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Russia Overview

    Context

    Russia’s economy is navigating an economic downturn with real GDP growth slowing to an estimated 1.3 percent in 2013 from 3.4 percent of 2012. The lack of more comprehensive structural reforms has led to the erosion in businesses’ and consumers’ confidence, which became the decisive factor for the downward revision of the World Bank’s November growth projections for Russia. In the past, the lack of comprehensive structural reforms was masked by a growth model based on large investment projects, continued increases in public wages, and transfers – all fueled by sizeable oil revenues. Recent events around the Crimea crisis have compounded the lingering confidence problem into a confidence crisis and more clearly exposed the economic weakness of this growth model.

    In 2013, frail domestic demand was a drag on economic growth. Then anticipation that private investors would start investing more during the second half of 2013 did not materialize. The lack of growth-supporting structural reforms and decreasing profit margins weighed heavily on business sentiments and pushed down industrial and investment activities in Russia. Consumption remained the main growth driver, supported by fast credit and wage growth, but its pace of expansion more than halved compared to 2012. However, external demand recovered as expected in the second half of 2013, while exports grew strongly.


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    Given the higher risk environment – since political uncertainties around the Crimea crisis in early March 2014 led to an increase in market volatility, the World Bank developed two alternative scenarios for Russia’s 2014-2015 growth outlook.

    • The low-risk scenario assumes a limited and short-lived impact of the Crimea crisis and projects growth to slow to 1.1 percent in 2014 and slightly picking up to 1.3 percent in 2015.
    • The high-risk scenario assumes a more severe shock to economic and investment activities if the geopolitical situation worsens and projects a contraction in output of 1.8 percent for 2014.

    Impact on economic mobility and continued middle-class formation in Russia:

    • Consumption growth is forecast to decrease to about 2 percent for 2014-2015 in the low-risk scenario, compared to 3.4 percent in 2013 and 6.9 percent in 2012.

    Russia’s long-term outlook will depend on a sustained positive shift in investors’ and consumers’ confidence.

    • Structural reforms will need to be started in the coming years.
    • Inefficiencies in factor allocation across the economy will need to be addressed, so that larger private investment is attracted in a sustained manner and on a larger scale.
    • The quality of regulatory and market institutions will have to improve, so that rules are implemented evenly.

    Last Updated: Apr 08, 2014

Strategy

Russia is a strategic partner for ECA. WBG engagement with the country is unique in that it is three-dimensional: global, regional, and national. At the global level, Russia has increased its contributions to IDA and supports the provision of global public goods through contributions to global funds. In addition, the WBG offers its expertise to help prepare Russia’s presidency of international forums. At the regional level, the WBG supports Russia as an emerging donor for less-developed countries in ECA. Russia is already a significant provider of development assistance through a growing portfolio of IDA-IBRD-administered Trust Funds. At the national level, the WBG aims to maximize its development needs. The current WBG 2012–16 CPS was discussed by the Board of Executive Directors on December 20, 2011. It is aligned with government priorities and covers four themes: (i) Increasing Growth and Diversification, (ii) Expanding Human Potential, (iii) Deepening Russia’s Global and Regional Role, and (iv) Improving Governance and Transparency (as a crosscutting theme).The strategy endorsed an envelope of up to US$5 billion in IBRD lending to support the program over the five-year period. IFC foresees total investments between US$3.8 and US$4.8 billion for its own account, plus the significant mobilization of counterpart funds. The Multilateral Investment Guarantee Agency (MIGA) continues to support foreign investors through the provision of political risk guarantees.

Russia’s Regional and Global Role

Russia has taken on an important regional and global role through its memberships in the Group of 8 (G8), the Group of 20 (G20), and the Asia-Pacific Economic Cooperation (APEC). Russia is shaping its own unique profile in addressing the major challenges of the 21st century as the chair of APEC in 2012, and the G20 in 2013. Russia is already on track to become a member of the OECD.

During the past decade, levels of Russia’s Official Development Assistance (ODA) have been steadily growing and rose from about US$50 million in 2002–03 to US$465.94 million in 2012. Favorable macroeconomic conditions based on strong economic growth and changes in the emphasis of Russia’s foreign policy after Vladimir Putin was elected president in 2000 have had a notable impact on Russia’s growing role in development cooperation and increasing levels of ODA. Russia officially started to report its level of development assistance to the OECD Development Assistance Committee (DAC) in 2011.

The majority of Russian development assistance is currently being channeled through multilateral institutions, including the WBG. The World Bank is a partner of choice for Russia’s development cooperation with the poorest countries. During the period of 2008–13, Russia’s total WBG development aid contributions amounted to US$660 million. International Development Association (IDA) funds represent 32 percent of the total contributions (US$213 million), financial intermediary funds, 42 percent (US$273 million), and IBRD/IDA Trust Funds (TFs), 26 percent (US$172.6 million).

Russia has increased its regional role and become the second largest Trust Fund donor in Europe and Central Asia (ECA) in the World Bank after the European Union (EU). Russia has five Trust Funds (US$74 million, or 31 percent of total Russian Trust Fund pledges) exclusively targeting ECA countries: (i) Public Expenditure Management and Peer-Assisted Learning (PEMPAL), (ii) Public Financial Management (PFM) Trust Fund, iii) ECA Statistical Capacity Building Trust Fund, (iv) ECA Capacity Development Trust Fund, which finances program and project preparation, and (v) Global Food Price Crisis Response Program for Tajikistan and the Kyrgyz Republic.

Russia is increasing its regional role in ECA also through the Eurasian Development Bank (EDB), a multilateral organization focused on Commonwealth of Independent States (CIS) countries and the Eurasian Economic Community (EurAsEC) Anti-Crisis Fund managed by EDB.  The Anti-Crisis Fund received resources in the amount of US$8.514 billion, of which US$7.5 billion was contributed by the Russian Federation to support CIS countries in response to the 2008–09 crisis. On March 14, 2011, the World Bank and the EDB signed a Framework Agreement that outlines their collaboration with regard to the projects of the EurAsEC Anti-Crisis Fund via the parallel co-financing of investment projects and joint analytical work.

Deepening Russia’s global and regional role is one of four strategic themes of the WBG-Russia 2012–16 Country Partnership Strategy (CPS).The WBG has been involved in development assistance policy dialogue with Russia since the 2006 G8 St. Petersburg Summit. An up-to-date capacity-building program for the Russian development aid system started in 2009 as the “Russia as a Donor Initiative (RDI),” funded by the UK’s Department for International Development (DFID), and has since been extended by the World Bank. The RDI has laid the foundation for Russia’s system of development assistance by providing support in the areas of ODA statistics (resulting in Russia’s reporting its ODA in November 2011 for FY10), ODA strategic communication, and the elaboration of a learning curriculum on international development cooperation for Russian universities. The Bank has built up and will continue to support Russia’s regional and global role as a provider of public goods, and to enhance Russia’s contribution to international forums.

Last Updated: Apr 08, 2014

Results

The World Bank

The Russian Federation joined the World Bank (IBRD and IDA) in 1992. The Bank has provided financing for 70 projects in different sectors totaling slightly over US$10.5 billion in IBRD loans. About 95 percent of the total portfolio has already been disbursed.

The current IBRD portfolio consists of 11 projects with a total current commitment of US$656 million (as of September 2013). All of the Bank’s financing to Russia is currently provided in the form of investment project financing. Reimbursable Advisory Services (RAS) show steady demand, with continued interest from the regions and growing demand from the federal government.

Portfolio quality is relatively high. Except for the Housing and Communal Services Project, Financial Education and Financial Literacy Project, and Registration Projects, which hold moderately unsatisfactory ratings, all other projects are rated at the moderately satisfactory or satisfactory level. The Judicial Reform Support Project went through intensive restructuring and has been upgraded to moderately satisfactory. FY13 closed with a disbursement ratio of 15.3 percent, which was still below ECA’s average of 21.3 percent. The average project age is 5.3 years, attributable to the fact that the majority of the projects are designed as five-year investment operations.

The Russia program is distinguished by several cooperation and innovation initiatives. These include IFC-Bank subnational lending, RAS, and a joint strategy that capitalizes on IFC’s and MIGA’s work in the private sector. The WBG is in constant search of innovative engagement opportunities and instruments, such as direct lending to regions with a sovereign guarantee and a mechanism to fund analytical work and technical assistance to poorer regions.

Analytical and Advisory Services (AAA) remain an important part of IBRD’s engagement in Russia. In close cooperation with the Government, AAA products are helping to modernize public finance and administration and improve social service delivery and the investment climate. The Bank expanded its technical assistance to areas of early childhood development (ECD) and social development, such as technical assistance on indigenous people and social accountability. In FY13, the report, “Professional Education and Skills” was presented along with two Russian economic reports, the traditional flagship product, providing advice and recommendations to address structural constraints to sustainable growth. A report on social mobility and one on environmental performance are being prepared for release in FY14.

In October 2012, the World Bank and IFC presented “Doing Business 2013: Smarter Regulations for Small and Medium-Size Enterprises.” The report found that Russia has made obtaining a construction permit simpler by eliminating requirements for several preconstruction approvals. Russia also eased the administrative burden of paying taxes for companies by simplifying procedures for complying with the value added tax and by promoting the use of tax accounting software and electronic services. This was part of a broader e-government initiative.  Starting a business became faster in Russia, thanks to improved coordination between the federal agencies involved in the business start-up process. The report also found that since 2005, Russia has implemented a total of 17 institutional or regulatory reforms that improve the business regulatory environment for domestic firms.

Demand has grown rapidly for the RAS. Demand covers a wide range of activities that are well aligned with Russia’s development challenges, from human development to social assistance, PPPs, and capacity-building for ODA. Since 2007, the WBG has provided government-endorsed RAS to about 40 of Russia’s subnational governments, including 24 active projects.

In Russia, as in other high-level-income countries, one of the areas of demand for RAS is support for large-scale projects. One of the examples is the St. Petersburg Pulkovo Airport expansion, which was awarded the title of “Global PPP Deal of the Year” by Infrastructure Investors in 2011. As international experience and analytical components are often the critical success factors in the human development and social assistance sectors, demand from clients has led to widespread use of RAS in these sectors as well. During the past two years, RAS are also in demand for improving the investment climate and building the capacity for ODA management.

International Finance Corporation

Russia became an IFC member in 1993. Since then, IFC’s investments in Russia have totaled US$11.1 billion, including US$3.4 billion in syndicated loans across 294 projects. IFC’s current committed investment portfolio in Russia is US$1.8 billion, which makes it IFC’s fifth-largest country exposure. There are currently no NPLs out of 113 projects with 79 clients. In FY13, IFC invested US$1.024 billion in Russia, including US$200 million in mobilization. IFC also delivered a number of landmark capital market transactions, including participation as anchor investor in Brunswick Rail’s debut US$600 million Eurobond, and the issue of the first inflation-linked ruble bond, raising 13 billion Russian rubles (US$410 million), of which 10 billion were purchased by Vnesheconombank.

In line with the WBG CPS, IFC promotes sustainable private sector development through its advisory and investment operations. IFC’s investments support key sectors, including financial services, infrastructure, manufacturing, retail, agribusiness, health care, telecommunications, and information technology. Across all sectors, IFC prioritizes investment in Russia’s less-developed regions and in projects that contribute to greater economic diversification and modernization. Active advisory programs focus on (i) developing the market for investment in sustainable resource use to mitigate climate change and increase economic competitiveness,  (ii) building risk management capacity in the financial sector, and (iii) implementing best corporate governance practices at company and regulatory levels. IFC seeks to introduce new models and innovative approaches to address pressing development challenges and open new markets (e.g., PPPs and resource efficiency, described below). IFC works closely with WBG partners, the Russian government, and other international financial institutions (IFIs) to maximize the impact and reach of these programs, which are often replicated in other markets, making Russia an important platform for innovation within IFC.

The development of PPPs in partnership with IBRD is one example of IFC’s strategic engagement in Russia. The success of Pulkovo Airport, Russia’s first large-scale PPP, should have an important demonstration effect in the market, leading to additional public-private investment in infrastructure. Going forward, IFC is seeking to develop projects in frontier regions with a strong resource-efficiency component, for example, municipal solid waste and district heating, or with social impact, such as health and education, as well as opportunities in transport infrastructure. IFC has shared its new study “Municipal Solid Waste Management: Opportunities for Russia” with the Deputy Prime Minister for Industry and Energy. The report recommends that Russia adopt a national waste management and recycling system to manage growing volumes of waste and the current limited landfill capacity, using private sector involvement, including PPPs, to introduce best practices and technologies into the Russian market.

Building on a WBG energy-efficiency study and passage of a new Energy Efficiency Law (2009), IFC has developed strong working partnerships with government agencies, the private sector, and other stakeholders to create a favorable environment for investment in resource efficiency. IFC’s initiatives include a Global Environment Facility (GEF)-funded project to develop renewable energy at the national level and in pilot regions through policy dialogue, analysis, and the support of project developers. IFC also supports the commercialization of sustainable energy finance (including residential energy efficiency) through private banks, and provides direct advice and financing to businesses seeking to boost competitiveness through greater resource efficiency. In March 2013, IFC’s Sustainable Energy Finance Program signed a project services agreement with Vnesheconombank to help launch new energy-efficiency financing products targeting industry.

Multilateral Investment Guarantee Agency

MIGA’s gross exposure in Russia is close to US$534 million (with a net exposure, after reinsurance, of slightly more than US$286 million) in 11 active projects as of August 31, 2013 – MIGA’s fifth-largest net exposure.

In dollar terms, MIGA’s exposure is still concentrated in Russia’s financial sector, having mainly supported the investments of global financial institutions in their banking, mortgage, and leasing subsidiaries in Russia.  

As these financial sector transactions are rolling off MIGA’s books (currently about 60 percent of MIGA’s net exposure in Russia resides in the financial sector, forecasted to decline to about 40 percent by the end of FY13), the Russian portfolio is starting to look more diversified. This is especially the case since all new transactions signed since the 2008–09 crisis have been in the nonfinancial sectors – manufacturing, telecom, and agribusiness – with the latter project establishing MIGA’s first presence in Russia’s rural “black earth” regions of Penza and Tambov (400–600 miles southeast of Moscow).

Last Updated: Apr 08, 2014

Country Office Contacts
Moscow, +7 (495) 745-70-00

36/1 Bolshaya Molchanovka st., 121069, Moscow, Russia

moscow@worldbank.org
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