World Bank Loans Tied to Reform Progress

With the hole in Russia's budget yawning ever wider, the World Bank this week stepped into the breach with promises of increased support to the tune of $3 billion a year, much devoted to paying off the government's critical backlog of wages and pensions.

But while bank president James Wolfensohn publicly touted the use of the money for "urgent social needs," the new loans are closely linked to the menu of ambitious structural reforms being pushed by the International Monetary Fund.

They also represent the passing of the baton between the sister institutions as the West seeks to consolidate Russia's reform process with generous financial backing, albeit with strings attached.

"The timing is quite appropriate. This money is a must for Russia, and there's a certain reorientation of the government's economic priorities," said Yevgeny Volk, Moscow director of the Heritage Foundation think-tank. "The danger ... is that it encourages the Russian government to rely on foreign credits and not proceed with radical reforms."

Seeking to avert that danger, World Bank officials now are negotiating the conditions that the government must meet to receive the first of three $500 million to $600 million loans World Bank intends to grant this year. Among those conditions are tax and pension reform, land privatization and regulation of natural monopolies -- a laundry list closely resembling the 1997 economic agreement now being finalized with the IMF.

"It's not as visible or dramatic as these [IMF] monthly mission trips," said Donald Green, managing director of PlanEcon, a U.S. consultancy focusing on the former Soviet bloc. "It's a much less public process of pressure on the Russian government to do what it pledges to do."

Indeed, in his press conference Monday, Wolfensohn largely steered away from the loan conditions.Yet if the government expects the World Bank to be a softer touch than the IMF, it is likely to be disappointed. Tough action by the fund will probably be followed by like action from the bank.

"If the fund keeps freezing these monthly tranches because the macroeconomy is off track, the bank probably wouldn't release its money," one official said. "They're more or less the same conditions."

Of the $3 billion the bank is pledging in each of the next two years, one-third is earmarked for specific investment projects and two-thirds goes straight to the general budget. Bank and Russian officials said the top priority would be paying the billions of dollars in wage and pension arrears owed by the government.

"This is not brilliant economics," Wolfensohn conceded when announcing the planned loans. "It is practical social and political life."

The short-term money, he said, is justified by Russia's urgent social needs, with the bank seeking in later years to shift its lending more toward investment projects.

In the meantime, the bank and IMF are using the leverage provided by the cash crunch to demand measures long resisted or ignored by the Russian government.

"This amount of money which would go to social purposes ... may be sufficient to really force through more transparent regimes regarding pipelines, railroads, electric power, natural gas," Green said.

The government will likely get a first $600 million "structural adjustment" loan based on prior actions and good intentions in the next two months, said Vladimir Konovalov, the World Bank's chief economist in Moscow.

Two subsequent loans of similar value, one tied specifically to social policy reforms, will be extended if further actions are taken and the conditions of the first are being met, Konovalov said, citing benchmarks such as privatization of land and electricity pricing.

Previous World Bank loans to Russia, notably a $500 million credit for the coal sector last year, have been afflicted by problems both before and after disbursement. But Wolfensohn said better monitoring in the last year had improved the percentage of "satisfactory" loans from 39 percent to 65 percent, with 80 percent a target for June, making the bank more confident about extending loans to Russia.

Although Russia's budget and infrastructure are in sore need of the loans -- which come at interest rates of 5 to 6 percent, well below that on the domestic or international capital markets -- some analysts fear the government is creating a debt mountain for itself that will be hard to dig out of. World Bank loans are repayable over 17 years with a five-year grace period.