A Farewell From and To Russia

PRIME-TASS - Interview with Shigeo Katsu, Vice President of the World Bank

Q. To what extent has cooperation between the Bank and Russia changed over the past 10 years during which you served as the ECA Vice-President?

A. I will stay in this position for about a month and then I will spend several months as advisor at the Office of the Managing Director.  Then I will officially retire from the Bank.  I have not decided as to what I will be doing after that.

Q. And yet, what changes have taken place in the nature of cooperation between the Bank and Russia over the past 10 years?

A. Ten years ago Russia was emerging after 1998 crisis and we supported reforms through SAL-3, - a structural adjustment loan.  The economy recovered fairly quickly, benefitting from devaluation.  Prices for energy and other commodities grew steadily.  We have seen unprecedented rates of growth and wealth accumulation.  During that period Russia became a G8 member.  This made a profound impact on the nature of our engagement with the country.  I would say that Russia has always known what it wanted.

As Russia grew stronger, it asked the Bank to perform some functions that are somewhat different from our normal operations.  In fact, our relations developed toward collaboration, sharing knowledge and experience.  Russia increasingly turned for the technologies and expertise that the Bank possessed.  Several pilots were launched, such as subnational lending without sovereign guarantees.  The IFC was very active in this exercise.  The Russian Federation encourages us to partner with regions, and now we enjoy deeper and more extensive relations with Russia.  Today Russia has more trading partners than 6-7 years and especially 10 years ago.  We hope that such form of cooperation will allow us to gain experience which we would be able to transfer to other countries.  I believe that Russia would also feel that the cooperation with the Bank produces necessary impacts and is useful and valuable for Russia.

Q. Has the global financial and economic crisis affected relations between the Bank and Russia, have you maintained cooperation with Russian regions? Do you think Russia understands what it needs from the Bank in this crisis environment? What is  discussed between the Bank and Russia?

A. At present our Resident Mission finalizes its CPS Progress Report.  We need to revise and update the strategy that was approved four years ago in order to reflect new needs and demands.  In fact, the needs tend to change even when there are no crises.  Under the crisis Russia focused more specifically on some possible cooperation areas.

Q. What are these areas?

A. To a great extent we talk about analytical work.  We realize that Russia intends to address the crisis and thinks about the future.  It is important to ensure that public expenditures are efficient and produce necessary outcomes.  A detailed analysis should be done to identify bottlenecks and areas where such efficiency and resource allocation could be improved.  “Public expenditure review”, - this is how we call such analysis.  Today this exercise is extremely relevant and needed.

Pension reform is another issue that has been under discussion in Russia for a rather long time.  We hope that we will be able to contribute to possible solutions.

Q. To what extent these areas are related to the projects that the Bank plans to implement in Russia?

A. We are still discussing details of our engagement.  It is premature to mention anything specific yet.  Perhaps, in two months I will be able to come up with a more specific answer.

Q. Does this mean that in two months some specific agreements will be reached?

A. Yes, over this period we intend to finalize our CPS Progress Report and submit it to the Board.

Q. You had several meetings with the Russian Government officials responsible for economic affairs.  What was discussed at the meetings?

A. I did not want to leave without saying goodbye in person, therefore these meetings to some extent comprised an element of courtesy.  However, given the developments in the Russian economy, it was very important and useful to obtain a first-hand account and learn about economic development prospects.

Q  To what extent the Russian authorities managed to identify right remedies to the crisis in terms of tools and instruments that are suggested?  What could you say about possible external borrowings to be done by Russia?

A. The Russian authorities managed to develop a comprehensive anti-crisis package, but it will take some time before the package can produce certain outcomes.  At the same time we see that economic decline proved to be much deeper and faster and caused a recession.  In many countries questions are asked whether anti-crisis measures are adequate and whether they are implemented in the right manner.  Obviously, Russia also has quite a number of questions.

I would like to give high marks for the macroeconomic situation analysis done by the Ministry for Economic Development and the projections they produce.  They gave a very fair and objective assessment of  the magnitude of economic decline.  Today we can say that the GDP decline in Russia may reach 8 per cent in 2009.  Nobody would publish such figures only three months ago.  I once again would like to give high praise to such warning issued by the Government.  This analysis indicates that there are certain assumptions regarding possible recovery.  Everyone is looking for such signs.  Projections for 12 months of 2009 demonstrate a decline of the GDP of 8-9 per cent whereas in the first half of 2009 the decline was 10 per cent.  This means that in the second half of the year some positive growth will be achieved.  The point is whether such “green sprouts” of recovery would be able to start economic growth.  Our economists assume that efforts over several years will be required to get back to the high economic growth situation.  Perhaps, the economy will return to the pre-crisis level in 2012.  Recovery will take a long time and we should not be deceived by  the shoots of economic growth that everybody is looking for.  We believe that the economic decline will be over fairly soon but the growth curve will not be very steep.  Several years will be required in order to return to pre-crisis levels.  Thus, we are talking not about a protracted decline and recession but about a long recovery.

Q. The Russian Government considers the need to use the proceeds of the National Welfare Fund to finance the budget deficit in 2010.  Is the Bank concerned with too fast depletion of our national funds?

A. Russia will overcome the crisis, although it will not be easy, - especially given difficulties with financing in 2010.  There is still surplus of the current account.  But the capital account balance looks less healthy since there is a need to service the debt, especially by the banking sector.  Therefore a question arises as to which resources should be used: those from the National Welfare Fund of from the budget revenues? In fact, it will be a mix of the two sources.  Based on this mix the authorities will consider how, when and how much to borrow externally. 

Q. That is to say Russia has not requested resources from the Bank yet?

A. We still are in the phase of technical discussions. 

Q. Will cooperation with Russian regions remain a priority for the Bank?

A. During the crisis regions show more interest in cooperating with the Bank.  This is logical and understandable.  In a situation where resources become increasingly scarce, regions start to understand the importance of managing the limited resources they have.  The resources allocated to health and education should make such services better.  Building competitiveness becomes important.  No wonder that regions are actively seeking cooperation with the Bank.

In 2006 in our CPS we indicated engagement with regions as a priority.  This will remain in our future strategy as well.  The crisis is but a brief interruption in the work we do with Russian regions.  Regions need us and this is where long-term prospects are for us.  In the short run regions will be turning to us for cooperation.

Q.  Who will succeed you in the position of ECA Vice-President?

A. In one month my position will be taken by Philippe Le Houerou, a French national, economist, who has been with the Bank for more than 20 years.  Currently he is the Vice-President for concessional finance, - what you might call “the IDA man”.  He has previous experience with Operations and knows Russia quite well, - he was the chief economist for Russia in 1992-1996 and focused extensively on fiscal transfers.  I am sure that he will be able to hit the ground running.  I hope he will visit Russia very soon.