Country brief 2008 Updated April 2008

• Key Facts
• Economy
• World Bank Program
• Contact Information

Map of Russia

*figures from the World Development Indicators 2007

Russia is a middle income country with a population of approximately 143 million people and a gross national income per capita of $7570 in 2007 (GNI, Atlas method, WDI-2007).

Russia was the largest republic of the Soviet Union. Like the Soviet Union before it, Russia is a collection of diverse territories at different stages of development. In both total area and geographic extent Russia is the largest country in the world. With an area of 17,075,200 sq km, Russia constitutes more than one-ninth of the world's land area.

Russia contains the greatest reserves of mineral resources of any country in the world. Although minerals are abundant, many are in remote areas with extreme climate conditions, which make them expensive to extract. Russia is especially rich in mineral fuels. The country may hold as much as one-half of the world's potential coal reserves and may hold larger reserves of petroleum than any other nation.

Russia's economy has been growing at a brisk pace since 2000. The real GDP growth averaged at around 6.5 percent annually over 2000-2007. Stable political situation has also contributed to economic growth and macroeconomic stability in the country. According to the latest official statistics, the number of people living below the subsistence level decreased from 29 percent in 2000 to 20.4 percent in 2003, and to below 14 percent (estimate) in 2007. Therefore, Russia could serve as a striking example of an emerging cohort of the World Bank Group's Middle-Income Countries (MIC) shareholders, which are more interested in developing new ways of doing business with the Bank rather than conventional sovereign lending.

The Russian Federation joined the World Bank in 1992. Since then, the World Bank Group program has focused on helping the country achieve sustained economic growth, create the environment for private sector development, improve social services, and protect the environment. Since the inception of the World Bank's program in the country, 64 projects for a total amount of almost $13.5bn have been approved by the World Bank's Board of Directors.

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Economy

The performance of the Russian economy since the 1998 crisis has been impressive. Between 1998 and 2007, Russian GDP expanded by an estimated 69 percent, real incomes of the population grew by 82 percent and poverty (headcount) rates were cut more than in half to below 14 percent. The growth has been increasingly driven by domestic demand supported by ample liquidity due to high prices on Russia's main export commodities - oil, gas and metals. Unprecedented macroeconomic stability was achieved in the context of strong budgetary and current account surpluses. Important reforms in areas such as taxation, budgetary institutions, and the removal of administrative barriers to business facilitated the rapid development of market institutions in many areas. Modernization and productivity growth outside the oil and gas sector have been important contributing factors to the recent expansion, although major strengthening of oil, gas, and other prices on Russia's commodity exports also gave a new boost to economic growth since 2003.

The continued responsible conduct of macroeconomic (stabilization) policy has also improved the economic climate in Russia. In 2005-2007, strong balance of payment inflows have been managed through prudent monetary policy and the accumulation of surplus revenues in the Stabilization Fund. This kept inflation and real appreciation at somewhat moderate levels, and supported high federal budget surplus estimated at 5.5 percent of GDP in 2007. In January 2005, Standard and Poor's joined Fitch and Moody's in giving Russia an investment grade rating. In September 2006, Standard and Poor's further upgraded Russia's sovereign rating. Most international investors have revised upward their expectations of these prices in the medium and longer term, thereby increasing the perceived attractiveness of Russia's rich and largely untapped resource base.

Despite the continued strengthening of world prices on commodity exports, many sectors are witnessing the slowdown in economic growth. Downward trends have been particularly notable in the oil sector and several manufacturing industries. This appears to reflect significant increases in production costs due to the real appreciation of the ruble and high factor prices, as well as increasing capacity constrains. The slowdown has heightened concerns within Russia about a loss of competitiveness in some branches of industry, and intensified debates over appropriate policy measures to address resource dependency and promote more diversified growth.

Weaknesses in the microeconomic foundations of Russia's economic growth raise questions about sustainability. The investment climate in Russia still suffers from weak property rights enforcement, inadequate competition, barriers to migration, and problems in public governance. These problems find reflection in still insufficient private investment levels and a slowdown in the growth of selected manufacturing industries in recent years. Their solution becomes increasingly critical to maintaining rapid growth as capacity and labor supply constraints increasingly bind in high growth regions and the ruble appreciates. Russia's high dependence on oil and gas, coupled with relatively low average productivity in manufacturing, complicates the realization of diversified growth and the effective integration into world markets.

The Kremlin appears to have acknowledged concerns over the business climate, and has given indications of supporting measures that would limit the discretionary authority of the tax administration. The final government Medium Term Program for the Social-Economic Development of the Russian Federation (2006-2008) reiterates the basic commitment of the government for improving conditions for the private sector as the primary engine of growth and investment.

Inflation is likely to remain the biggest challenge for macroeconomic policy in the short-term. The authorities are facing unpleasant choice between higher inflation and currency appreciation. Gradual appreciation of the ruble is needed but may not be sufficient to reduce inflation without tightening monetary conditions. In 2007 consumer pries increased by 11.9 percent, considerably exceeding the initial government target for the year -- 8 percent. This inflation outcome, combined with seasonal spikes in fruits and vegetable prices, expected increases in pensions, and adjustments in utility prices in early 2008 could contribute to rising inflation expectations. Rosstat estimated CPI inflation at 4.8 percent during January-March 2008, as compared to 3.4 percent during the same period of 2007.

NB: Lending is per fiscal year, July 1–June 30

Challenges ahead

Despite the country’s strong economic performance since 1999, formidable challenges remain:

• OVERCOMING SPATIAL DEVELOPMENT OF THE REGIONS. The disparities in regional economic development in Russia could become an obstacle for fast economic growth at the federal level.
  
• DIVERSIFYING THE ECONOMY. Greater diversification of the economy is needed to address poverty and inequality. While growth has been steady, it has been uneven, and poor regions and segments of the population have fallen further behind. Moreover, exports are largely commodity-based, and investments remain concentrated in the natural resource sectors. The high dependence of Russia's growth on prices for export commodities is undesirable in any case, but even more so in light of the goals of doubling GDP and reducing poverty by half. Success in achieving these goals would depend on scope and speed of diversification away from oil and gas and deeper into Russia's regions.
  
• ENCOURAGING GROWTH OF SMALL AND MEDIUM ENTERPRISES. Small and medium enterprise growth has been anemic and needs to be encouraged to ensure that growth is more broad based.
  
• RAISING PRODUCTIVITY GROWTH. Despite relatively high rates of productivity growth in Russia after the 1998 crisis, the absolute level of productivity is still considerably below the average productivity level in manufacturing sector in OECD countries. Therefore further growth of productivity in Russia is crucial for maintaining sustainable economic growth and competitiveness on the global market.
  
• IMPROVING COMPETITIVENESS. The weak system of financial intermediation, decaying transport infrastructure, continued dominance by unreformed natural monopolies, and delayed privatization of agricultural land must be tackled to improve the competitiveness of the economy.
  
• BUILDING HUMAN CAPITAL. Building the country's human capital - with increased social spending and investment in education, health, and ensuring the availability of reasonably-priced housing - is an essential prerequisite for economic growth.
  
• IMPROVING GOVERNANCE. Institutional capacity continues to be important for Russia. Governance is still a serious issue that needs to be addressed - not only corporate governance in the narrow sense of how commercial entities are created and run, but governance in the broader sense of drawing clear demarcation lines between the public and private sector, and setting rules for all parties on how to live within them.
  

World Bank Program

Program to date

The World Bank's mission in Russia is to help keep sustained rapid growth, to improve public sector management and performance, delivery of social services - both at the federal and regional levels, and also to enhance Russia's global role. To do this, the World Bank provides financial support, analysis and advice.

On December 14, 2006 the World Bank's Board of Executive Directors endorsed a new three-year Country Partnership Strategy (2007-2009) for Russia which marks a shift towards new ways of cooperation focused on knowledge sharing, increased technical advice and direct financing to the country's regions, new fee-for-service arrangements for investment and policy advice, combined with continued strong levels of financing to the private sector and limited financing for assistance in managing priority public investments.

The Country Partnership Strategy is organized around four central themes which help address Russia's key remaining development challenges:

1. Sustaining Rapid Growth, including active participation in economic policy debates, monitoring the investment climate, supporting public investment and PPPs for growth and diversification, working with regions to identify and overcome barriers to growth, supporting investments in priority areas at the regional level, and providing direct assistance to the private sector.
2. Improving Public Sector Management and Performance, including remaining engaged in supporting programs for modernizing selected public sector institutions, and improving government administration, the judiciary, local self-government, and budgetary management at federal and sub-national levels.
3. Improving Delivery of Social and Communal Services. In addition to continued general cooperation with the federal government, the Bank will concentrate much of its support for improving social service delivery at the subnational level. Activities will include improving the health of the general population, modernization and improvement of the education system and vocational training, upgrade of targeted social assistance and improvement in the provision of housing and communal services, among other things.
4. Enhancing Russia's Global Role. The Bank will step up cooperation with the Russian government in support of its emergence as an international donor and active member of multilateral organizations. This will include assistance in establishment of an Official Development Assistance system for Russia as an emerging donor, and providing access to the Bank's instruments for channeling Russian development assistance, including arranging an Africa debt-for-development swap and assisting in the establishment of a Malaria Booster Trust Fund and other development aid contributions.

The Bank will provide its assistance on the first three pillars increasingly at the regional level - working directly with regions using traditional and new Bank instruments.

NEW PROJECTS IN FOCUS

Housing and Communal Services Project tests a competitive grant mechanism to cities that increase market mechanisms in housing and communal services and also strengthen social protection of vulnerable consumer groups. The project will help the Russian Government scale up the quality of housing and communal services in part based on the Bank's global knowledge and experience in designing and implementing similar projects around the world. The loan will also finance technical support to design capital investment programs for measurable improvements in reducing operating losses, pipe breaks, water leakage, or energy inefficiency, while increasing the share of private investment in the sector and private management of facilities.

Primary objective of the Second State Statistical System Development Project is to contribute to sustainability, efficiency and effectiveness of the National Statistical System to enable efficient provision of relevant, timely and reliable data for evidence-based policy making. The follow-up project builds on the success of the already completed Bureau of Economic Analysis and STASYS Projects. It resonates with the new Federal Targeted Program on Statistics, and supports the implementation of the Socio-Economic Program, as well as helps meet national priorities in the area of healthcare and demography, education and housing. The STASYS 2 Project is expected to foster the generation of the statistical data required for efficient and effective underpinning, monitoring and evaluation of the administrative reform implementation, promoting performance management and performance based budgeting, adoption of international accounting standards, and for facilitating the municipal reform, to name a few.

IMPACT ON THE GROUND

Health Reform Implementation Project: Comprehensive Restructuring of Health Services in Pilot Regions--Chuvash Republic and Voronezh Oblast. There has been substantial progress in the two regions in shifting and striking a better balance between inpatient and outpatient care and specialist and primary health care using modern guidelines. This has been accomplished by targeted investments supported under the project alongside investments from the Federal National Priority Health Program and other regional initiatives that have facilitated the introduction, strengthening and consolidation of General Practice (GP) and Family Medicine as the entry point into the health system, the improvement of the diagnostic capacity, both laboratory and imaging, at the ambulatory level, the development of day surgery, the restructuring and strengthening of emergency medical services, the restructuring of hospital services, introduction of new standards of care and treatment protocols and guidelines, training of personnel, and more importantly the introduction of a new incentive framework in the form of performance-based payments for physicians, and management information systems for coordinating the flow of clinical and managerial and financial information across the health system.

E-Learning Support Project is of an innovative nature, and is aimed at supporting the “e-Education” and “e-Russia” programs. As an outcome, it assisted in creation of the enhanced labor market-relevant learning opportunities for students, regardless of their social status or geographical location. It supported the Government Education Modernization Program goals of improving the accessibility, quality and efficiency of general and initial vocational education. The program set up the enabling conditions to assist with the system-wide introduction and enhanced use of Information and Communication Technologies (ICT) in Russian general and initial vocational schools. The project helped build sustainable Russian capacity to produce high quality, affordable and flexible learning materials to meet the needs of students, teachers and education managers preparing to participate in a knowledge economy. It also supported both pre-service and in-service teacher training in the introduction of ICT into classrooms and its embedding in teaching and learning practices; as well as establishing a network of resource centers in the regions of Russia, which improved local access to ICT enhanced education opportunities and dissemination of new teaching practices.

Cadastre Development Project helped Russia improve information flow and rationalize normative and operational procedures for the Unified State Cadastre of Immovable Property. In a country as large as Russia, a strong Cadastre Agency is very important for establishing clear property rights for land and immovable properties. The project also helped further facilitate development of real property markets, improve the quality of services provided by the offices of the Cadastre Agency, and strengthen linkages with other organizations.

Local Self-Governance and Civic Engagement in Rural Russia project, the first Japanese Social Development Grant-based project for Russia, which improved the lives of rural communities through better service delivery, expanded influence on budgetary decision making, and enhanced local economic development. Round tables in St. Petersburg, Rostov-on-Don, and Smolensk, helped connect rural administrators, government officials, and the donors' community in a constructive discussion of the directions and working models for rural self-governance. Moreover, the locality information cards at both district and settlement levels were prepared and piloted. The analytical report was presented in Russian and in English on outstanding issues in rural development and on effective examples of local self-governance - in the context of the on-going decentralization reform - in Russia.

Administrative and Civil Service Reforms being Aided. A number of analytical reports have been prepared and published by the Bank. These include a summary of international experiences and approaches to public administration reform, and analysis of civil service reform in the country over the last ten years. A Russian-language public administration reform website has also been created. As a result, in 2004 the World Bank and DFID launched a Donor Secretariat for Civil Service and Administrative Reform in Russia. The aim is to coordinate donor support to public administration reform, provide policy advice, disseminate international best practices, and monitor progress at the federal and sub-national levels. The key goals are to strengthen capacity of the Government and selected regional administrations to design and implement public sector and governance reforms including performance management and budgeting; as well as efficient coordination of donor-funded projects and government activities pertaining to public sector governance reforms. The Donor Secretariat model proves to be highly successful and plays an important role in harmonizing efforts and in aligning international assistance for public administration reform implementation in Russia.

Russia Is Moving Forward With Climate Change Activities. The Government of the Russian Federation created the legal framework for the Joint Implementation, an important instrument under the Kyoto Protocol. The first applications for projects implemented under the Kyoto Protocol through the Joint Implementation has already been received by the Ministry of Economic Development and Trade, the legal Russian entity of the Russian Government for using this kind of instrument. The Ministry - in cooperation with the World Bank - also starts a study on the "Green Investment Scheme (GIS)" in the framework of the Kyoto Protocol, which envisages the investments in the energy efficient and ecological projects. The study has been supported by the Japanese Government with a USD725, 000 grant and should provide an answer to numerous questions regarding the legal aspect of projects implementation and schemes for investments, as well as the methodology for projects' selection and implementation. The first results of the study could become available by autumn this year. Moreover, Russia has already agreed to the "Bali Roadmap”, and the Four Carbon Finance projects will lead to the purchase of some 10m tons of carbon reductions, in particular from gas flaring reduction projects.

Enhancing Russia's Global Role. The Government of the Russian Federation increased its IDA15 contribution to SDR70mln (75% over IDA14 level). The Government also made a strategic decision to channel a significant part of Russian development assistance through multilateral mechanisms rather than tied aid, including the already signed a US$20 million agreement with the World Bank Group and the World Health Organization (WHO) on Malaria Control (Africa), and several new joint programs at the advanced stage of preparation of total value up to US$95 million. In response to the Ministry of Finance request the Bank and DFID stand ready to support Russia in its efforts to establish the state-of-the-art development aid systems.

Regional Program in Russia. To meet Russia's remaining development challenges at the regional level, the Bank refocused its operations and introduced new instruments for directly delivering financial and analytical services to the regions, without the need of sovereign guarantees. This was the Bank's response to the call of the Russian Government and President Putin. One should emphasize here the help from the Government from the very beginning: and later, when it introduced changes to the legal and institutional framework for the International Finance Institutions, including World Bank Group members, in Russia.

The timeliness of such a cooperation cannot be emphasized enough as further implementation of reforms depends on the regions in many areas. Despite of budget surpluses at the federal level, many regions still face considerable social and local development challenges. In the course of an intensive dialogue, the following three priority areas for Bank support were identified by the regions: (i) technical assistance for public administration and municipal reform, introduction of performance management; (ii) financing of regional infrastructure and particularly roads programs, (iii) rationalization and upgrade of education and health services.

Three IFC/World Bank subnational operations have already been singed, including a loan to the municipality of Petropavlosk-Kamchatsky for infrastructure development, and two loans to Chuvash Republic for municipal bonds issue and for roads finance.

Furthermore, 12 analytical services are being provided to the administrations of three regions- Khanti-Mansiysk-Ugra, The Republic of Tatarstan and the city of St. Petersburg - on health, education, housing, public-private-partnerships, business environment, and public management issues.

In addition, the World Bank Group in Russia is discussing with the Federal Government establishment of various joint facilities to support activities in poorer regions - both in terms of analytical work, and financial assistance.

NB: Lending is per fiscal year, July 1-June 30

Active Portfolio by Sector as of April 2008
(US$ millions)

Contact Information

The World Bank Office

36/1, Bolshaya Molchanovka St.
Moscow 121069, Russia
Tel: (7 495) 745-7000
Fax: (7 495) 745-7002
Email: moscow@worldbank.org
Website: www.worldbank.org.ru