spatial disparities, improving the investment climate, and diversifying the economy. •

Maintain macroeconomic stability. Since 2006, IBRD has made a major contribution to policy debates and capacity building by independent, evidence-based analyses of policies and technical support that strengthened the case for sound macroeconomic policies and structural reforms. For example, joint work with the MOF on long-term fiscal stability exposed the perils of large oil price fluctuations on long-term public finance and helped highlight future funding gaps in pensions, health, and infrastructure finance due to negative demographic and past infrastructure trends. In June 2008, the Russian Economic Report warned of overheating and risks to the funding model of commercial banks (June 2008).

•

Promote private sector development IBRD helped strengthen the financial sector through lending and TA for securities market regulation, financial sector strategy, and insurance and banking sector supervision. On a fee basis, IBRD provided TA to the Central Bank to support payments system development and monitoring. IBRD and FIAS also helped develop land and property markets through lending and advisory services. IFC increased access to finance for Russian entrepreneurs through on-lending and microfinance by client banks to SMEs.17 A Regional Doing Business survey will be launched in July.

•

Increase economic diversification. IFC contributed directly to economic diversification by supporting job growth outside the extractive industries18. IBRD shared best practices on methods to deepen the innovation sector in regional workshops. At the federal level, there was no demand for lending in support of Special Economic Zones or IT parks.

•

Correct spatial imbalances. Bank ESW contributed to policy debates on regional policy, and lending supported the migration of poor residents out of underdeveloped northern territories. The migration process subsequently stalled and demand did not develop as expected for regional growth strategies. However, about 34 percent (USD610 million) of IFC private sector investment in Russia during the CPS period reached frontier regions of Russia.

•

Remove infrastructure bottlenecks. Demand was limited at the federal level but was developing at the regional level for PPPs) and finance. In St. Petersburg, four fee-based service assignments prepared the legal and institutional framework for the country’s first concessions in the transport sector.19 Subnational finance, a joint IFC-Bank product, helped repair and upgrade regional and municipal water/wastewater infrastructure and road networks in four regions. IFC also prioritized investment in Russia’s transport and logistics infrastructure.

2. Improve public sector management and performance. Partnership with IBRD (lending and advisory services) has contributed substantially to fiscal reforms, local self-government, and improvements in state capacity and service quality in federal agencies.

In FY08, IFC’s portfolio clients provided around 106,000 SME loans and held an SME outstanding portfolio of USD8.4 billion. IFC’s portfolio clients provided approximately 42,000 microfinance loans and held a microfinance outstanding portfolio of almost USD150 million. During FY07-08, IFC client companies contributed over USD2 billion to government revenues. 18 IFC invested USD113 million in the manufacturing sector, including construction materials, USD183 million in trade finance, and USD136 million in IT, communications and high tech sectors. 19 To help St. Petersburg provide a model for PPP concessions, IBRD advised on the legal and institutional requirements to structure private participation in the Western High Speed Diameter, Orlovski tunnel, Nadex light rail, and Pulkovo airport projects.

•

Lending. Russian statistical reporting by Rosskomstat is continuously improving in line with international standards. The Treasury provides full accounting and auditing of federal and regional budget expenditures. The Federal Tax Service has higher voluntary compliance through e-government filing. Clearance of goods through pilot customs offices is down from 5 days in 2003 to 7 hours in 2008. Cadastral mapping offices reduced registration time from 4 months to 20 days (see Box 2). The national weather service (Hydromet) has reduced warning time for severe weather conditions, reducing damage to agriculture. Fires have been brought under control in some of the world’s largest forestry preserves. Due to the recent start-up of lending, contributions to judicial reform have been less visible, with activities focusing on peer-learning.

•

TA and advisory services. IBRD supported the transition to local self-government and budget autonomy at the village level in several pilot regions by developing the capacity of municipal associations and helping to increase public participation in decisionmaking.20 Federal and regional officials benefited from peer-learning activities and TA on performance management and best cases in integrated service delivery through MultiFunctional Service Centers. There has also been strong support and engagement by IBRD and FIAS in the Southern Federal District for pilot Regulatory Impact Assessments and reforms to reduce administrative barriers to business development. Recent surveys demonstrated that, as a result, the investment climate in Rostov Oblast (region) improved dramatically compared to a 2003 survey, including lower incidence of informal payments.

3. Improve the delivery of social and communal services. The Bank Group contributed to improvements in housing and communal services and to favorable trends in adult mortality and educational performance. Progress was limited in social assistance. •

Affordable housing and utilities. IFC helped develop the mortgage market in Russia. Pilot banks disbursed 110,858 mortgage loans worth USD6.8 billion from 2005-8, with extremely low delinquency rates. Bank lending for municipal heating, water and wastewater raised the quality of services in participating cities while improving financial management and reducing housing subsidies in place of targeted social assistance. The Board approved the Housing and Communal Services loan to finance expansion of lessons from such projects; it has been cleared for signature by Government.

•

Addressing demographic pressures through improved health. The TB/AIDS Control Project had a system-wide impact on health services, contributing to a decline of TB mortality by 18 percent in the total population and to a 5 percent decrease in the rate of growth of HIV prevalence from 2003-8. Reforms supported by IBRD at the regional level to strengthen primary care services and introduce innovative resource allocation mechanisms have produced good results and are being emulated in other regions, including through fee-based services. Numerous diagnostic reports, GDLN-sponsored events and WBI courses helped raise awareness of the health and demographic crisis and contributed to capacity and strategies to deal with it (e.g., to reduce adult mortality from non-communicable diseases and accidents). Private sector solutions have been financed by IFC in the health sector.

•

Modernizing the education sector. IBRD helped develop globally competitive skills and educational services through the E-Learning Support project, which increased access to modern teaching and learning opportunities for all students. As a result of the project,

A Russian project on local governance won the first award by the SD Network in this year’s “Putting People First” contest.

rural children showed the same levels of ICT competence as in urban areas. Several feebased service projects are testing approaches to lifelong learning and more effective educational expenditures. Kazan, a major center in Tatarstan for higher education, is implementing recommendations on how to create world-class institutions, in line with the Government’s strategy for an innovation economy. Khanty-Mansisk, which has a high migrant population, is implementing a strategy to improve the cost-effectiveness and inclusiveness of early childhood education. Tver Oblast and Krasnoyarsk Krai are reviewing vocational education options based on Bank analysis. •

Improving social assistance. Demand for assistance at the regional level was greater than at the federal level, so systemic impact was limited. A fee-based project in Tatarstan demonstrated methods to improve the targeting of social assistance, while in the Southern Okrug, the poorest region in Russia with the highest ratio of unemployed youth, a Local Initiatives project was designed and tested that could become the basis for a future public works program.

4. Enhancing Russia’s Global Role. Progress was substantial in enhancing Russia’s role as a donor. Significant efforts were made to increase Russia’s role in mitigating climate change, including through energy efficiency. Carbon finance projects are now awaiting Government signature. •

Enhancing Russia as Donor. Following the WBG’s support to the Russian Federation during its G-8 presidency in 2006, cooperation has developed well for capacity building and in learning-by-doing in joint development assistance programs. Capacity is being developed for an aid reporting system and regulatory framework with support from DFID and Government funds. Joint cooperation programs with IBRD include a malaria support program for Zambia and Mozambique, energy access for poor villagers in East Africa, and Trust Funds to improve the quality of basic education, develop an international methodology for financial literacy, and support solutions to the food price crisis in the Kyrgyz Republic and Tajikistan.

5. Global Public Goods. A joint IFC/IBRD initiative raised high-level interest in energy efficiency (based on path-breaking ESW), contributed to legislation to facilitate public and private investments in EE, and helped develop an EE product for industry.21 IBRD supported the development of a legal and institutional framework for carbon finance and helped prepare four projects under the Kyoto Protocol through joint implementation. A study on Green Investment Schemes (GIS), in the framework of the Kyoto Protocol, was initiated that would address legal issues and selection criteria for investments in energy efficient and ecological projects. Several carbon finance projects were prepared, including one approved by Rosneft to reduce gas flaring.

Since program launch in 2005, it facilitated USD150 million in IFC commitments and USD100 million in EE projects financed by 6 partner banks resulting in USD60 million in annual energy cost savings and 3.6 million tons of projected lifetime CO2 emissions reduction.

•

Promote private sector development.

•

• Strong progress in land registration and cadastre listings. Increase in availability of finance for Russian entrepreneurs. Financial sector regulation reform implemented.

•

Cadastre Project improves quality of services of real estate property registration by supporting integration of land and real estate data and by rationalizing, shortening and simplifying registration procedure. IFC invested more than USD1.8 billion in 60 projects in Russia’s private sector. Financial markets investments (USD870 m) to regional banks supported on lending to SMEs and for mortgage lending and energy efficiency investments. In FY08, IFC’s portfolio clients provided around 106,000 SME loans and held an SME outstanding portfolio of USD8.4 billion. IFC’s portfolio clients provided approximately 42,000 microfinance loans and held a microfinance outstanding portfolio of almost USD150 million. IFC’s client companies contributed over USD2 billion to government revenues. MIGA issued nearly USD581 million in new guarantees supporting investments of global financial institutions into their banking, mortgage and leasing subsidiaries in Russia. FIAS: Project to address Administrative Barriers to Investment and Business Development in several regions. GDLN VC workshop series on investment climate improvement, delivered in 2007 and 2008 to an audience of about 140 participants in multiple •

• •

•

Considerable improvements in the system of registration of immovable property; more attention to quality of services; steps aimed at full integration of cadastre, registration and better linkages with the taxation system. Improvements in business taxation. Number of cadastre plans of land parcels registered increased from 4.2 million in 2004 to 6 million in 2007 (latest data). Time spent for land transactions decreased from 2 months to 20 working days. 164 Private Surveying companies established. In 2007, there were more than 25 mln. privatized living quarters (2/3 of all housing resources subject to privatization). Financing by banks in 2007 reached 37.2% of GDP (2006 – 29.9%), plan for 2020 – 78%).

Country CPS Outcomes WBG Activities Progress in Russia Development Goals OVERARCHING OBJECTIVE: Improvements in the well-being of the population and decrease in poverty, based on a more dynamic and competitive economy Goals: • Sustain rapid economic growth • Improve public sector management and performance • Improve the delivery of social and communal services • Enhance Russia’s global role Strategic Pillar One: Sustaining Rapid Growth

Annex A5: CPS Results Matrix

•

Maintain macroeconomic stability.

Country Development Goals

• Fund for Future Generations created according to world best practices.

CPS Outcomes

•

locations, including , Kabardino-Balkaria, North Ossetia and Stavropol Krai in Russia. Capital Markets Development Project (CMDP Lending) to strengthen securities markets regulation and provide TA to the Ministry of Finance in financial sector policy (financial sector development strategy, government assets and liability management, including reserves and stabilization funds management). FSAP TA to strengthen insurance sector and banking sector supervision, Fee-for-Service TA to the Central Bank to support Payments System development and monitoring. ESW on Protection of Consumers of Financial Services; TA on financial literacy. MIGA guarantees support manufacturing projects in the consumer goods industry and financial institutions interested in regional expansion and consumer and SME credit and services. Treasury provided TA during establishment of Funds. Timely, regular monitoring and assessment of economic developments and macro policies in Russia through the publication of Russian Economic Reports. A study on long term fiscal sustainability and longterm fiscal planning provides policy recommendations on how to manage oil revenues to ensure sustainable growth and promote economic diversification. GDLN presentation of RER #18 to senior government audiences in 8 Russian cities focused on Russian macroeconomic outlook and social aspects of the anti-crisis policy response. WTO Accession GDLN series in 2008 and 2009, delivered to audiences in 9 cities in Russia, Belarus, and Kazakhstan. WBI Migration work: Seminar on remittances from Eastern Europe and the former Soviet Union and Knowledge Sharing VC with Turkey on Internal

WBG Activities

Fund for Future Generations and Reserve Fund created; total accumulation reached peak of USD580 billion. Starting 2009, these reserves are used to finance the budget deficit. • Anti-crisis measures amount to 6.7% of GDP adopted in 2008 and announced for 2009. • Budget for 2009-2010 is prudently based on conservative oil price assumptions.

Progress in Russia

•

Correcting spatial imbalances and promoting growth points.

Increase diversification of the economy.

Country Development Goals

•

Selected regions with Bank support (development strategies) improve climate for growth and investment. Progress in housing reform (utilities prices, competition in the industry, etc.) in regions participating in housing and communal service project or receiving IFC support. Drafting of national regional

SEZs, IT parks, and Investment fund projects implemented according to best practices. Russian firms monitored clearly and benchmarked relative to past and other countries on competitiveness measures. Attraction of substantial private investment to non-oil tradable sectors . Increase in innovation rates.

CPS Outcomes

•

Migration (2007). Federal Government decided not to borrow for SEZs, IT parks. ECA flagship study on productivity growth “Unleashing Prosperity: Productivity Growth in Eastern Europe and Former Soviet Union” analyzed Russia in a comparative perspective and provided policy recommendations for export diversification through technological innovation. IFC investments in the real sectors during the CPS period focused on key industries including transport and logistics infrastructure (USD175 m); manufacturing, including glass, wood processing, metallurgy, and retail (USD113 m); activities in extractive industries and the chemicals sector, including iron ore mining, oil processing, and fertilizer manufacturing (USD140 m); and agribusiness, including food and beverage manufacturing and processing and agri-infrastructure (USD227 m). IFC also invested in private health clinics (USD62.5 m), and IT and communications infrastructure (USD85 m). IFC investment in extractive industries over the CPS Period was just 3% of total IFC investment across all sectors. Series of WBI/GDLN events on Services Trade connecting multiple sites in Russia and in the CIS. WBI/GDLN Course on Trade Policy and WTO Accession (2008-9). Country Economic Memorandum identifies the sources of regional growth and agglomeration effects, highlights convergence across regions, and provides policy recommendations on spatial inequalities and development. GDLN global dialogue on the impact of global economic crisis on subnational finance, with involvement of Brazil, China, India and Russia (Moscow and Khanty-Mansiysk). 34% (USD610 m) of IFC private sector investments reached Frontier regions of Russia. Commitments in

WBG Activities

•

The government continued developing and implementing measures aimed at more balanced regional development (political, legislative, budget, administrative and other measures). Decline in differentiation of regions by rate of growth of the gross regional product (GRP) and growth of consumer prices. Inter-regional differences remain in per capita GRP, population income, volume of investments and budget financing.

Average annual growth of GDP in 2003-2007 in manufacturing, construction and trade was higher than in mining operations. In 2007, the share of innovation sector amounted to 10.9% of all value added (plan–17% in 2020). The government pursued policies targeted at elimination of administrative barriers for businesses; the share of eliminated violations of antimonopoly law reached 89% in 2008 (85% in 2004).

Progress in Russia

•

Remove infrastructure bottlenecks to growth in transportation, energy, and other areas.

Country Development Goals

•

• •

•

Improvement in overall legal, regulatory and institutional framework for PPP. Successful formation of PPPs. Key (with economic impact) infrastructure created in the context of Bank projects Power sector able to attract investment resources at good terms (under guarantee). Effective allocation of Investment Fund and Federal Targeted Program resources. Enactment of energy efficiency law and development of secondary legislation to enable

strategy for promoting growth points. Improvement in regional trade through reduction in transportation logistics costs.

CPS Outcomes

•

• •

•

Frontier regions as a percentage of total Russia commitments increased during the CPS period, from 24% in FY07 to 54% in FY09 YTD. (Frontier regions are defined as having average income levels less than or equal to 80% of GNI). 22% of these Frontier investments during the CPS period were in the form of financing to banks focused on SME, mortgage and retail lending. IFC’s Russia Far East Business Development Advisory (2002-2008) in Magadan established a micro-finance facility, serving local SMEs and including the aboriginal crafts community. The project helped 150 SMEs access financing worth over USD6 million. WBI TA program to local tourism associations to enhance competitiveness and attract investors in the Republics of Northern Ossetia - Alania (12/07); Karachayevo-Cherkessia (03/08); and Adygeya and Kabardino-Balkaria (11/08) as part of FIAS project WBI Capacity building support to GDLN centers in Russia to increase outreach and impact of Bank programs through ICT (2007). WBI program on enhancing SME competitiveness and innovation in the N.W. region of Russia (2007) Improvement of institutional capacity for management of traffic within the City of Moscow (Moscow Urban Transport Project). Technical assistance to City of St. Petersburg to develop PPP in the transport sector (RTA). Technical assistance to Volgograd Oblast on feasibility of road by-pass to alleviate congestion and support regional development (RTA). Policy paper on Russia’s energy efficiency. IFC invested USD175m in transport and logistics infrastructure during the CPS period. IFC-Bank Subnational loans (USD116 m in Kamchatka, Chuvashia, Mariy-El, and Moscow oblast have helped repair and upgrade regional and municipal water/wastewater infrastructure and road networks, including rural road networks, improving

WBG Activities

•

Enactment of Concession law in July 2005 and creation of Investment Fund in January 2006 to support PPP projects Federal Targeted Program “Modernization of the Transport System in Russia (2002-2010)”. Goods and services in the transport system grew by 3% in 2006-2008. Introduction of energy-saving measures. In 2008, the amount of standard fuel saved was 38 mln. tons. (potential is up to 420 mln. tons). More than 50% of capital assets in energy and fuel are currently highly depreciated. 20% of heat networks are in an emergency state.

Progress in Russia

•

Creation of an efficient, modern, and professional civil service that is motivated to improve the investment climate and quality of public services.

Country Development Goals

•

delivery of social services and facilitating access to markets. These will connect an additional 105,000 people in rural areas to allweather road networks by 2012. Regional GDLN/WBI event on Regulatory Reform and Regulatory Impact Analysis linking Russia, Armenia, Georgia, Tajikistan, and Azerbaijan (05/08). WBI Knowledge Exchange workshop on PPP in Infrastructure, St-Petersburg (12/07); one multicountry GDLN/WBI event with Stavropol State Agrarian University on Regulatory Reforms (05/08).

WBG Activities

Realization of public administration reform program for re-organization of apparatus and conversion to new principles. Significant initiatives taken in regions for reforming government administration. Relatively rapid progress on administrative reform in regions where IBRD is engaged.

TA to the City of St. Petersburg on institutional design and capacity building for the management of PPPs. • WB-DFID Trust Fund “Support to Public Administration and Governance in Russia” (Nov 2007 – March 2011) on: • Performance management and budgeting at the federal and subnational level. • Investment climate, e.g identifying and removing administrative barriers to investment and business development in the Southern Federal District (in cooperation with FIAS). • Improving quality of public services and Monitoring and Evaluation of administrative reform, e.g., for peer-learning for Southern Federal Districts on Multi-Functional Service Centers and analytical support to MoED in evaluating MFCs. • Coordination of development partners involved in implementation of public administration reform, including development of web-based resources on MoED administrative reform portal and SFD Secretariat resource center. Capacity building to Khanti-Mansiysk Autonomous District Government to support implementation of functional review in the regional executive authorities (RTA). Fourteen GDLN global dialogues on e-government

•

Progress in Russia

Performance management tools have been implemented in the government at the federal and regional level. Performance reporting practice has advanced at the federal level. Practice of developing regulations for administrative procedures has enhanced in federal and regional executive authorities. For 2006-2008 over 550 administrative regulations has been developed (350 adopted for implementation) in federal executive authorities, while over 3500 regulations have been developed in the regional authorities; Regional executive authorities performance assessment system adopted by the government; Multifunctional service centers (MFC) – onestop shops for service delivery - were created as mechanisms to improve quality and accessibility of public services. By March 2009 about 50 MFCs were established all over Russia (37 of them with federal support). Stronger emphasis on reducing administrative barriers for SMEs. Late 2008 the federal law On Protection of Rights of Individual Entrepreneurs and Legal Entities when Implementing State and Municipal Control and Supervision Procedures was adopted, which revised procedures, limited the number of

Strategic Pillar Two: Strengthening Public Sector Management and Performance

both public and private investments into energy efficiency projects across Russia.

CPS Outcomes

Improving the efficiency and results orientation of budgeting at the federal and subnational

•

Fiscal and administrative decentralization Creation of effective local self government on the basis of budgetary and administrative autonomy at the lowest municipal level of government.

•

Country Development Goals

•

Successful realization of 3-year budgetary framework at the federal level.

Good progress on the development of local selfgovernment in pilot rural areas (Penza, Adygea, and Perm regions). Increased capacity of Municipal Associations in Adygea, Penza, and Perm. Measureable increased of participation of the population in public decision-making in the three regions of the study. Development and piloting of new modalities of interaction between the government and the population in the process of public decision-making.

CPS Outcomes

•

Regional fiscal technical assistance project (TA) contributed to improving the legal framework for public finance in the regions, and promoted responsible fiscal behavior. Tax administration project supported systematic reforms and targets to raise administrative efficiency, strengthen enforcement capacity, and

with Russia’s participation in 2007 – 2009. A typical event included from 20 to 300 participants from key federal and regional government agencies. GDLN workshop on sharing international experience and dialogue among 6 Russian regions. Launching single window government services centers (Nov. 2008). WBI Round-table on Recent Developments in Public Financial Management with lecturers and professors from Stavropol State Agrarian University (June 2008). WBI Training of Trainers workshop on Intergovernmental Fiscal Relations (IGFR) for faculty of the Stavropol State Agrarian University (June 2009). TA to reform implementation : • Developed support of tested and replicable models of capacity building for settlement-level administrators (both elected and appointed). • Developed methodologies for effective public hearings mandated under the new legislation. • Advised the GoR (the Ministry of Regions) on the development of indicators of local government effectiveness. • Developed locality cards as examples of data to be collected by national statistical agencies. • Designed new formats for interaction between local government officials and the population (to be continued with the help of a USD750 000 JSPF grant to the Perm administration).

WBG Activities

•

Transition period for the municipal reform has been completed; as of 2009 all regions of Russia are to fulfill the decentralization legislation in full. While most of the regions have undergone a fairly smooth transition, the quality of local government is highly uneven; the training and capacity building programs are insufficient. Consulting assistance for the newly created settlement level administrations has been insufficient. Monitoring of settlement-level municipal effectiveness has not been developed. Programs for support of local initiatives have not been developed, minimizing incentives for inclusion of the population into public decision making and processes of local governance. Settlement-level statistics not consistently collected by Rosstat. MOF introduced three-year budget framework in 2008. Improvements in capacity to monitor fiscal performance and to carry out fiscal and structural reforms at the subnational level. Tax Administration instituted new management principles. Collective accountability for results

checks and prohibited unplanned checks without Prosecution Office permit. National Anticorruption Plan was adopted. Federal Law On Combating Corruption introduced procedures for anticorruption analysis of legislation. New Federal law On Access to Information about the Activities of Government Authorities and Local Self-Governance Bodies, signed to establish standards for publishing information in electronic format.

Progress in Russia

•

Improve the judiciary and other key public institutions.

levels.

Country Development Goals

•

• Continued improvements in the quality of Russian statistics as targeted in Stat projects. Progress in judiciary reform in context of project (information transmission and disclosure).

CPS Outcomes

•

State Statistics II project (2007) continues process of aligning Russian statistical services with international standards. Judicial Reform Support Project (2007) complements the Federal Targeted Program by supporting implementation of information systems and related judicial training aimed at transforming the judiciary into an institution that is more transparent, efficient, accountable and worthy of public trust and confidence.

improve fairness in the implementation of tax laws. GDLN series on introduction of results-based management in Russian regions delivered by the Center for Strategic Research in 2007. IFC-IBRD investments at the subnational level improve the alignment of regional assets and liabilities and improve regional debt structures, reducing borrowing risk, lowering cost of debt service and freeing up resources for additional investment. These investments also send positive market signals, allowing regions to attract additional financing on good terms.

WBG Activities

•

Considerable improvement in the quality of Russian statistics, gradually approaching international standards. Mid-term progress assessed positively by judges in implementation of 2007-2011 Federal Targeted Program (FTP) for “Development of the Judicial System” (USD1.56 billion). Publication of arbitrazh court decisions on the unified web-portal begun. An increase in the number of authorized positions for judges and court personnel facilitated more rapid consideration of cases and other materials. Law On Securing Access to Information on Courts’ Activities (signed into law Dec. 2008) increases public and mass media access to information on courts’ activities. President Medvedev’s speech to Congress of Judges (Dec 2008) prompted legislative amendments to enhance qualification requirements for judges; create a single disciplinary body to consider accusations and disputes regarding judges at all levels; improvement of the Judicial Ethics Code.) The amendments also increase the powers of commercial courts. A state system of free legal aid for low-income persons is to be created in 2010.

was created through the Modernization Dept., which oversees IBRD project and the Federal Targeted Tax Program. About 40 percent reduction in late filing of tax returns by mid-2008. Notable increase in the share of tax declarations filed electronically. Regions where tax reforms were implemented were 180% more efficient than those without reforms in obtaining higher tax revenues as a share of expenditures in tax collection.

Progress in Russia

Improve the quality and quantity of affordable housing and utilities available to the population, including facilities for migrants in growing regions.

Improve the health of the population, increase life expectancy, and reverse negative demographic trends.

•

Country Development Goals

•

WBG Activities

Signs of reversals in negative health status trends Successful implementation of National Project in Health and other programs supported by international organizations (e.g., World Bank, Global Fund). Reforms of health care system implemented in pilot regions with good results that are being emulated in other regions.

Increases in affordable housing as measured from Bank infrastructure and housing projects or IFC mortgage support. Implementation of National Project in Housing. Regional pilots launched for reforming housing sector. Continued rapid growth of the mortgage market.

•

In 2009, implementation of the Housing and Communal Services loan will address reforms in the sector. The Municipal Heating and Municipal Water and Wastewater projects improved quality of heat and water/wastewater services in participating cities. At end CY07, IFC’s investment client banks provided over 40,000 housing finance loans for a total amount of USD3.1 billion. IFC’s Russia Primary Mortgage Market Development Project (2005-2008/9): From FY05 to December 2008, advisory project pilot banks disbursed 110,858 mortgage loans worth USD6.8 billion, with extremely low delinquency rates. In FY09, in response to the economic crisis, IFC refocused the mortgage market program and is providing diagnostics and client real estate portfolio stress testing, as well as tools for lenders to manage loan portfolios and distressed assets. The program also published a borrower manual for better understanding rights and responsibilities in event of delinquency and submitted modernized regulation on investor disclosure. 120 mortgage specialists attended program seminars on loan restructuring servicing and pricing and portfolio management. TB-AIDS control project had system-wide impact on health services, contributing to a decline of TB mortality by 18% in total population from 20032008 and to slow down the rate of growth of HIV prevalence—a 5% decrease in 2008 as compared to 2003. Health Reform Implementation Project strengthened federal stewardship for effective regulation of a highly decentralized system and supported the development of strategic approaches to health system restructuring in Chuvash Republic and Voronezh-the two pilot regions covering 2.5 mln. people. First subnational loan in health to Chuvash Republic (2009) •

•

Progress in Russia

Life expectancy increased from 65.5 in 2005 to 68 years in 2008. Primary health care has been strengthened vis-àvis hospital services (e.g., it accounts now for between 50-60% of total regional health budgets in pilot regions, up from 30-40% in 2002) facilitating access to health services, particularly in rural areas, and increasing patient satisfaction. Innovative resource allocation mechanisms tied to achievement of predefined programmatic targets introduced to improve performance in different regional health systems (e.g., payment systems for general practitioners that include a basic level of remuneration and a variable

In 2008, 21% of families purchased standard dwellings with the use of credits or own funds; new housing construction totaled 63 mln. sq.m (twice as much as annually in 2000-2002). In 2008, the share of private investments in total investments in modernization of communal infrastructure was 30%.

Strategic Pillar Three: Improving Delivery of Social and Communal Services

CPS Outcomes

•

Modernize the education system with greater relevance to the demands of an open market economy.

Country Development Goals

•

• Realization of objectives set out in Bank assistance to federal and regional education programs for modernizing curriculums, particularly in access to high quality education using ICT. Successful implementation of National Project in education on regional education programs. Successful implementation of

CPS Outcomes

•

IFC investments in private sector health services over the CPS Period total USD62.5 m. Fee-based services to Khanty-Mansiysk on health care restructuring options (2008-9). Numerous diagnostic reports contributed to understanding of nature and characteristics of demographic and health crisis, including social and economic costs, and development of strategies to address it based on international experience. Evaluation of health reform efforts at the regional level, focusing on processes, outputs and initial outcomes, to derive lessons for supporting similar efforts across the country. Capacity building at federal and regional levels on health policies and health care organization and financing through high level policy seminars, flagship courses on health reform organized in collaboration with WBI, study tours, GDLN conferences to disseminate lessons from international experiences, particularly in G8 countries, and preparation of policy notes to support health activities related to Russia's commitments after G8 Presidency. GDLN Health Reform VC Series delivered in 2007 to 58 health officials in 6 Russian cities and focused on sharing the US experience of transformation of the veteran’s administration health system and on national responses to road trauma and injuries. Education Reform Project piloted key reform initiatives later supported and disseminated through National Priority Project «Education». E-Learning Support Project provided access to modern teaching and learning opportunities to Russian students. Vocational education development program and policy paper were developed in two regions under FBS agreements: Tver oblast and Krasnoyarsk krai. Up to 7 universities in Kazan city are receiving assistance in developing strategic plans and programs for improving access to quality education.

WBG Activities

•

Program for International Student Assessment (PISA) 2006: 33-38 place out of 57 countries in science performance, 37-40 in reading and 32-38 in mathematical performance. Progress in International Reading Literacy Study (PIRLS): significant progress from 12th place (out of 37 participating countries) in 2000 to the first place in 2006 (40 countries). Trends in International Mathematics and Science Study (TIMSS) 2007: In 2007 Russia achieved 10th place out of 59 countries. The unified collection of digital resources with

portion dependent on performance as measured against indictors of priority interventions).

Progress in Russia

•

Improve effectiveness of social assistance.

Country Development Goals

•

Measured progress in regions targeted for poverty reduction and social assistance support in the World Bank poverty work.

National Project in Education on innovative universities. All schools connected to the internet.

CPS Outcomes

• The ECD and preschool education systems of KhantyMansyisk region are being improved through (i) introduction of modern curriculum, (ii) strengthening the quality assurance system, and (iii) increasing access to ECD services to families. • The plan for transforming the Higher School of Economics into a World Class University was developed. • A policy paper "Transforming Russian Universities into World Class Universities" contributed development of new higher education policy. • A study of Russian students’ achievements in PIRLS examined reasons for the success and disseminated successful teaching and learning practices. • VC discussions on education policy issues for public officials in 30 municipalities of Perm Krai during 2007-2009. • Knowledge sharing on social policy (labor and safety nets) in the face of the crisis, including workshops with the Federal Employment Service to offer policy options and increase labor market monitoring. • VC discussions on education policy issues for public officials in 30 municipalities of Perm Krai during 2007-2009. • A Poverty and Living Standards Assessment study identified critical areas for social policy to combat chronic poverty and vulnerability to poverty, raising awareness on poor targeting of existing social assistance. • GDLN Food Price Crisis Series, four events with a focus on managing the effects of higher food and fuel prices on ECA countries, including Russia. Social protection and food security assurance aspects were discussed. • GDLN series on labor migration and remittances in ECA. Four workshops for 90 government officials and experts in Russia as well as Armenia, Moldova, Kazakhstan, the Kyrgyz Republic, the Philippines, and Tajikistan.

WBG Activities

• Anti-crisis measures included social assistance to alleviate the impact on vulnerable groups. Temporary employment opportunities (public works, temporary work, internships), mobility subsidies for relocation for employment, expansion of unemployment benefits, and SME support to promote self-employment (e.g., lumpsum benefits) were introduced as part of the anticrisis response. • Active labor markets policies for the unemployed were introduced at the regional level to mitigate the impact of the crisis on employment, in addition to weekly monitoring of labor market indicators. • The existence of divided responsibilities between the federal and local levels of government impeded substantive reforms in improving targeting.

•

• •

more than 100 000 learning items has been established and is accessible to all Russian schools through Internet. All schools connected to the internet. New performance based salary schemes, per capita financing mechanism for general education and new governance schemes introduced in the regions. Innovative development programs in the leading universities are supported by the Government.

Progress in Russia

Developing and articulating role as an emerging donor

Fulfilling international obligations for global public goods.

•

Legal and institutional framework established for carbon finance. Increased number of carbon finance operations in the country with increasing awareness of climate change problems.

Development of an ODA strategy Expanded donor activities realized according to articulated vision

•

“Energy Efficiency in Russia: Untapped Reserves”. (September 2008) discussed at the highest levels of government. Four carbon finance operations were prepared by IBRD including one of the biggest projects in Russia and ECA; one of them is waiting for Govt. approval. IFC has done one carbon finance deal in Russia (purchasing ERUs from destruction of nitrous oxide in a fertilizer plant). Russia Sustainable Energy Finance Program (RSEFP; 2005-present), a joint IFC/ IBRD initiative, is developing a marketable energy efficiency product for industry and EE investments. Since program launch, the RSEFP has facilitated USD150 million in IFC commitments and USD100 million in EE projects financed by 6 partner banks, resulting in over USD60 million in energy cost savings annually and 3.6 million tons of projected lifetime CO2 emissions reduction. IFC/IBRD assistance to four oblasts in NW Russia on EE action plans and incentives for renewable energy investments. IFC’s Russia Cleaner Production Program (2008present) promotes cleaner production in industry through equipment modernization, improved management practices, waste management and product and process re-design, resulting in reduction of emissions and other wastes as well as in cost and energy savings.

Policy workshops and advice informed design of the national Concept of Development Cooperation and assisted in identification of capacity gaps. DFID TF (2008-2010) supports Bank advisory services to help develop effective national ODA system using multilateral principles. Team includes ECCU1, PTP, WBI, DEC, EXT. Bank and OECD supporting preparations for 2010 conference

Strategic Pillar Four: Enhancing Russia’s Global Role

•

• •

•

Concept of International Development Cooperation and Action Plan for its implementation approved (fall 2007). Two trust funds to improve international methodology on education quality and financial literacy (2008). Development of USUSD10-billion Anti-Crisis Fund. Contributions to IBRD-managed Trust Funds for Food Price Crisis and Vulnerability Fund (2009). Hosting 2010 Conference for Emerging Donors on aid effectiveness. Climate Doctrine approved in April 2009. Legal framework for Joint Implementation projects was established in 2008. Gradual increase of attention of the Government to the problems of Climate Change.

Annex A6: Fee-Based Service Activities (Completions as of May 2009)

Project Definition Kazan International Airport (KIA)

KhantiMansiysk Autonomos Okrug - Yugra

Development Objectives

Results Indicators

Provide advice on the medium term development strategy for the KIA while building capacity by the client to design and implement the strategy, with emphasis on: i) analysis of PPP options, ii) assessment of required TA program for successful implementation, and iii) preliminary financial analysis of KIA investment and funding requirements. The activity was aimed at the optimization of the organizational structure and functions of regional authorities in Khanti-Mansiysk autonomous district. The assignment was expected to result in training, knowledge-sharing, transfer of experience for implementing horizontal functional reviews of executive bodies, and facilitation of advisory support to the Autonomous District Administration staff. Sustained over time, the activities undertaken through this assignment will also result in an increase in the capacity of the Okrug’s administration to continually monitor, evaluate and refine its organizational structure and functions, and hence its efficiency and effectiveness.

The final report "AIRPORT BUSINESS DEVELOPMENT STRATEGY AND PRIVATE SECTOR PARTICIPATION (PSP) OPTIONS,” delivered to the client in June 2008, defined the strategy and contributed to capacity-building through joint analysis. • •

•

Transport Nadzemny Express PPP St. Petersburg.

Advise the recipient in developing Nadzemny Express (a light rail train in the city of St. Petersburg) as a PPP. This includes: i)Assessment of Feasibility and Technical Design Documentation of the Project; ii) Support to the Government during the pre-qualification stage of the PPP transaction; and iii) building

• • •

The activity was completed in December 2008 with the following outputs: Results of functional review (including register of functions and services) were analyzed and recommendations on further steps proposed. Proposed approaches to architecture and program platform for fee-based public services portal were assessed. Participation of international and Russian speakers in the regional conference on administrative reform was facilitated. Training on functional review methodology was delivered for 60 participants representing more than 30 bodies of the regional government. Just-in-time advisory support on analysis of functions and improving performance of regional executive authorities was facilitated (6 analytical outputs were produced). The task was delivered in December 2007 and considered successful. The documentation was assessed. The pre-qualification process received 6 expressions of interest from most reputable firms in light railway industry.

Linkage to CPS Pillars Sustaining rapid growth; improving public sector management

Strengthening public sector management and performance

Sustaining rapid growth, improving public sector management and supporting government investment and PPPs for

Project Definition

Development Objectives

Results Indicators

recipient’s capacity in designing and implementing PPP based projects, interacting with private sector entities and lenders and with advisors; knowledge transfer and best practice regarding implementation of similar projects.

•

The institutional capacity in PPP increased as a result of educating the project company (Nadex). Next steps of the project are being implemented under the

Linkage to CPS Pillars growth and diversification.

second agreement with the same core Bank team (see below).

Transport Nadzemany Express PPP St.Petersburg – Part 2

This is the follow-up to the above project (Phase I). It is aimed at developing the Nadzemny Express Project as a PPP. The focus of the advisory service is on knowledge transfer and best international practice regarding implementation of similar projects. The scope of activity under the present agreement included i) completion of the Financial Model, ii) completion of the bidding documents, including development of the bid evaluation criteria, and iii) preparation of the competitive bidding process.

The activity has been completed satisfactorily. IBRD developed, refined, and updated the financial model, presented it to the City Finance Committee (FC) for review and responded to the issues raised. Led the process of engaging with different advisors and bidders, advised the City and Nadex how to incorporate the comments; supported Nadex in two Bidder's Conferences, advised on the most suitable bidding strategy under crisis conditions.

Sustaining rapid growth improving public sector management and supporting government investment and PPPs for growth and diversification.

Transport Pulkovo Airport Expansion PPP St. Petersburg

Advise the city in developing the St. Petersburg Pulkovo Airport Expansion Project as a PPP, including i) assessment of Feasibility and Technical Design Documentation of the Project; ii). support to the Recipient for preparing to the prequalification stage of the PPP transaction; (iii) during the prequalification and bidding process and (iv) during the bid award and financial close of the transaction. The focus of the Advisory Services was on knowledge transfer and best practice regarding implementation of similar projects.

Sustaining rapid growth, improving public sector management.

Urban PPP Unit in St. Petersburg

Provide advisory services to the City of St. Petersburg in order to establish a form of organizational entity for the management of PPP projects and to facilitate this process by identifying the needs of the City by bringing

The phase (i) was fully accomplished under the agreement. It allowed to • build the capacity of the client in the assessment of potential PPP projects and analysis of PPP schemes. • do the analysis and project feasibility upon which the client made the knowledgeable decision to prepare this project as PPP. • assist the client in learning how to work with advisors, select high-quality consultants, do risk allocation in their identification and how to review and assess their inputs. The success of this TA allowed further cooperation with the Government of St. Petersburg: the second agreement was signed (for subsequent phases i-iv). The TA enabled the City of St. Petersburg to implement an appropriate framework for the management of PPP projects. The review and recommendations on institutional arrangements

Improving public sector management.

Project Definition

Western HighSpeed Diameter and Orlovski Tunnel PPP St Petersburg

Volgograd road by-pass study

Pulkovo Airport PPP (St Petersburg)

Tver Vocational Education

Development Objectives

Results Indicators

international experience and best practices. This required: i) Design of the Fiscal Risk Management Framework; ii) Analysis of international experience in institutionalizing preparation and management of PPP projects; iii) Analysis of St Petersburg needs in establishing a PPP Management Unit and of possible organizational and legal forms for its establishing; iv) Recommendation of the optimal mechanism for establishing such a PPP Management Unit; and (v) Development of methodologies that will be used by the PPP Management Unit. Provide advisory services to the City of St Petersburg in selecting a private partner for an urban toll road (Western High-Speed Diameter) and Tunnel under a PPP arrangement. The advisory service consisted in: i) Assessment of feasibility of the project and financial structuring; ii) Support to the City during the transaction for the selection of a preferred partner (until financial close).

directly lead to creation of a PPP unit. Prepared training manuals are being used by the PPP unit in the preparation of PPP projects. IBRD team provided a Program of Action for the City PPP Program, together with a policy document. Two seminars were organized: on options for institutional arrangement for the management of PPP projects, and on preparing PPP projects within the established framework.

Provide advisory services to the Volgograd Oblast on the feasibility of a road by-pass to relief the cityâ&#x20AC;&#x2122;s congestion and support regional development. The objective of the Oblast was to implement the project as a PPP. T he Phase 1 of the advisory services consisted in reviewing an existing feasibility study and provide professional opinion on feasibility of the road as a PPP. Provide advisory services focusing on knowledge transfer and best practices in PPP applied to the design and implementation of the Pulkovo airport PPP project. Phase 1 consisted in supporting the City during the feasibility stage of the project. Phase 2 consisted in supporting the City during bidding phase. The objective of the TA is to design a set of measures aimed at improving

Linkage to CPS Pillars

The services have been satisfactorily delivered to the City. IBRD supported the client during all phases of bidding and contributed to strengthening the institutional capacity of the City to prepare and procure a PPP project (based on international best practice). IBRD recommended the City to restructure the PPP projects in the context of the crisis. A new agreement is expected to be signed on additional advisory services for these projects. The services for Phase 1 have been satisfactorily delivered to the Oblast. The feasibility study has been reviewed and the financial assessment completed. IBRD identified several issues in the analysis and provided its recommendation to the Oblast.

Improving public sector management.

The services for Phase 1 have been completed satisfactorily. Phase 2 is on-going and the project received in May 2009 three bids from international consortium. This is considered an achievement in the context of the current crisis.

Improving public sector management.

The following outputs were produced, discussed with the

Improving delivery of

Improving public sector management.

Project Definition

Krasnoyarsk Vocational Education

Kazan Higher Education

Education KhantyMansiysk

Development Objectives

Results Indicators

the efficiency of vocational education system (VET) in the Tver Oblast. The major tasks of TA were to i) identify key VET development outcomes, and main challenges in the VET sector based on best Russian and international experience, and ii) design regional VET development program.

experts and stakeholders, and endorsed by the Client: • Diagnostics Study of the current status and performance of the VET system. • Development Strategy for the VET system. • Long Term Targeted Program to support development of the VET sector. The following outputs were produced, discussed with the experts and stakeholders, and endorsed by the Client: • Diagnostic Study; and Policy Options Paper. Krasnoyarsk Ministry of Education is currently using the Paper as a basis for drafting regional Technical VET development program.

The project was aimed at the creation of a joint program on secondary vocational education and training (SVET), sector modernization and development on the basis of best international expertise and knowledge; and development of local capacity. The major tasks of TA were to improve relevance and efficiency of SVET network in Krasnoyarsk region, and the activities were designed to i) assist Krasnoyarsk region in the evaluation of the present situation in SVET system and (ii) to develop regional policy in respect to the structure of SVET network operating in the region. The objectives of the TA were to i) enable Kazan partners to implement reforms and strengthen institutions in higher education (HE) system; ii) contribute to the development of HE system capacity for serving the purposes of regional and municipal socio-economic development, and iii) build sustainable relationship with the client and develop Bank 's capacity in subnational TA. In particular, the Diagnostic Study was aimed to help Kazan authorities to identify strengths and weaknesses of Kazan education system, analyze the determinants of the problems, and benchmark the system against comparators. It was expected to launch a program of development of the strategic planning capacity in the universities of the Kazan city as a follow up of the Diagnostic Study. Review the existing situation and trends in the regional education system and prepare a report including recommendations on further

Linkage to CPS Pillars Social and Communal Services.

Improving delivery of Social and Communal Services.

The outputs were as follows: • The diagnostic study was accepted by the Client. T he recommendations are focused on measures to strengthen the universities role in regional development and their leading positions among other Russian and international universities. • Three workshops for the universities were delivered to improve strategic planning capacity development in Kazan universities. Participating universities developed several drafts of strategic plans with the support from IBRD.

Improving delivery of Social and Communal Services.

Advisory services to KhantyMansiysk Region were delivered through the review of the education system and elaborated at

Improving delivery of Social and Communal

Project Definition

Nizhnevartovsk Housing Community Service

Development Objectives

Results Indicators

improvement. Identify possibilities for applying the most successful approaches and models of education development from the international and best Russian practice in the format of an international conference. Provide advisory services and help build institutional capacity within the department of Housing and Communal Services in the Municipality of Nizhnevartovsk. The activity included the following tasks: i) review the current situation in the HCS sector; ii) present conclusions and develop the sector strategy; iii) develop action plan for 2008 â&#x20AC;&#x201C; 2012; and iv) develop measures of capacity building.

the international conference. â&#x20AC;˘ The diagnostic helped to improve the education system through implementation of IBRDâ&#x20AC;&#x2122;s recommendations.

Task 1 was delivered to the client in September 2008. In January 2009, the client requested to postpone 3 remaining parts of the activity until July 2009 due to budget constraints. As a result, the activity was only partially completed, which is reflected in the ACS rating.

Linkage to CPS Pillars Services.

Improving delivery of Social and Communal Services.

USD9.8 million

RUB700 million (approximately USD27 million equivalent)

USD49 million

RUB200 million (USD7.3 million)

RUB 1,400 million (approximately USD42 million)

Municipality of PetropavlovskKamchatsky, Kamchatka Krai

Chuvash Republic

Voronezh Oblast

Amount

Chuvash Republic

Location

01/30/2009 (approved); Status: Pending signing

05/31/2007 (approved); 06/18/2007 (signed); Status: Active 03/20/2009 (approved); 05/18/09 (signed) Status: Active

12/21/2007 (approved); 02/27/2007 (signed); Status: Active

Approval year 04/27/2006 (approved); 05/25/2006 (signed); Status: Active

IFC ID 24582: Partial credit guarantee of the Republic’s 5-year unsecured RUR 1 billion (USD35 million) bond issue. This was the first bond issued with a third party guarantee by a regional government in Russia and the Republic’s longest tenure, largest bond issue ever at the time. The raised funds enable the Republic to implement its Targeted Investment Program and address its priority infrastructure needs in the areas of water, transport, housing construction and the renovation of schools and hospitals. P110444, IFC ID 26363: The project involves implementation of a program of capital investments in local infrastructure by the Municipality of Petropavlovsk-Kamchatsky (the easternmost municipality of the Russian Federation with a population of about 195,000, and the capital of Kamchatka Krai). Previously these investments had been financed from the Municipality’s operational surplus, plus short term borrowing. The SNF investment is a local currency loan of up to RUB700 million (approximately USD27 million equivalent) to the Municipality with an 8 year maturity to finance a part of its capital expenditure program for 2007 and 2008. Almost 70% of this program involves investments in road resurfacing and rehabilitation, street lighting, and social infrastructure (i.e. equipment and furniture for schools and hospitals). Parallel technical assistance helps improve the quality of future road sector investments, strengthen road asset management practices and advise on streamlined institutional arrangements for road management. P106225, IFC ID 25835 : The project is a senior loan to help finance the first phase of a roads transport modernization program involving the construction of about 550 km of rural roads to connect 57,000 people in 360 isolated communities to all weather road network; and the rehabilitation of 450 km of the major road network presently in poor condition. The investment is a USD49 million RUR-denominated 8 year A loan, fully guaranteed by the Republic. P115338, IFC ID 27786: The project would support the implementation of the Chuvash Republic’s 2009 capital expenditure program in the health care sector. The main priority of the Republic’s healthcare capital expenditures in 2009 is strengthening the prevention and treatment of cardiovascular (“CVD”) and trauma related disorders, to purchase new diagnostic and treatment equipment and upgrade existing medical facilities for CVD and trauma patients. The investment is a local currency loan of RUR200 million (USD7.3 million). The expected maturity of the loan is 5 years, including 2 years grace period. This is the first SNL exclusively in the health sector. P112063: The proposed investment is a local currency loan to support the Oblast's 2008-2009 capital expenditure program. The Oblast Administration has a long-standing partnership with IBRD, and has developed strategies and regional programs particularly in infrastructure and human development. Over the next three years, the Oblast's capital expenditures program will focus on healthcare facilities, improvements of energy efficiency in district heating through modernization of boiler stations, and the expansion of gas distribution networks into currently non-covered towns. The gas distribution program would connect to the network 200,000 households in 2008-2010, increasing gas coverage to 92% for the Oblast and to 84% for its rural population. The rehabilitation or replacement of 150 boilers over two years would improve the efficiency of the Oblast's district heating system, reducing emissions by about 20%, and improving

Project description

Annex A7: Russian Federation: Subnational lending

RUR 300 million (approximately USD8.4 million)

Municipal rayon of Mytischi Moscow region

04/01/2009 (approved); 04/10/2009 (signed) Status: Pending disbursement 06/22/09 (approved) 06/25/09 (first commitment recorded) Status: Pending disbursement

Approval year

Project description

The loan proceeds would finance installation of 80 automated individual heat substations and rehabilitation of about 14km of the distribution network using modern insulated heat pipes, which is approximately one third of the City’s rehabilitation plan for the next two years . The Project, which would be a continuation of the IBRD Municipal Heating Project (2001-2008), would improve quality of heating and hot water services to residents, reduce heat losses and maintenance costs, improve energy efficiency and promote sound cost recovery practices. The Project would also contribute to reduction in emissions of CO2 and other pollutants. Mytischi would be the first district heating subnational engagement in Russia where most regions are facing a pressing need to modernize their heating networks and reduce energy losses.

The loan will finance in part the Oblast's capital expenditure program during 2008-2009, and will be repaid from the Oblast's general revenues. IFC/IBRD's financing would represent approximately 14% of the capital program. P115248, IFC ID 27781: The proposed Project involves support to the Republic of Mariy El (located in the Volga River basin southeast of Tatarstan and Chuvashia) in financing its program of capital investment in roads and refinancing of the Republic`s bond due in May 2009. The road investments will primary focus on roads forming part of the core network identified by the Republic: repair and rehabilitation of the road sections in bad condition, upgrade of roads needing increased capacity due to higher traffic, and selected improvement of “black spots” with excessive pedestrian accident rates to upgrade these sections of roads to a sustainable and safe standard. IFC Project ID 27777 The investment is a local currency senior loan to municipal company UEZ ZhKKh wholly owned by the Municipal Rayon22 of Mytischi to advance rehabilitation of the heating infrastructure of the city of Mytischi , the largest second-tier municipality in the Rayon. The loan will be fully guaranteed by the City and the Rayon, and the source of repayment will be the City’s general revenues, with UEZ ZhKKh serving as an intermediary. The structure of the transaction responds mainly to a constraint created by the current wording of the federal Budget Code, which has the unintended effect of preventing International Financial Institutions from directly lending to municipal governments in Russia.

the performance and reliability of the heating service as well as its fuel efficiency. In the health sector, the Oblast has started to implement the second phase of a healthcare restructuring program (2003-2010) that is currently being supported by the World Bank-financed federal Health Reform Implementation Project ("HRIP"). Second stage investments are expected to upgrade physical infrastructure and equipment at several regional hospitals and the regional cardiac center, as well as the construction of new regional neonatal and oncology centers.

Municipal Rayons (or Districts) in Russia are a tier of local government below the regional level.

RUB 450 million (USD16.1 million equivalent)

Republic of Mariy El

Amount

Location

Amount

€53.2 million

USD6.2 million (estimate)

USD13.5 million (estimate)

Location

Yamal-Nenets Autonomous Okrug

North Danilovsk, Khanty-Mansiysk Okrug

Bratsk

2009 Status: PCN approved on

2009 Status: Pending signing of Letter of Intent

Approval year 08/08/2008 (approved); 09/15/2008 (ERPA signed); Status: Pending signing

Pipeline

Bratsk hydroelectric plant (BHPP) is the second HPP of the coordinated hydroelectric system downstream on the Angara river and the world’s leader in the total volume of electricity production since the first generating unit was put into

P101997

The preparation and implementation of this carbon project supports IBRD’s commitment to support Russia’s efforts to mitigate climate change and is consistent with its stated role in the carbon market.

The Project is a carbon finance operation based on a completed investment of a new 36 MW gas power plant (GPP) utilizing associated petroleum gas (APG) that otherwise would have been flared for electricity production. The generated electricity is being purchased by local users at the North-Danilovsk oil field and neighboring oil fields and replaces the electricity that was formerly supplied from the regional electric grid.

The history of the Project has 2 periods due to the change of project owner. IBRD started to work with Russian Oil Export company which was the project developer. In the end of 2007 Lukoil took over the company. Since then, IBRD is negotiating the signing of a new Letter of Intent with Lukoil.

P095812:

In September 2008 the whole package was submitted to the Ministry of Economic Development for Approval. The package was cleared by responsible Ministries (MNRE and MinEnergo). The status: awaiting the Letter of Approval from the Government.

The envisaged direct role for IBRD in this Project is limited to facilitation of carbon financing with ancillary contributions in the areas of capacity building, methodology development, environmental safeguards, and demonstration of replicable financing mechanisms for other Russian gas flaring reduction projects.

The Project was developed by OJSC “NK Rosneft”. The Project would process a portion of recovered Associated Petroleum Gas (APG) from the Komsomolskoye oil field near Gubkinsky City in the Yamal-Nenets Autonomous District in the Tyumen Oblast of Western Siberia in the Russian Federation. The project contributes to sustainable development in the Russian Federation through the reduction of flaring, which in turn reduces local air pollution and other environmental impacts associated with the flaring of natural gas. Apart from emission reductions due to the reduction of flaring, the project includes socio-economic, environmental, and technological benefits.

The first carbon finance project prepared and signed by the World Bank in Russia. Project was identified in 2007, prepared by the WB team and successfully passed the determination by an independent validator. Following Emission Reduction Purchase Agreement (ERPA) that was signed on September 15, 2008, IBRD will purchase 5.32 million tons of ERUs (80% of total project ERUs amount).

P102324

Project description

Annex A8: Russian Federation: Carbon Finance

Location

Amount

Approval year June 1, 2009

IBRD is preparing this project together with Macquarie bank who will purchase 50% of generated ERUs.

Without the contribution of the JI component, the rehabilitation of the turbines would not be economically feasible for “Irkutskenergo” and the wheels would continue operating based on their existing operational reserve beyond 2012.

operation. The project comprises the replacement of 6 impellers of turbines during the period from 2006 to 2010. The rehabilitation will increase the units’ generation efficiency up to 95.3% and provide supplemental generation. The supplemental power generation from the Project is expected to reduce about 2,103,743 tonnes of CO2 during the period 2008-2012 by displacing the power generation by fossil-fuel power plants of the Irkutskenergo power grid.

Project description

Annex B1: Country at a Glance

Russian Federation at a glance

9/24/08

Russian Federation

Europe & C entral Asia

Upper middle income

Population, mid-year (millions) Surface area (thousand sq. km) Population growth (% ) Urban population (% of total population)

141.6 17,098 -0.6 73

445 23,972 0.0 64

823 41,497 0.6 75

75-79

GNI (Atlas method, US$ billions) GNI per capita (Atlas method, US$) GNI per capita (PPP, international $)

1,071.0 7,560 14,400

2,694 6,051 11,116

5,750 6,987 11,868

30-34

8.1 8.8

6.8 6.7

5.8 5.1

.. .. 66 14 ..

5 11 69 23 ..

.. .. 70 22 ..

100 99 96 96

99 96 98 96

94 92 112 109

97 87

95 89

95 83

Key Development Indicators

Age distribution, 2007

(2007)

Mal e

Fe ma le

60-64 45-49

15-19 0-4

GDP growth (%) GDP per capita growth (%)

perce nt

(mo st recent estimate, 2000–2007) Poverty headcount ratio at $1.25 a day (PPP, %) Poverty headcount ratio at $2.00 a day (PPP, %) Life expectancy at birth (years) Infant mortality (per 1,000 live births) Child malnutrition (% of children under 5)

Under-5 mortality rate (per 1,000) 60 50 40

Adult literacy, male ( % of ages 15 and older) Adult literacy, female (% of ages 15 and older) Gross primary enrollment, male (% of age group) Gross primary enrollment, female (% of age group) Access to an improved water source (% of population) Access to improved sanitation facilities (% of population)

30 20 10 0 1990

1995

Russian Federation

Net Aid Flows

1980

1990

2000

2007

2006

(US$ millions) Net ODA and official aid Top 3 donors (in 2006): United States European Commission Germany

254

1,561

1,322

.. .. ..

0 0 254

915 97 64

716 160 98

Aid (% of GNI) Aid per capita (US$)

.. ..

0.0 2

0.6 11

0.2 9

Long-Term Economic Trends

2000

Europe & Central Asia

Growt h of GDP and GDP per cap ita (%)

-10 -20 95

Consumer prices (annual % change) GDP implicit deflator (annual % change)

.. ..

5.6 15.9

20.8 37.7

9.1 13.5

Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100)

.. ..

0.0 ..

28.1 100

25.6 199

GDP

GDP per capi ta

1980–90 1990–2000 2000–07 (average annual growth %) Population, mid-year (millions) GDP (US$ millions)

139.0 ..

148.3 516,814

146.3 259,708

141.6 1,291,011

0.6 ..

-0.1 -4.7

-0.5 6.6

Agriculture Industry Manufacturing Services

.. .. .. ..

(% of GDP) 16.6 6.4 48.4 37.9 .. 17.6 35.0 55.6

4.8 38.6 19.1 56.7

.. .. .. ..

-4.9 -7.1 .. -1.7

3.9 5.8 .. 7.2

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation

.. .. ..

48.9 20.8 30.1

46.2 15.1 18.7

49.7 17.3 24.5

.. .. ..

-0.9 -2.2 -19.1

10.2 2.0 11.6

Exports of goods and services Imports of goods and services Gross savings

.. .. ..

18.2 17.9 36.3

44.1 24.0 36.2

30.3 21.9 29.8

.. ..

0.8 -6.1

9.1 19.7

Note: F igures in italics are for years other than those specified. 2007 data are preliminary. .. indicates data are not available. a. Aid data are for 2006. Development Economics, Development Data Group (DECDG).

Russian Federation Balance of P ayments and Trade

2000

2007

105,033 47,192 53,506

355,465 223,421 112,209

1,275

4,100

Current account balance as a % of GDP

46,839 18.0

78,310 6.1

Reserves, including gold

27,970

476,391

Governance ind icators, 2000 and 2007 (US$ millions) Total merchandise exports (fob) Total merchandise imports (cif) Net trade in goods and services Workers' remittances and compensation of employees (receipts)

Voice an d accou ntab ili ty Pol itica l stab ili ty R egu la to ry qu ali ty Ru le of l aw Co ntrol of corrup ti on 0

Central Government Finance (% of GDP) Current revenue (including grants) Tax revenue Current expenditure

35.9 34.1 28.0

39.8 37.8 30.9

Overall surplus/deficit

3.1

6.1

Highest marginal tax rate (%) Individual Corporate

13 35

13 24

100

2007

Co untry's perce ntil e ra nk (0-1 00)

2000

higher v alues imply bett er ratings

Source: Kaufmann-Kraay-Mastruzzi, World Bank

Technology and Infrastruct ure

2000

Paved roads (% of total) Fixed line and mobile phone subscribers (per 1,000 people) High technology exports (% of manufactured exports)

67.4

137

13.5

9.4

Agricultural land (% of land area) Forest area (% of land area) Nationally protected areas (% of land area)

13 49.4 ..

13 49.4 7.9

Freshwater resources per capita (cu. meters) Freshwater withdrawal (% of internal resources)

.. 1.8

30,127 ..

CO2 emissions per capita (mt)

10.0

10.6

2.1

2.6

Energy use per capita (kg of oil equivalent)

4,196

4,517

World Bank Group portfolio

2000

2007

IBRD T otal debt outstanding and disbursed Disbursements Principal repayments Interest payments

6,844 540 266 412

4,292 214 724 262

IDA T otal debt outstanding and disbursed Disbursements T otal debt service

0 0 0

275 226 33

2,124 1,928 735

309

274 71

837 285

2007

External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed Total debt service Debt relief (HIPC, MDRI) Total debt (% of GDP) Total debt service (% of exports) Foreign direct investment (net inflows) Portfolio equity (net inflows)

159,993 11,825 –

251,067 50,223 –

61.6 9.9

25.3 13.8

2,714 150

30,827 6,149

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) Com position of total external debt, 2006 IDA, 0

IM F, 0

IBRD, 4,759 Short -t erm , 40, 448

Other m ul tilateral, 657

Bil at eral, 6, 249

(US$ millions)

P ri vate, 198,954

U S$ mi ll ion s

Private Sect or Development

2000

2008

– – –

29 2.6 52

Ranked as a major constraint to business (% of managers surveyed who agreed) Economic and regulatory policy uncertainty T ax administration

2000

2007

.. ..

25.8 24.2

Stock market capitalization (% of GDP) Bank capital to asset ratio (%)

15.0 12.1

116.4 12.5

Time required to start a business (days) Cost to start a business (% of GNI per capita) Time required to register property (days)

IFC (fiscal year) T otal disbursed and outstanding portfolio of which IFC own account Disbursements for IFC own account Portfolio sales, prepayments and repayments for IFC own account MIGA Gross exposure New guarantees

Note: F igures in italics are for years other than those specified. 2007 data are preliminary. .. indicates data are not available. – indicates observation is not applicable. Development Economics, Development Data Group (DECDG).

9/24/08

Millennium Development Goals

Russian Federation

With selected targets to achieve b etween 1990 and 2015 Russian Federation

(estimate closest to date shown, + /- 2 years) Goal 1: halve the rates for extreme povert y and malnutrition Poverty headcount ratio at $1.25 a day (PPP, % of population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitile (%) Prevalence of malnutrition (% of children under 5)

1990 .. .. 10.0 ..

1995 .. 30.9 4.5 ..

2000 .. 19.6 4.9 ..

2007 .. .. .. ..

Goal 2: ensure that children are ab le to complete primary schooling Primary school enrollment (net, % ) Primary completion rate (% of relevant age group) Secondary school enrollment (gross, %) Youth literacy rate (% of people ages 15-24)

98 .. 93 100

.. 91 .. ..

.. 94 .. 100

91 94 84 ..

Goal 3: eliminate gender disparity in ed ucation and empo wer women Ratio of girls to boys in primary and secondary education (% ) Women employed in the nonagricultural sector (% of nonagricultural employment) Proportion of seats held by women in national parliament (%)

104 50 ..

.. 50 10

.. 50 8

99 51 10

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) Infant mortality rate (per 1,000 live births) Measles immunization (proportion of one-year olds immunized, %)

27 23 83

27 23 85

24 20 97

16 14 99

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) Births attended by skilled health staff (% of total) Contraceptive prevalence (% of women ages 15-49)

.. .. 34

.. 99 73

28 99 ..

Goal 6: halt and begin to reverse the spread of HIV/AIDS and other m ajor diseases Prevalence of HIV (% of population ages 15-49) Incidence of tuberculosis (per 100,000 people) Tuberculosis cases detected under DOT S (%)

.. 45 ..

.. 73 0

0.5 113 5

1.1 107 44

Goal 7: halve the proportion of peop le without su stainable access to basic n eeds Access to an improved water source (% of population) Access to improved sanitation facilities (% of population) Forest area (% of total land area) Nationally protected areas (% of total land area) CO2 emissions (metric tons per capita) GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent)

94 87 49.4 .. 15.3 2.1

95 87 .. .. 10.1 1.9

96 87 49.4 .. 10.0 2.1

97 87 49.4 7.9 10.6 2.6

Goal 8: develop a global partnership for development Telephone mainlines (per 100 people) Mobile phone subscribers (per 100 people) Internet users (per 100 people) Personal computers (per 100 people)

14.0 0.0 0.0 0.3

16.9 0.1 0.1 1.8

21.9 2.2 2.0 6.4

30.8 120.0 21.2 13.3

Edu cation ind icators (%)

Measles imm unization (% of 1-year olds)

ICT indicators (per 1,000 peop le)

125

100

150

100 75 75

100

50 25

0 2000

2002

2004

2006

0 1990

Primary net enrol lmen t ratio Rati o of girls to boys in primary & seco ndary education

1995

Russi an Fed era tion

2000

2006

Europe & Central Asia

Note: F igures in italics are for years other than those specified. .. indicates data are not available. Development Economics, Development Data Group (DECDG).

2000

2002

2004

Fixed + mobile subscri bers

2006

Internet users

9/24/08

Annex B2: Selected Indicators of Bank Portfolio Performance and Management Indicator Portfolio Assessment Number of Projects Under Implementation

2006

2007

2008

2009

22 4.7 4.5 8.3 9.1 12.8 15.7

20 5.0 0.0 0.0 0.0 0.0 19.2

18 5.7 5.6 4.8 5.6 4.8 20.5

14 6.4 28.6 37.9 35.7 41.7 14.9

2,306 96

no 2,201 105

no 2005 111

a b

Average Implementation Period (years) Percent of Problem Projects by Number a, c Percent of Problem Projects by Amount a, c Percent of Projects at Risk by Number a, d Percent of Projects at Risk by Amount a, d Disbursement Ratio (%) e Portfolio Management CPPR during the year (yes/no) Supervision Resources (total USD) Average Supervision (USD/project)

Memorandum Item Proj Eval by OED by Number Proj Eval by OED by Amt (USD millions) % of OED Projects Rated U or HU by Number % of OED Projects Rated U or HU by Amt

yes 2,225 93

Since FY 80

Last Five FYs

48 8,709.3

11 751.9

38.3

18.2

55.5

17.5

a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in IBRD's 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 IBRD's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.

Annex B3: IBRD lending program Proposed IBRD/IDA Base-Case Lending Program a Fiscal year

Proj ID

USD(M)

2010

PCG for VEB Infrastructure Finance

500.0

Result Overall Result

500.0 500.0

Strategic Rewards b (H/M/L)

Implementation b Risks (H/M/L)

Annex B3 Russian Federation: IFC Investment Operations Program

Commitments (US$m) Gross Net**

2006

2007

2008

2009*

722.40 590.90

590.49 542.27

842.44 761.86

1040.46 495.46

5.77 20.31

5.78 4.12

100

3.69 13.27 9.27 61.57 2.30 100

21.70 5.28 8.20 10.51 6.56 1.64 3.76 41.85 0.50 100

6.05 10.09 0 11.6 14.3 4.03 5.87 40.44 7.56 100

11.02 3.43 71.84 13.71 100

13.32 19.4 55.57 11.71 100

49.56 5.24 43.89 1.31 100

33.83 16.8 48.37 1 100

Net Commitments by Sector (%) CAG CGM CHE CIN COC CIT CSF CGF CFN Total

18.28 13.77 1.69 1.42 38.76

Net Commitments by Investment Instrument (%) Equity Guarantee Loan Quasi loan Total

* As of June 30, 2009 ** IFC's Own Account only

MIGA Guarantees MIGA's Outstanding Exposure in Russia (Gross Exposure, $ million) As of end of fiscal year

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

FY2009 through 5/31/09

85.0 0.0 11.7 11.7 17.1 125.4

179.2 54.9 5.7 11.7 17.1 268.5

202.2 51.7 0.0 0.0 17.1 271.0

160.9 53.7 304.6 0.0 17.1 536.3

530.9 57.4 242.3 0.0 15.0 845.7

555.9 67.1 242.3 0.0 15.0 880.4

628.0 60.2 220.6 0.0 15.0 923.8

MIGA's Risk Profile Transfer Restriction Expropriation War & Civil Disturbance Breach of Contract

125.4 98.7 13.8 0.0

213.7 241.8 7.8 54.9

219.3 256.0 2.1 51.7

482.6 503.3 288.7 53.7

788.3 812.7 224.3 57.4

813.2 847.4 224.3 67.1

863.6 890.8 292.8 60.2

MIGA's Gross Exposure % Share of MIGA's Gross Exposure MIGA's Net Exposure % Share of MIGA's Net Exposure

125.4 2.5% 87.6 2.7%

268.5 5.2% 179.2 5.5%

271.0 5.3% 145.0 4.6%

536.3 10.0% 210.9 6.4%

845.7 16.0% 315.5 9.8%

880.4 13.6% 311.9 8.7%

923.8 13.9% 331.2 9.3%

Sectoral Distribution Finance Infrastructure Mining Oil & Gas Agribusiness/Manufacturing/Services/Tourism

Annex B4: Summary of Nonlending Services Product

Completion FY

Cost (US$000)

Audience a

Objective b

Recent completions ICA (RUSSIA - REGION)

2007

785.0

G, D, B

WATER QUALITY MANAGEMENT IMPROV.

2007

90.0

G, D, B

KG,PS KG,PS

HOUSING CPAR - RU

2007 2007

261 78

G, D, B G, D, B

KG,PS KG,PS

INDUSTRIAL POLLUTIO N ABATEMENT HOUSING MARKET STUDY PUBLIC ADMINSTRATI VE REFORM IN RF

2007 2007 2007

104 41.4 355

G, D, B G, D, B G, D, B

KG,PS KG,PS KG,PS

AGRI CULTURAL POLICY MONI TORING PERFORMANCE-BASED BUDGETING RURAL SECTOR DIALOGUE

2007 2007 2007

25.6 128 42

G, D, B G, D, B G, D, B

KG,PS KG,PS KG,PS

SOUTHERN OKRUG HUMAN DEVELOPM. HEALTH ADVI SORY SERVICES

2007 2007

278 62

G, D, B G, D, B

KG,PS KG,PS

G-8 ADVISORY SERVI CES

2007

455

G, D, B

KG,PS

EVALUATION AND MODELING REFORM IMP RURAL FINANCE

2007 2007

167 73.3

G, D, B G, D, B

KG,PS KG,PS

CIVI L SERVI CE REF TA HD ADVI SORY SERVICES

2008 2008

431 240

G, D, B G, D, B

KG,PS KG,PS

SELF GOV & CIVIC ENGMT

2008

715

G, D, B

KG,PS

Underway PROGRAMMATIC POVERTY

2009

876

G, D, B

KG,PS

CONSUMER PROTECI ON

2009

G, D, B

KG,PS

STATE GRAIN TRAIDING CEM (STAGE 2)

2009 2009

40 607

G, D, B G, D, B

KG,PS KG,PS

YOUTH ENPOWERMENT & SECURITY

2009

320

G, D, B

KG,PS

POLICY DIALOG ON PPP GDLN I NITIATIVE SUPPORT

2009 2009

117 133

G, D, B G, D, B

KG,PS KG,PS

DEVELOPMENT AID HD ADVI SORY SERVICES ENVI RO NMENTAL PERFORMANCE REVI EW

2009 2009 2009

273 240 150

G, D, B G, D, B G, D, B

KG,PS KG,PS KG,PS

QUALITY OF LOCAL GOVERNANCE ENERGY EFFICI ENCY STUDY FOREST REFORM

2009 2009 2009

107 180 152

G, D, B G, D, B G, D, B

KG,PS KG,PS KG,PS

ECONOMIC DIVERSIFICATION POST FSAP TA

2009 2009

220 200

G, D, B G, D, B

KG,PS KG,PS

POLICY NOTE O N DEMO GRAPHY LONG TERM FISCAL SUSTAINABILITY VULNERABILITY REVIEW

2009 2009 2009

123 410 63

G, D, B G, D, B G, D, B

KG,PS KG,PS KG,PS

Planned REGI ONAL HD PUBLI C EXPEND. REVIEW

2010

154

G, D, B

KG,PS

PER REGI ONAL GROWTH

2010 2010

144 144

G, D, B G, D, B

KG,PS KG,PS

____________ a. Government, donor, Bank, public dissemination. b. Knowledge g eneration, publ ic debate, probl em-solving.

Annex B5: Russian Federation Social Indicators Latest single year

Same region/income group

1980-85

1990-95

2001-07

Europe & Central Asia

143.9 0.7 72.0 2.1

148.1 0.0 73.4 1.3

142.1 -0.4 72.9 1.4

445.6 0.1 63.6 1.7

823.7 0.7 75.2 2.0

POVERTY (% of population) National headcount index Urban headcount index Rural headcount index

.. .. ..

30.9 .. ..

19.6 .. ..

.. .. ..

INCOME GNI per capita (US$) Consumer price index (2000=100) Food price index (2000=100)

.. .. ..

2,650 21 22

7,530 239 151

6,052 159 ..

7,107 143 ..

INCOME/CONSUMPTION DISTRIBUTION Gini index Lowest quintile (% of income or consumption) Highest quintile (% of income or consumption)

.. .. ..

48.3 4.4 53.3

37.5 6.4 44.1

.. .. ..

.. ..

.. 3.9

3.3 3.1

3.6 3.6

3.4 3.8

.. .. ..

98 98 98

.. .. ..

91 92 90

94 94 94

.. .. ..

95 98 87

97 100 88

95 99 88

95 98 83

.. .. ..

85 78 ..

99 98 ..

97 96 ..

94 96 ..

68 63 73

65 58 73

68 62 74

70 65 74

71 67 75

25 30

23 27

13 15

21 23

21 24

332 127 .. ..

466 169 .. ..

429 158 28 100

303 125 44 95

225 138 97 95

POPULATION Total population, mid-year (millions) Growth rate (% annual average for period) Urban population (% of population) Total fertility rate (births per woman)

SOCIAL INDICATORS Public expenditure Health (% of GDP) Education (% of GDP) Net primary school enrollment rate (% of age group) Total Male Female Access to an improved water source (% of population) Total Urban Rural Immunization rate (% of children ages 12-23 months) Measles DPT Child malnutrition (% under 5 years) Life expectancy at birth (years) Total Male Female Mortality Infant (per 1,000 live births) Under 5 (per 1,000) Adult (15-59) Male (per 1,000 population) Female (per 1,000 population) Maternal (modeled, per 100,000 live births) Births attended by skilled health staff (%)

Uppermiddleincome

Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment rate: break in series between 1997 and 1998 due to change from ISCED76 to ISCED97. Immunization: refers to children ages 12-23 months who received vaccinations before one year of age or at any time before the survey. World Development Indicators database, World Bank - 27 April 2009.

Annex B6: Key Economic Indicators Indicator National accounts (as % of GDP) Gross domestic producta

Actual 2005

2006

2007

Estimate 200 8

Projected 2010

2009

2011

100

6 39 55

5 38 57

5 37 58

.. .. ..

Total Consumption Gross domestic fixed investment Government investment Private investment

66 18 3 15

66 19 3 16

67 21 3 18

65 22 4 18

68 23 5 18

66 24 5 19

65 24 5 19

Exports (GNFS)b Imports (GNFS)

35 21

34 21

30 22

31 22

27 21

29 21

30 21

Gross domestic savings Gross national savingsc

34 31

33 30

35 32

32 27

34 29

35 30

764531

9 91450

1294932

1679484

1390008

1 351088

1381403

4460

5810

7570

9720

9740

9860

9740

Real annual growth rates (%, calculated from 00 prices) Gross domestic product at market prices 6.4 Gross Domestic Income 15.2

7.7 14.3

8.1 10.0

5.6 15.2

-6.4 -18.8

0.0 -0.1

2.5 3.3

Real annual per capita growth rates (%, calculated from 00 prices) Gross domestic product at market prices 6.9 8.2 Total consumption 11.7 13.2 Private consumption 11.9 11.7

8.6 17.4 14.1

6.1 15.4 11.9

-5.9 -16.4 -22.3

0.5 -4.0 -3.8

3.0 2.3 6.0

Agriculture Industry Services

Memorandum items Gross domestic product (US$ million at current prices) GNI per capita (US$, Atlas method)

Balance of Payments (US$ millions) Exports (GNFS)b Merchandise FOB Imports (GNFS)b Merchandise FOB Resource balance Net current transfers Current acco unt balance

268768 243798 164299 125434 104469 -1038 84408

3 34652 3 03550 2 09120 1 64281 1 25532 -1538 94338

393753 354401 282580 223486 111173 -3506 76271

522909 471603 368210 291861 154699 -3096 102330

381067 340375 296388 233431 84678 -3475 10986

389299 347254 286936 225987 102362 -3378 26424

408545 363956 295902 233048 112643 -3454 44109

Net private foreign direct investment Long-term loans (net) Official Private Other capital (net, incl. errors & ommiss ions)

118 10541 -20089 30630 -33861

6550 -30454 -25474 -4980 51058

8481 28927 -25287 54214 60479

17930 8749 -1700 10449 -174349

0 -32070 -1681 -30389 -75400

0 -25994 -1612 -24382 -35400

6907 -11133 -1436 -9697 1507

Change in reservesd

-61206

-1 21492

-174158

45340

96484

34970

-41390

13.7

12.7

8.6

9.2

6.1

7.6

8.2

0.5 -0.3 12.1 29.0

1.4 1.3 1.9 28.9

5.6 2.4 -0.1 25.2

5.7 .. .. 19.0

-4.7 .. .. -19.0

1.4 .. .. -4.4

2.6 .. .. 2.1

Memorandum items Resource balance (% of GDP) Real annual growth rates ( YR00 prices) Merchandise exports (FOB) Primary Manufactures Merchandise imports (CIF)

Russian Federation - Key Economic Indicators (Continued)

Indicator

2005

Public finance (as % of GDP at market prices)e Current revenues Current expenditures Current acco unt surplus (+) or deficit (-) Capital expenditure Foreign financing Monetary indicators M2/GDP Growth of M2 (%) Private sector credit growth / total credit growth (%) Price indices( YR00 =100) Merchandise export price index Merchandise import price index Merchandise terms of trade index Real exchange rate (US$/LCU) f Real interest rates Consumer price index (% change) GDP deflator (% change)

a. b. c. d. e. f.

Actual 2006 2007

200 8

Estimate 2009

Projected 2010 2011

39.6 29.0 10.6 2.6 -3.6

39.2 28.5 10.7 2.7 -2.7

40.0 31.1 8.9 3.2 -2.2

38.1 29.2 8.9 4.4 -0.3

34.5 37.4 -3.0 5.0 -0.1

35.7 35.4 0.3 5.0 -0.1

37.0 33.1 3.9 4.5 -0.1

33.4 36.3 677.1

37.7 40.6 220.4

44.2 44.2 164.2

46.5 32.4 146.4

47.3 4.7 108.8

49.8 13.8 116.5

52.4 13.1 130.5

185.3 110.1 168.2 149.3

227.5 111.9 203.4 163.4

251.6 121.5 207.1 172.7

316.7 133.3 237.5 180.1

239.8 134.2 178.7 167.3

241.3 136.0 177.5 158.6

246.6 137.3 179.6 154.6

12.7 19.2

9.8 15.5

9.1 13.9

14.1 19.2

12.0 10.0

10.0 8.0

5.0 5.0

GDP at factor cost "GNFS" denotes "goods and nonfactor services." Includes net unrequited transfers excluding official capital grants. Includes use of IMF resources. Consolidated central government. "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

Annex B7: Key Exposure Indicators Actual 2005

Indicator Total debt outstanding and

Estimated 2007

2006

2008

Projected 2010

2009

2011

216396

251600

388755

400115

370545

347051

338418

13559

-11794

31985

11360

-29570

-23494

-8633

59725

83551

83038

93265

135657

127301

120645

TDO/XGS

75.5

68.9

88.1

68.9

89.6

83.2

77.8

TDO/GDP

28.3

25.4

30.0

23.8

26.7

25.7

24.5

TDS/XGS

20.8

22.9

18.8

16.0

32.8

30.5

27.7

disbursed (TDO) (US$m)

Net disbursements (US$m)

Total debt service (TDS) (US$m)

Debt and debt service indicators (%) b

Concessional/TDO IBRD exposure indicators (%) IBRD DS/public DS Preferred creditor DS/public

2.9

2.8

11.7

14.6

14.2

14.0

13.6

3.2

2.8

12.9

16.7

15.6

14.8

0.3

0.2

DS (%)c IBRD DS/XGS IBRD TDO (US$m)

5091

4800

4300

3800

3707

3227

2747

Of which present value of guarantees (US$m) Share of IBRD portfolio (%)

IDA TDO (US$m)d

IFC (US$m) Loans Equity and quasi-equity /c MIGA MIGA guarantees (US$m)

a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net shortterm 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. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments.

Annex B8: IFC Portfolio Russian Federation Committed and Outstanding Portfolio As of May 31, 2009 (in US$ millions) Committed

Outstanding

Commitment

Institution

QL + QE

GT*

ALL

QL + QE

Fiscal Year

Short Name

GT*

Cmtd - IFC

Cmtd - Part

Out - IFC

ALL

ALD Russia

12.67

0.00

2009

ATB

16.87

12.54

29.42

9.73

9.70

19.44

0.00

2006

ATS

4.00

0.00

Out - IFC Out - Part

4.00

2006/ 2007/ 2008

Absolut Bank

11.66

28.10

39.76

11.66

28.10

39.76

0.00

2006

Alliance Oil Co.

15.63

0.00

2008

Ava Peter

9.93

0.00

10.67

0.00

BLL BSGV

15.63

0.00

2004

BSGV Leasing

17.23

0.00

2001

2004

BVF

0.75

0.63

0.00

2005

BVPEF III

11.39

9.68

0.00

2008/ 2009

Belgrankorm

30.00

46.21

76.21

30.00

46.21

76.21

0.00

2006/ 2008

Brunswick Cptl

92.45

0.00

2002/ 2005

Center-Invest

3.80

5.00

8.80

3.80

5.00

8.80

0.00

2006/ 2009

Chuvash Republic

6.49

7.46

13.95

7.46

0.00

2007

Chuvashavtador

42.18

2006

Cinema Park

18.46

0.00

2007/ 2008

Concordia Ltd.

30.50

27.19

30.50

27.19

2008

Daido Metal Rus

5.01

0.00

2002/ 2003/ 2006

Delta Credit

59.12

35.12

0.00

2004/ 2006

Delta Leasing

3.63

0.00

2008

Electro-Com

12.50

0.00

0.00 23.59

2005

0.00

Esanna

10.11

29.36

8.38

2005/ 2006

Eurosibtrans

52.14

15.00

67.14

7.70

22.91

15.00

37.91

7.70

2006/ 2007/ 2008

Far East Brewing

0.00

1995

First NIS Fund

0.00

2006

Fora Bank

2008

Home Center RUS

2007

ING Life Russia

2004/ 2005

Kronospan Russia

Kinross 2004/ 2005/ 2009 2005/ 2008 2006/ 2007/ 2008/ 2009

Kronostar

3.80

0.00

25.00

10.00

35.00

10.00

0.00

21.40

6.22

0.00

51.64

0.00

75.48

0.00

57.02

12.13

87.02

12.13

57.02

KuAz

6.00

19.50

25.50

6.00

19.50

25.50

Kupol

12.60

0.00

Locko

27.48

20.04

6.15

53.67

45.00

27.48

20.04

6.14

53.66

45.00

2009

Logopark Ob

2007/ 2008/ 2009

MDM Bank

2009

MRIF

2008

Medicina

2005/ 2006/ 2007/ 2008/ 2009

Moscow Credit Bk

2002/ 2003/ 2004/ 2006/ 2008 2001

35.00

0.00

5.57

40.57

35.00

5.57

40.57

0.00

135.00

80.56

12.21

227.76

500.00

135.00

80.55

12.21

227.76

500.00

100.00

0.00

10.13

0.00

6.61

22.62

29.23

6.61

22.62

29.23

0.00

NBD

14.41

1.50

15.91

14.41

1.50

15.91

0.00

NMC

0.79

2009

Nitol Solar

33.73

32.65

0.00

2007/ 2008

Norum Russia III

15.79

4.96

0.00

2005

Novatek

0.79

0.00

5.26

0.00

2005/ 2006

Peter Hambro

21.46

21.39

0.00

2008

Petropavlovsk K

22.71

56.93

0.00

2.95

0.00

2004

Pilkington Rus

2007

Primsots

2007

Promek

138.91

0.00

2005/ 2007

Quadriga Capital

20.00

14.29

0.00

RCL - 1

28.20

2003

RZB Russia

2007

RZB Rus 2007-1

2009

Rep. Mariy El

0.00

97.78

0.00

12.00

0.00

14.60

11.36

0.00

2009

Rostpromstroybk

5.27

0.00

2003

Ru-Net

5.00

0.00

1996

Russ Tech Fnd

2002/ 2003/ 2004

Ruscam

2002/ 2003/ 2004/ 2005/ 2006/ 2007/ 2009

Russ Stndard Bnk

14.60

0.00

9.36

1.00

10.36

9.36

1.00

10.36

0.00

0.45

0.00

2004/ 2005

Russkiy Mir

31.62

27.57

31.62

27.57

2005

RussiaPartnersII

9.80

7.70

0.00

2007

Rus MBS 2006-1

7.86

8.77

16.63

7.86

SCF Restructured

0.00

10.71

6.43

17.14

10.71

6.43

17.14

0.00

2004

Sevtekhnotrans Sodrugestvo-Soy

50.00

0.00

2006

Trio

18.33

0.00

2008

URSA Bank

57.72

16.00

73.72

56.25

57.72

16.00

73.72

56.25

2008

United Trading

36.83

0.00

2003

UralTransBank

0.83

0.00

UralSib Bank

10.00

0.00

2005

Volga Shipping

12.79

8.55

12.79

8.55

2008

2006

Vostok

16.11

0.00

2006

Vyksa

2002/ 2007

ZAO Europlan

Total Portfolio

47.14 13.14 1,485.44

0 0 587.51

0 0 112.56

*Denotes Guarantee products.

0 0 57.66

47.14 13.14 2,243.17

0 0 713.75

47.14 13.14 1,288.54

0 0 435.35

0 0 112.56

0 0 48.88

47.14 13.14 1,885.33

0.00 0.00 707.98

749.67

Total Undisbursed (Active + Closed)

Project Name

CADASTRE DEVT S CAP MRKT DEV S CUSTOMS DEVT S ENV MGMT U HOUSING & COMMUNAL SMS HYDROMETEO SYST MODS JUDICIAL REFORM SUPPOU N RESTRUCT MS REG FISC TA S REGISTRATION MS ST. PETERSBURG ECON DS STATE STATS SYST 2 MS SUST FORESTRY PILOT MS TREASURY DEVT S

P078420 P042622 P072960 P008821 P079032 P082239 P089733 P064238 P058587 P093050 P069063 P092429 P053830 P064508 Overall Result

Fiscal Year

IBRD

Original Amount in US$ Millions

S S S U MS S U U MS MS S MU MU MS

2006 1996 2003 1995 2008 2005 2007 2001 2000 2006 2003 2007 2000 2002

100 89 140 110 200 80 50 80 30 50 161.1 10 60 231 1391.1

IDA

GRANT

Cancel.

Undisb.

11.24566 34.089 4.755446 64.83841 26.26301 200 43.27776 45.7777 45.20407 3.325577 50 60 41.22519 9 19.97982 174.2698 94.089 739.1625

-1.754339 38.844446 64.838409 26.263014 3 31.797756 12.421703 45.204073 3.325577 20.2 100.81519 -0.5286 19.97982 174.26984 538.67689

19.97982 109.3741 271.277

0.079733

34.40407 0.562526

10.68097

5.094446 64.83841 26.26301

Orig. Frm Rev'd

Disbursements a/

Implementation Progress

Supervision Rating

Difference Between Expected and Actual

Last PSR

Development Objectives

Project ID

Active Projects

10.51

Total Undisbursed (Closed)

6,077.17

9,618.11

5,857.11

9,065.66

220.06

552.45

739.16

Total Undisbursed (Active)

of which has been repaid

Total Disbursed (Active + Closed)

of which has been repaid

Total Disbursed (Closed)

of which has been repaid

Total Disbursed (Active)

IBRD/IDA *

Closed Projects

Annex B8: IBRD Portfolio

A RCT IC

UNITED STATES OF AMERICA

80°N

O CEA N

Bering St ra

Nor wegian Sea

NORWAY

NETH. DENMARK

Kola Pen.

Kara

m Tay

Petrozavodsk Arkhangel'sk Nar'yan Mar Vologda

MOSCOWYaroslavl

Vorkuta

Gyda Pen.

Magadan

Tomsk

Novokuznetsk Abakan

Ust' Ordynskiy Irkutsk

GornoAltaysk

Lake Baikal Ulan Ude

Kyzyl

Blagoveshchensk

Khabarovsk Birobidzhan

Chita Aginskoye

Vladivostok

CHINA

OBLAST CENTERS

Sea of Japan

MONGOLIA

FEDERAL CITIES

D.P.R. OF KOREA

NATIONAL CAPITAL RIVERS MAIN ROADS

RUSSIAN FEDERATION

MAY 2009

OBLAST, KRAI, REPUBLIC, AUTONOMOUS OBLAST, OR AUTONOMOUS OKRUG BOUNDARIES INTERNATIONAL BOUNDARIES

90°E

200

REP. OF KOREA

400 600 Kilometers

200

400

100°E

J A PA N

°N

600 Miles

110°E

120°E

130°E

IBRD 33470R2

RAILROADS

°N

Sikh

RUSS I A N FEDER AT I O N

li n

Barnaul

YuzhnoSakhalinsk

Krasnoyarsk

Kemerovo

ote-A

Sea

ian

Sea of Okhotsk

Angara

Plain

K A Z A K H S TA N

Len

PetropavlovskKamchatskiy

Dzhug

S i b eOr i a n

Omsk

Yakutsk

Plateau

We s t

Ran

Okhotsk

Novosibirsk

UZBEKISTAN

Siberian

KhantyMansiysk

Makhachkala

AZERBAIJAN

Siberian

Central

sey

Groznyy

rskiy

wland

Salekhard

Che ga

i Ye n

GEORGIA

Kotlas Kostroma s. Ivanovo Syktyvkar Orel Tula Vladimir Kursk Nizhny Novgorod Ryazan Lipetsk Belgorod Kirov Cheboksary Voronezh Yoshkar-Ola Tambov Saransk Kazan' Izhevsk Penza Perm' Black Ul'yanovsk RostovSea on-Don R. Saratov Samara Krasnodar Yekaterinburg Ufa Volgograd Maykop Stavropol Tyumen Chelyabinsk Elista Orenburg ol Gora El'brus Cherkessk o b Kurgan T (5,633 m) Nal'chik Astrakhan r a Vladikavkaz Nazran Bryansk Kaluga

insu

Smolensk Tver

Yamal Pen.

Pen

Range

BELARUS

Laptev Sea Kolyma

Novgorod

UKRAINE

Sea

St. Petersburg

Pskov

Anadyr

dzhur

Karelia

Novaya Zemlya

ng e

New Siberia Islands

ESTONIA

Severnaya Zemlya

g irka

LATVIA

LITH.

POLAND

Murmansk

East Siberian Sea

Kaliningrad

FINLAND

RUSSIAN FED.

Franz Josef Land

Kolmya R ange

B a r e n t s S e a

SWEDEN

GERMANY

y da

60°N

80°N

°N

70°N

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.