IFC and MIGA Performance in Russia: A Report Card

An in-depth evaluation of the activities of the International Finance Corporation (IFC), the private sector financing arm of the World Bank Group, was recently undertaken by the IFC’s independent Operations Evaluation Group (OEG). Through the end of 2001, IFC devoted the bulk of its efforts in Russia to technical assistance. This strategy reflected Russia’s needs during the first half of the 1990s, the availability of ample investment financing from the EBRD, and IFC’s continuing concern about the high risks of investment operations in the country.

Commitments for loans and equity investments in 48 private financial, manufacturing, and retail enterprises amounted to $710 million, about one-seventh the scale of funding by the EBRD. OEG found that IFC had an impressive record of technical assistance operations and addressed strategic needs and contributed materially to Russia’s transition process. Along with other development finance institutions, however, IFC ramped up its investments in 1993-98 ahead of the reform process, with attendant disappointing outcomes. Mainly as a result of the 1998 crisis and the generally difficult business environment that led to losses for most private companies, particularly in the financial sector, only 35 percent of IFC’s investment projects achieved satisfactory development outcomes. By contrast, 96 percent of donors’ grants channeled through IFC for technical assistance achieved satisfactory development outcomes. Nonetheless, despite the success of 1,100 privatization auctions the IFC helped conduct for small and medium enterprises in the early 1990s, IFC has not yet established a sustainable wholesale channel for investments in such enterprises. Looking forward, OEG’s evaluation supported the planned expansion of IFC activities in response to the improving investment climate in the past two years.

According to a desk review by its Operations Evaluation Unit, the Multilateral Investment Guarantee Agency’s (MIGA) guarantee program met the demands from private foreign investors for political risk insurance prudently and selectively. As a result, it has not suffered any claims losses in Russia, which is ranked among the top five countries in MIGA’s portfolio. Before the outbreak of the financial crisis, MIGA covered transfer risks, but did not offer coverage for currency convertibility. MIGA continued to support projects after the country’s default on foreign debt. Although demand for MIGA’s products was relatively low, its $549 million in coverage issued for 18 projects—mainly in agribusiness, food processing and beverages, finance, and extractive industries—nonetheless facilitated an estimated $1.3 billion of foreign direct investment in Russia. In investment marketing services, MIGA launched the web-based PrivatizationLink Russia in October 2000, providing important and timely information to potential foreign investors. The Operations Evaluation Unit suggested that in the future MIGA should strive to maximize the amount of foreign direct investment it facilitates while diversifying its portfolio and minimizing its net exposure in Russia.