World Bank's Country Brief for Russia wrap data, economic analysis and a summary of World Bank support and activities in the country into single package.
Income status: Russia is a middle income country with a population of approximately 141 million people and a gross national income per capita of $9,760 in 2008 (GNI, Atlas method).
Economic developments-resume: After a decade of high growth averaging 7% during 1999-2007 and solid growth in 2008 of 5.6%, the Russian economy is now experiencing a recession in the wake of the global financial crisis. Real economy and social impact on Russia was larger than anticipated. Russia’s real GDP is likely to contract about 7.9 percent in 2009. Unemployment could rise to 13 and poverty to 17.4 percent by year end. At the same time Russian middle class measured by household consumption is likely to shrink––by about 10 percent––from 55.6 to 51.2 percent (a decline of 6.2 million people). But the large stimulus package, gradual recovery of oil prices and lower inflation could bode well for the second half of the year, and the Russian economy could return to modest growth in 2010. However, given the weak global demand, external environment for Russia will continue to be difficult over the next 18 months. More detail on recent economic developments and anti-crisis policy response may be found in Russian Economic Reports.
Economy
Recent economic developments: In 2009, the world has entered the first global recession since the Second World War. The impact of the crisis worldwide is proving far deeper and broader than previously thought. The impact on Russia has been accentuated by its structural vulnerabilities: dependence on the oil and gas sector, a narrow industrial base and limited small and medium-size enterprise sector. Early labor market and poverty impacts have been severe. The global outlook remains uncertain, with declines in world output (-2.9% in 2009) and trade and very limited capital flows to developing countries this year and world oil prices in the USD 55-65 range in 2009-10. The fiscal space for further support to the economy has considerably shrunk, but the government will be able to finance its fiscal deficit thanks to its large fiscal reserves. Future (short-term) policy responses will have to be more selective, cushioning the impact on the vulnerable, addressing the most critical infrastructure bottlenecks, and supporting small and medium-size enterprises. With more constrained financing environment for the government and the private sector in the post crisis period, Russia should accelerate structural reforms aimed at raising productivity and improving diversification and competitiveness.
Russia's early fiscal policy response to the crisis has been larger than that of many other G-20 countries and greater than the internationally recommended 2 percent of GDP. Policy has so far focused on supporting the financial sector and enterprises, with rather limited support to households. But with significant social impact now unfolding, the focus of future policy should shift toward cushioning the impact on the poor and vulnerable. A modest, temporary increase in the three social protection programs (costing about 1 percent of GDP) focused on child allowance, unemployment benefits and low-end pensions--targeting some of the most vulnerable groups at risk of poverty--could provide significant cushion of the impact of the crisis on the poor. In addition, addressing most critical infrastructure bottlenecks and providing support for small and medium businesses--with additional support even during the crisis--would help the economy in the recovery stage and benefit medium-term growth and diversification.
Challenges Ahead
Russia faces a balancing act of limiting the larger-than-anticipated social impact of the crisis while controlling public finances and supporting economic recovery. There are policy risks associated with the departure from strong macroeconomic fundamentals and the delay implementing anti-crisis fiscal measures as well as measures addressing structural and institutional weaknesses of the Russian economy:
CONTAINING THE SOCIAL IMPACT OF THE CRISIS. As a result of the crisis, unemployment and poverty are expected to rise rapidly in 2009-even after taking into account the policy measures taken and announced so far. Some regions with already high unemployment and poverty will be particularly hard hit. Yet with large fiscal deficit of about 8 percent of GDP projected for 2009, scope for additional fiscal expenditures to cushion the social impact is limited. Thus, the immediate challenge is to limit the adverse social consequences of the crisis within an increasingly tight budget.
ADDRESSING FUNDAMENTAL WEAKNESSES IN THE BANKING SECTOR. The weaknesses include excessive discretion by banks in determining their levels of loan provisioning, high lending concentration, especially in extractive and construction sectors, and large related-party lending. The authorities have also noted that the long-term stabilization of the banking system may require additional resources than currently provisioned in the budget. Accelerated consolidation of the banking system is needed.
DIVERSIFYING THE ECONOMY AND FOSTERING REGIONAL DEVELOPMENT. The depth of the impact of the current crisis has revealed the vulnerability of the Russian economy because of its narrow structure. Greater diversification of the economy is needed not only to foster more balanced and sustainable growth but also to help fight poverty and reduce income, social and spatial inequities. 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. Social services remain unequally distributed across Russia's vast territory. Success in achieving the goals sustained growth and more dynamic regional development depends on the 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. This means improving the investment climate, reducing barriers to entry and exit, and ensuring a stable institutional environment for the growth of entrepreneurship.
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 in the global markets.
IMPROVING COMPETITIVENESS. Russia faces an array of challenges to improve competitiveness and the macro, sectoral and micro levels. This includes the need to strengthen and modernize the banking system, improve decaying transport infrastructure, reduce continued dominance by natural monopolies, and restart privatization of agricultural land.
BUILDING HUMAN CAPITAL. Beyond the short term concern with the social impact of the crisis, Russia must invest more and more effectively in its people in order to build a dynamic, competitive economy for the 21st century. Building the country's human capital - with increased and more effective social spending and investment in education, health, and ensuring the availability of reasonably-priced housing - is an essential prerequisite for long-term economic growth.
IMPROVING GOVERNANCE. Institutional capacity constraint 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 and respecting the rules of the game for all economic actors.
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.
Program to Date
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:
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.
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.
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.
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.
Brochure about the analytical and advisory work, provided by the Bank on reimbursable basis including preparation of strategies and sector analyses for regions.
This 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. Project Information
Second State Statistical System Development Project
Primary objective of the 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. Project Information
Impact on the Ground
Russian Federation Tuberculosis and AIDS Control Project
The Bank has provided USD 150 million assistance under the project to develop guidelines for prevention, treatment and monitoring of patients, and to improve access to quality services for case detection and treatment, including strengthened capacity at laboratories, training of personnel, and recording and reporting of cases. Read More
Russian Economic Report (RERs)
The World Bank’s Russian Economic Reports provide domestic and international audiences with up-to-date, evidence-based analyses of the pressing macroeconomic and structural issues, as well as challenges facing the country. The Reports are designed to stimulate public debate and contribute to informed better policies. Also, every Report contains a special focus, based on work carried out by the Bank as part of its analytical and advisory assistance program to the Russian Federation. Read More
Local Self-Governance and Civic Engagement in Rural Russia
This project is the first Japanese Social Development Grant-based 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. Read More
Administrative and Civil Service Reforms
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
Russian Federation: Analytical Services Provided on Cost-Recovery Basis to the Republic of Tatarstan on Higher Education: The Government of Tatarstan asked the Bank to help through a fee based arrangement to identify constraints to better service quality and to build capacity to implement reforms. In response, the Bank has been working with local experts to build capacity in strategic planning and policy formulation for reforms to narrow, and eventually close the gap to national and global comparators.
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:
technical assistance for public administration and municipal reform, introduction of performance management;
financing of regional infrastructure and particularly roads programs,
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.
Contact Information
The World Bank Office (IBRD)
36/1, Bolshaya Molchanovka St. Moscow 121069, Russia Tel: (7 495) 745-7000 Fax: (7 495) 745-7002
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