The new, two-year World Bank strategy for Russia is currently being prepared and is scheduled to be discussed by the Bank’s Board of Directors in April 2002, Julian Schweitzer, director of the World Bank’s Moscow Office, announced during a recent press conference in Moscow. The Bank has started releasing $600 million in loans to Russia for six previously approved programs. The six projects include a $85 million loan for municipal heating, $122.5 million for municipal water supply and sanitation, $50 million for education reform, $80 million for promoting relocation of far north residents, $60 million for a forestry pilot project, and $200 million for a coal and forestry coguarantee. In 2002 the Bank may lend Russia another $600 million.

The International Monetary Fund’s (IMF’s) management has thrown its weight behind a radical plan for an international bankruptcy procedure that will allow indebted governments to seek legal protection from private sector creditors. Describing the plan as "the missing element we must provide" in the global financial system, on November 26 IMF Deputy Managing Director Anne Krueger said the Fund should have the power to impose temporary standstills on debt payments while countries worked out restructuring deals with their creditors. "At the moment, too many countries with insurmountable debt problems leave it too long, imposing unnecessarily heavy economic costs on themselves and on the international community that has to help pick up the pieces," said Krueger. As the Financial Times put it, Krueger’s comments mark a major departure for the IMF, which has looked doubtfully at such ideas and has generally dealt with financial crises by providing massive loans to the afflicted countries. The new scheme would stop bondholders from taking countries to court during the standstill. Debtor countries would be permitted to impose temporary capital controls to prevent capital flight.

The Russian government is seeking more than $2 billion over the next three years from the European Bank for Reconstruction and Development (EBRD), the Moscow Times reported. The increased focus on public sector—as opposed to private sector—borrowing is expected to push the number of loans to Russia in the bank’s total portfolio to 30 percent in the coming years, with €1 billion ($900 million) in new loans approved annually. Economic Development and Trade Minister German Gref has already said that Russia is expecting to receive $800 million from the EBRD in 2002. "Of this amount, 40 percent will be spent for concrete projects, covered by sovereign guarantees, and the remaining 60 percent will go to the private sector," he predicted. The government is ready to provide sovereign guarantees for five projects worth about €370 million. Three of those projects—and the bulk of the money—are slated for St. Petersburg.

The EBRD has invested €4 billion in the Russian economy since 1991, more than 80 percent of which has gone to the private sector, which the bank considers to be its priority. Over the last 10 years only nine loans with sovereign guarantees, totaling $710 million, have been approved. With the new approach the government is taking, the proportion of private sector loans will decrease significantly, which means a new phase in EBRD activity in Russia. The EBRD expects to invest more in infrastructure. With the absence of a fully functioning financial system and the reluctance of Russian banks to finance large infrastructure projects, the EBRD seems ready to fill this gap. It has recently announced a €100 million loan to Unified Energy Systems to help restructure the national power grid, and talks are under way for a $200 million credit for various transportation projects.

The private sector accounts for about 70 percent of the EBRD’s overall portfolio. The figure tends to be higher in advanced countries and lower in less developed countries, for instance, it is 53 percent in Uzbekistan and 60 percent in Poland. The EBRD committed €1.24 billion in new loan and equity investments in 33 projects in Central and Eastern Europe and the Commonwealth of Independent States in the first six months of 2001, compared with 27 projects worth €581 million in the first half of 2000.

On December 7 the World Bank approved the release of $100 million as the second tranche of the Ukraine Programmatic Adjustment Loan, having released the first tranche of $150 million last September. The Bank’s statement points out that conditions for the release of the latest tranche were successfully met: the collection of cash from enterprises for the use of electricity (denied for years) went ahead, the obstacles to the next round of privatization of 12 regional power supply and distribution companies were removed, the price of electricity was adjusted, and the action plans for improved financial accountability and public procurement were approved.

Strong GDP growth of 5.8 percent in 2000 was followed by even stronger growth of 9.3 percent during the first three quarters of 2001, and may amount to more than 8 percent for the whole of 2001. Economic growth has now expanded from traditional industrial export goods to encompass agriculture, construction, and food processing.

During an October visit to Ukraine, World Bank President James D. Wolfensohn met Prime Minister Anatoly Kinakh to discuss the Bank’s program in Ukraine and the status of economic reforms in the country. Wolfensohn underlined the need to translate Ukraine’s strong growth performance into better conditions for the poor and congratulated the government on the recent adoption of a comprehensive poverty reduction strategy.

Donors participating at a conference of the Stability Pact for South-Eastern Europe in Bucharest, Romania, in late October, pledged €2.4 billion ($2.14 billion) for 27 infrastructure projects to improve transport links and to fund energy and environment investments, with the latter focused on water and waste management, as well as to deepen economic integration among the nations of southeastern Europe in a new support package for the Balkans.

About half the financing will take the form of loans from the large multilateral lending institutions, with the rest including soft loans and grants. Romania, with $535 million, and Bulgaria, with $400 million, both negotiating entry into the European Union, will be among the biggest recipients. The Republic of Yugoslavia will obtain another $400 million. Croatia and Bosnia-Herzegovina can expect about $300 million each, while Albania is expected to secure about $250 million. (The Balkan Stability Pact was formed after the 1999 Kosovo war with the goal of delivering regional peace and prosperity.)

The World Bank and the IMF presented a paper to the conference entitled Building Peace in Southeast Europe: Macroeconomic Policies and Structural Reforms since the Kosovo Conflict. The paper paints a guardedly optimistic picture of the region’s economic prospects despite the global economic slowdown, which is projected to have a relatively modest impact on the region, although there will be considerable variation across countries. Continued growth is important in tackling two stubborn problems: poverty and unemployment. Governance remains a major weakness that undermines the capacity to implement reforms and enforce the law, and contributes to high levels of organized crime and corruption. The paper warns that the record of attracting investment remains poor, which points to the need to further improve the overall investment climate and, more generally, to create the conditions that stimulate private sector development.

The World Bank Regional Office for South Central Europe became operational as of November 12. This Zagreb-based office covers the Bank’s assistance programs in Bulgaria, Croatia, and Romania. The relocation of the regional office from Washington, D.C. to Zagreb is part of the Bank’s decentralization policy. "The Zagreb-based regional office allows us to be closer to our clients and to be more cost-effective in our operations. Also, we will better support steps toward European Union accession of all three countries as well as respond to the Stability Pact initiatives in Southeast Europe," pointed out Andrew N. Vorkink, country director and head of the regional office. The Bank’s portfolio in Bulgaria, Croatia, and Romania is almost $5.5 billion. The World Bank’s local offices in the three capitals, Sofia, Zagreb, and Bucharest, will be maintained and will now report to the regional office in Zagreb.

On November 6 the World Bank approved two IDA credits for Vietnam. A $110 million credit will support a new project aimed at reducing poverty in northern mountainous areas. It will help build infrastructure and provide basic education and health care for about 1 million people, 85 percent of whom are ethnic minorities, in six northern provinces, the poorest region of Vietnam. Another $103 million will fund small grants to poor communities to replace old or build new infrastructure (including roads, tracks, trails, bridges and ferry crossings, schools and health centers, irrigation and flood protection works, drinking water systems and sanitation, and electricity), also in the mountainous poor regions, helping 2.4 million people.

In another development, on November 21 the IMF Board approved the disbursement of $52 million to Vietnam, the second tranche of a $368 million loan to assist the country’s reform efforts. "Vietnam has made exceptional progress in reducing poverty over the last decade," said Shigemitsu Sugisaki, deputy managing director and acting chairman of the IMF during an earlier visit to Vietnam, and he praised the government for its "sound macroeconomic management, which has kept economic growth relatively robust and inflation low even in a difficult external environment." The IMF will provide additional technical assistance to the country’s tax reform efforts.