GAO

United States General Accounting Office

Report to the Chairman and to the 

Ranking Minority Member, Committee on 

Banking and Financial Services, House of 

Representatives

November 2000 FOREIGN 

ASSISTANCE

International Efforts 

to Aid Russia’s 

Transition Have Had 

Mixed Results

GAO-01-8

Page 1 GAO-01-8 Foreign Assistance to Russia

Contents

Executive Summary 6

Chapter 1

Introduction

24

Chapter 2

Donors Have Adopted 

Different Strategies 

and Means for 

Providing Assistance

39

The International Community Agreed on Fundamentals 

Regarding Russia’s Economic Transition but Lacked a 

Comprehensive Strategy for Assistance 39

Assistance Programs Have Pursued Similar Objectives With 

Different Instruments and Strategies 42

Coordination of Assistance Has Proved Difficult, With Some 

Improvements Over Time 62

Chapter 3

Institutions and 

Donors Have Had 

Limited Success in 

Meeting Their 

Objectives

67

Russia’s Economic Performance Over the Decade Has Been Poor 67

Success of Individual Projects Has Been Mixed 70

Success of Assistance Programs Has Been Hindered by Conditions 

in Russia and Limitations of Programs 73

Four Policy Areas Illustrate Challenges and Interdependencies Across 

Assistance Objectives 82

Changes in Assistance Programs Reflect Commitment to Staying in 

Russia 99

Chapter 4

Conclusions and 

Lessons Learned

105

Donors Assessing Status of Russia Programs 105

Conclusions 106

Lessons Learned 107

Appendixes Appendix I: Additional Information on International Monetary 

Fund Programs in Russia 110

Appendix II: Additional Information on World Bank Assistance 

to Russia 130

Appendix III: Additional Information on European Bank for 

Reconstruction and Development Programs 

in Russia 150
Contents

Page 2 GAO-01-8 Foreign Assistance to Russia

Appendix IV: Additional Information on the U.S. Freedom 

Support Act Program in Russia 163

Appendix V: Additional Information on the European 

Union's TACIS Programs in Russia 181

Appendix VI: Time Line of Key Economic and Political Events 

in the Russian Federation, 1990-2000 193

Appendix VII: Additional Information on Economic Trends 195

Appendix VIII:Comments From the Department of State 

and USAID 210

Appendix IX: Comments From the Treasury Department 213

Appendix X: Comments From the International Monetary Fund 215

Appendix XI: Comments From the World Bank 217

Appendix XII: Comments From the European Bank for 

Reconstruction and Development 219

Appendix XIII:Comments From the European Commission 221

Appendix XIV:GAO Contacts and Staff Acknowledgments 223

Related GAO Products 224

Tables Table 1: Highlights of the IMF’s Assistance Strategy for Russia, 

1991-2000 43

Table 2: Highlights of the World Bank’s Assistance Strategy 

for Russia, 1991-Present 48

Table 3: Evolution of the EBRD’s Strategy for Russia, 1991-2000 51

Table 4: Development of the U.S. Assistance Program for Russia, 

1991-Present 55

Table 5: Evolution of TACIS’ Strategy for Russia, 1991-2000 60

Table 6: Funding History of IMF Programs for Russia 113

Table 7: Status of World Bank Loans for Russia, From Fiscal 

Year 1993 Through September 2000 133

Table 8: Foreign Currency Debt Service of the Russian 

Federation in 1999 205

Figures Figure 1: Disbursements to Russia by Five Institutions and 

Donors, 1991-September 2000 10

Figure 2: IMF Disbursements and Russian Repayments, 

1992-2000 30
Contents

Page 3 GAO-01-8 Foreign Assistance to Russia

Figure 3: World Bank Approved Lending and Disbursements 

to Russia, 1992-2000 31

Figure 4: EBRD Annual Funding for Russia Projects, 1991-2000 32

Figure 5: U.S. Freedom Support Act Annual Funding for Russia, 

1992-2000 33

Figure 6: TACIS Annual Funding for Russia, 1991-2000 34

Figure 7: World Bank Approved Adjustment vs. Investment 

Lending, 1993-September 2000 50

Figure 8: EBRD Funding for Russia by Sector, 1991-2000 53

Figure 9: Freedom Support Act-funded Activities Grouped by U.S. 

Objectives, 1992-Present 58

Figure 10: Portions of All Freedom Support Act Funds Budgeted 

for Each U.S. Objective, Fiscal Years 1992-2000 59

Figure 11: TACIS Funding for Russia by Sector, 1991-98 61

Figure 12: Trends in Real Output for Russia, the Czech Republic, 

Poland, Romania, and Ukraine, 1989-2000 68

Figure 13: Russian Federal Government Budget Expenditures and 

Financing, 1992-2000 84

Figure 14: Russia’s Monthly Inflation Rate, 1990-2000 85

Figure 15: Real and Nominal Monthly Exchange Rate Indexes 

for Russia, 1994-2000 86

Figure 16: Trends in Approved World Bank Lending and 

Disbursements to Russia, Fiscal Year 1993 - September 2000 135

Figure 17: World Bank Lending to Russia, by Type of Instrument, 

Fiscal Year 1993 Through September 2000. 136

Figure 18: Status of World Bank Approved Loans to Russia as of 

September 2000 137

Figure 19: Russia’s World Bank Portfolio Performance, 1994 to 

June 2000 143

Figure 20: Russia’s World Bank Projects and Commitments 

Considered to Be at Risk, June 2000 . 144

Figure 21: Annual EBRD Funding for Russia Projects, 1991-2000 154

Figure 22: EBRD Lending and Equity Investment for Signed 

Projects by Sector in Russia, 1991-2000 155

Figure 23: Funding Levels for Major U.S. Programs With Russia 

Since 1992 (Budgeted and Expended, Respectively) 164

Figure 24: Funds Budgeted for Freedom Support Act Assistance 

to Russia, Fiscal Years 1992-2000 (in $millions) 170

Figure 25: TACIS Commitments and Disbursements for Russia, 

1991-2000 185

Figure 26: TACIS Commitments by Sector, 1991-1999 186
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Page 4 GAO-01-8 Foreign Assistance to Russia

Figure 27: Index of Russian Production, Consumption, Industrial 

Output, and Investment, 1990-1999, 1990 = 100 196

Figure 28: Average Russian Life Expectancy at Birth, in Years 198

Figure 29: Share of Russian Population Below Subsistence Level, 

December 1991-June 2000 199

Figure 30: Merchandise Trade of Russia, January 1992-December 1999 

(Billions of U.S. dollars) 200

Figure 31: Composition of Russian Exports, 1994-98 201

Figure 32: Composition of Russian Imports, 1994-98 202

Figure 33: Russia's Foreign Debt, 1990-99 (Billions of U.S. dollars) 203

Figure 34: Debt Components of the Russian Government, 

End 1999 (Billions of U.S. Dollars) 204

Figure 35: Gross Foreign Investment in Russia, 1993-99 (Billions of 

U.S. dollars) 206

Figure 36: Per Capita Cumulative Foreign Direct Investment in 

Transition Economies (1988-99) 207

Figure 37: Estimate of Capital Flight From Russia, 1994-98 (Billions 

of U.S. dollars) 209
United States General Accounting Office

Washington, D.C. 20548

Page 5 GAO-01-8 Foreign Assistance to Russia

November 1, 2000

The Honorable James A. Leach

Chairman

The Honorable John J. LaFalce

Ranking Minority Member

Committee on Banking and Financial Services

House of Representatives

This report responds to your request that we review the strategies of international institutions and 

donors to assist Russia in its economic and political transition to a market economy.

We are sending copies of the report to the Honorable Madeleine K. Albright, the Secretary of State; the 

Honorable Lawrence Summers, the Secretary of the Treasury; to the heads of the institutions we 

included in our review (Horst Köhler, Managing Director, International Monetary Fund; James 

Wolfensohn, President, the World Bank; Jean Lemierre, President, the European Bank for 

Reconstruction and Development), and to Christopher Patten, Director General for External 

Relations, the European Commission, as well as other interested parties.

If there are questions regarding this report, please contact Harold J. Johnson at (202) 512-4128 or 

Thomas J. McCool at (202) 512-8678. GAO contacts and staff acknowledgments are listed in appendix 

XIV.

Harold J. Johnson, Director

International Affairs and Trade

Thomas J. McCool, Managing Director

Financial Markets and Community Investment
Page 6 GAO-01-8 Foreign Assisstance of Russia

Executive Summary

Purpose Since the breakup of the Soviet Union in 1991, multilateral organizations 

and bilateral donors, including the United States, have provided the 

Russian Federation (Russia) with tens of billions of dollars in economic 

assistance directed at helping Russia’s transition to a market economy 

within a democratic state. The value of this assistance is difficult to assess, 

however, since Russia appears to be a long way from having a competitive, 

market economy, and its transition experience over the past decade has 

been more difficult than was expected. The approaches used to assist 

Russia, both in the past and for the future, continue to be debated.

To help focus this debate, the Chairman and Ranking Minority Member of 

the Committee on Banking and Financial Services, House of 

Representatives, asked GAO to review the strategies of different lending 

institutions and donors in providing economic assistance to Russia with a 

view toward identifying lessons learned that might be valuable for making 

future decisions about assistance policies. Specifically, GAO examined 

(1) what types of assistance these institutions and donors have provided, 

what their program strategies were, and how the assistance has been 

coordinated; (2) how successful the institutions and donors have been in 

terms of meeting their assistance objectives and what factors have affected 

their success; and (3) what lessons can be learned that may have relevance 

for future policy decisions about Russia. The lending institutions GAO 

included in this review are the International Monetary Fund, the World 

Bank’s International Bank for Reconstruction and Development,1

 and the 

European Bank for Reconstruction and Development. The other programs 

are U.S. bilateral assistance under the 1992 Freedom Support Act2

 and the 

European Union’s Technical Assistance to the Commonwealth of 

Independent States program. From 1992 until September 2000, these five 

programs have provided about $36 billion in assistance to Russia, with U.S. 

bilateral assistance under the Freedom Support Act of $2.3 billion.

1

 GAO examined the lending made to Russia by the International Bank for Reconstruction 

and Development because it has provided the vast majority of the World Bank Group’s 

funding to Russia. Two other parts of the World Bank Group that have provided funding to 

Russia are the International Finance Corporation and the Multilateral Investment Guarantee 

Agency in Russia.

2

 “Freedom” in the name of this act stands for Freedom for Russia and Emerging Eurasian 

Democracies and Open Markets (P.L. 102-511). Throughout this report, GAO refers to the act 

as the “Freedom Support Act.”
Executive Summary

Page 7 GAO-01-8 Foreign Assisstance of Russia

To meet its objectives, GAO analyzed a wide range of documents and 

interviewed current and former officials from each of the five lending 

institutions and donors as well as Russia experts from think tanks, 

academic institutions, and nongovernmental organizations. GAO traveled 

to Russia and interviewed current and former Russian government 

officials, in-country donor representatives and experts, and also project 

beneficiaries. GAO obtained access to International Monetary Fund, World 

Bank, and European Bank for Reconstruction and Development officials 

and documents through the Department of the Treasury and through the 

U.S. member of each institution’s executive board. 

Results in Brief The international community generally agreed on some fundamental 

principles concerning Russia’s economic transition, but it did not have a 

comprehensive strategy regarding the level, timing, and priorities of 

assistance and how assistance would be coordinated. The leaders of the 

major industrial nations, including the United States, chose early on not to 

commit substantial bilateral resources to Russia, leaving the International 

Monetary Fund and the World Bank to provide the bulk of financial 

assistance. The strategies and means for providing assistance of the 

international institutions and donors have reflected their different 

missions. For example, the International Monetary Fund has provided 

loans to Russia’s central government, tied to reforms aimed particularly at 

controlling inflation and achieving macroeconomic stability, while the 

much more limited U.S. bilateral program has targeted primarily market 

reforms, but also democracy and humanitarian needs, largely through 

providing technical assistance. Over the transition period, institutions and 

donors themselves and the Russian government have created various 

forums for coordination of assistance. This coordination has improved in 

some areas over time, but it is still a challenge to the institutions and 

donors and to the Russian government. 

While there have been successes across individual program objectives for 

the institutions and donors GAO reviewed, officials have acknowledged 

that in many respects, there has been limited progress in reaching their 

broad program goals. While the worst fears of the early transition period, 

such as anarchy or return to communist rule, have not been realized, 

Russia’s economic decline has been more severe and its recovery slower 

than anticipated. At the individual project level, the success of assistance of 

these institutions and donors has been mixed, according to their own 

evaluations and the views of officials and analysts GAO interviewed. 

Limitations in program success are due to obstacles encountered in Russia, 
Executive Summary

Page 8 GAO-01-8 Foreign Assisstance of Russia

including the lack of domestic political consensus behind reform and 

emergence of powerful vested interests; sometimes poorly designed or 

implemented programs; and the scale and complexities of the challenges. 

These factors can be interrelated. Assistance efforts in four key policy 

areas—macroeconomic stabilization, social safety net protection, 

privatization, and banking sector reform—illustrate barriers to success and 

how limited reforms in some areas have undermined progress in other 

areas. Institutions and donors have modified their strategies and programs 

in Russia in different ways over the decade, but remaining engaged in 

Russia has been a common goal. 

A number of conclusions and lessons learned can be drawn from assistance 

efforts in Russia that have implications for looking ahead. The overarching 

lesson is that without some degree of consensus and political commitment 

within Russia, the impact of assistance programs on political and economic 

reforms is limited. The immense challenge of Russia’s transition to a 

market economy and democratic society was underestimated by the 

international community and by Russians, and the transition will clearly 

take longer than initially expected. The transition involves developing 

effective laws and institutions and restructuring many enterprises. It 

requires broad, grassroots support and calls for greater means to cushion 

social impacts on vulnerable groups. The Russian government’s recent 

development of a long-term economic program demonstrates that the 

government has the capacity to seriously evaluate and debate the economic 

policy choices the country faces and that those choices remain difficult 

ones for Russia. International assistance efforts need to be structured for 

the possibility of long-term involvement. 

In written comments on this report, the organizations GAO reviewed 

generally agreed with GAO’s conclusions regarding the difficulties of the 

transition and types of lessons learned. Several commented that the report 

was fair and balanced. In addition, these organizations expanded on a 

number of points made in the draft about the complexity of Russia’s 

transition process and the reasons for the mixed results that institution and 

donor assistance programs have achieved.

Background The official end of the Soviet Union in December 1991 presented the Soviet 

Union’s former Cold War adversaries with opportunities and challenges. 

The major organized threat to the West vanished, but thousands of nuclear 

warheads and also aging nuclear power plants remained in a region 

characterized by political uncertainty and economic turmoil. When Russia 
Executive Summary

Page 9 GAO-01-8 Foreign Assisstance of Russia

became independent in December 1991, economic conditions were rapidly 

worsening after several years of decline. Economic output was falling, and 

trade relations between the former republics of the Soviet Union were 

collapsing. President Boris Yeltsin enjoyed broad popular support, but his 

government was engaged in bitter disputes with the mainly Communistdominated legislature. Unlike Central Europe, where Communists were 

largely swept from important positions of power in 1989, Russia had 

experienced only a partial revolution, with many of the same authorities 

who had formerly run ministries and enterprises still in charge. Whether 

basic needs of the population, such as food, would be met through the 

winter was in doubt. Most worrisome to western leaders was the 

uncertainty about who would be in charge in Russia and have control over 

the vast nuclear arsenal of the former Soviet Union.

The common assumption among western leaders was that Russia’s 

conversion from a Communist state to a market economy within a 

democratic state would bring long-term stability within Russia and 

between Russia and the West. This transformation required fundamental 

changes throughout the Russian economy, government, and society. Unlike 

other transition countries such as Poland and Hungary, Russia had no 

vestige of a democracy or competitive market economy and almost nothing 

in the way of supporting institutions or economic relationships with 

western partners.

Many bilateral donors and international institutions implemented programs 

to assist Russia’s transition process. According to one U.S. government 

estimate, the total value of international assistance disbursed to Russia 

through September 1998 was $66 billion,3

 excluding food aid loans, trade 

credits, and debt rollovers. The five institutions and donors that GAO 

reviewed have provided loans, grants, and technical assistance to aid 

Russia’s economic transition. The International Monetary Fund (IMF) lent 

Russia more than $22.2 billion to help stabilize the economy. The World 

Bank targeted reforms in various sectors of the economy, disbursing 

$7.5 billion in loans. The European Bank for Reconstruction and 

Development aided the development of the private sector in Russia, 

disbursing $2.2 billion in loans and investments in Russian firms. Under the 

3

 Although there are important limitations to the comparisons, for purposes of context, this 

can be compared to the more than $500 billion the German government has spent since 1989 

to support the economic transition in eastern Germany, and international assistance to 

Poland of about $36 billion from 1989 through 1994.
Executive Summary

Page 10 GAO-01-8 Foreign Assisstance of Russia

Freedom Support Act, the United States has expended $2.3 billion in grants 

for technical assistance, exchanges, and other programs to address 

humanitarian needs and support economic and democratic reform. The 

European Union’s Technical Assistance to the Commonwealth of 

Independent States program has spent $1.6 billion to provide grantfinanced technical assistance to support the development of a market 

economy and a democratic society (see fig. 1 for an illustration of donor 

assistance to Russia, 1991-September 2000).

Figure 1: Disbursements to Russia by Five Institutions and Donors, 1991-September 

2000

Legend: EU-TACIS=European Union’s Technical Assistance to the Commonwealth of Independent 

States

EBRD=European Bank for Reconstruction and Development

FSA=Freedom Support Act

Note 1: These figures have not been adjusted for inflation.

Note 2: Figures for the IMF, World Bank, and EBRD do not include disbursements for technical 

assistance programs.

Sources: GAO analysis of information from the IMF, the World Bank, the European Bank for 

Reconstruction and Development, the U.S. Department of State, and the European Union.

0

1

2

3

4

5

6

7

8

9

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

IMF $22.2B World Bank $7.5B EBRD $2.2B US-FSA $2.3B EU-TACIS $1.6B

Billions of dollars
Executive Summary

Page 11 GAO-01-8 Foreign Assisstance of Russia

Principal Findings

Donors Have Adopted 

Different Strategies and 

Means for Providing 

Assistance

In its early efforts to assist Russia’s economic transition, the international 

community generally agreed on some fundamental principles concerning 

the transition, but it did not have a comprehensive strategy for the 

assistance it would provide and how its efforts would be coordinated. With 

other foreign policy concerns and domestic political constraints, the major 

industrial countries chose early on not to commit substantial bilateral 

resources to Russia. Instead, primary responsibility for providing 

assistance fell to multilateral organizations such as the IMF and the World 

Bank. Western leaders, and a key group of Russian officials, shared several 

basic assumptions. They believed, for example, that controls on prices and 

trade needed to be removed right away and inflation controlled and that 

state enterprises should be privatized quickly, with the assumption that the 

institutions needed to support the new market economy would develop 

over time. Beyond those basic principles, however, many aspects of overall 

assistance policy were not laid out, such as interrelationships among 

different aspects of transition and how well assistance needs fit the 

traditional instruments of the international financial institutions. Effective 

coordination of assistance proved difficult. 

The institutions and donors GAO reviewed have pursued the similar broad 

objectives of helping Russia make the transition to a market-based 

economy, but their individual strategies and means for providing assistance 

have differed, reflecting their different roles. The primary objective of the 

IMF’s involvement with Russia has been to achieve macroeconomic 

stabilization, largely defined by low inflation. The IMF has provided loans 

to Russia’s Ministry of Finance and central bank; it has given technical 

assistance and engaged in high-level dialogue with Russian officials. IMF 

financing has been tied to Russia’s meeting certain economic conditions, 

often measured by quantitative indicators, such as budget deficit and 

revenue targets. Over time, the IMF’s strategy in Russia has shifted to 

emphasize structural reforms, such as changes in Russia’s tax system and 

financial sector, to improve the environment for economic growth. 

The World Bank has used both lending and nonlending services to pursue 

its objectives of supporting Russia’s transition to a market economy based 

on initiatives in the private sector, protection of poor and vulnerable 

groups, and the development and strengthening of Russian institutions. 

Implementation of World Bank programs in Russia began slowly. From 
Executive Summary

Page 12 GAO-01-8 Foreign Assisstance of Russia

1992 through 1995, the World Bank approved $3.4 billion for investment 

projects across several Russian sectors, but by the end of 1995, only 

$278 million in investment lending had been disbursed.4

 The World Bank’s 

strategy has shifted during the transition away from financing a variety of 

investment projects across Russia toward providing large loans aimed at 

federal-level reforms, ranging from policies for specific sectors, such as 

coal, to tax and pension policies. The European Bank for Reconstruction 

and Development’s strategy has focused on financing commercial projects 

in Russia’s private sector while having a “transition impact,” not competing 

with private sources of funding and, at the same time, making a small 

profit. Over time, the strategy has become more focused on promoting 

restructuring in large companies and developing small- and medium-sized 

businesses. 

The objectives of the U.S. Freedom Support Act bilateral program have 

been to promote market reform and democracy and to address urgent 

human needs related to Russia’s transition to a market economy. The 

United States has pursued these objectives through a variety of instruments 

including technical assistance, exchanges and training, grants, trade 

promotion, and enterprise funds. The U.S. program has generally 

emphasized the objective of promoting market reforms, although recent 

budgets have placed more relative emphasis on democracy and rule of law 

programs. In 1996, the U.S. program began shifting resources from work at 

the federal level to a few reform-minded regions. The strategy of the EU’s 

Technical Assistance program has been to finance the provision of 

technical assistance in Russia by consultants and European institutions, 

with the objectives of assisting and accelerating the socioeconomic and 

democratic reform process. Over time, its strategy has shifted from 

providing small, quick projects in close collaboration with the Russian 

government to emphasizing larger projects with a greater focus on 

developing civil society, removing structural barriers to reform, and 

carrying out efforts that more closely link Russia and the European Union.

Initial attempts to coordinate these institutions’ and donors’ efforts were 

impeded by the lack of a clear western strategy. At the same time, it was 

not clear to those providing assistance whether the Russian government 

wanted coordinated assistance efforts. Early formal coordination bodies, 

such as a group set up by the Group of Seven industrialized countries (G-7), 

4

 The World Bank disbursed a $600-million adjustment loan for balance-of-payments support 

to the Russian government in 1993.
Executive Summary

Page 13 GAO-01-8 Foreign Assisstance of Russia

proved cumbersome and were disbanded in 1997.5 Donor officials told us 

they prefer the informal mechanisms that have developed over time to 

share information and discuss approaches. In selected sectors, such as 

health and banking sector reform, for example, donors have formed 

informal working groups. Donor programs sometimes lay the groundwork, 

through grants and technical assistance, for World Bank and European 

Bank for Reconstruction and Development loans in specific areas, 

including housing, tax, the financial sector, and legal reform. 

The Russian government is not totally satisfied with the coordination of 

this assistance, and officials told GAO that one ministry is not always 

aware of donor efforts in other ministries. Representatives of the donor 

community in Russia also told GAO that although some improvements have 

been made, coordination with the Russian government continues to be a 

challenge, often complicated by difficulties in coordinating within the 

Russian government. Russia’s 1998 financial crisis demonstrated the need 

for more formal coordination in banking sector reform and, in the 

aftermath of the crisis, the Central Bank of Russia set up a coordinating 

committee composed of donor and government representatives. Donor 

officials told us that progress to date has been mixed.

The Impact of Assistance 

Programs Has Been Mixed, 

With Broad Results Limited 

in Many Respects

While there have been a number of individual successes of assistance 

programs in Russia, officials have acknowledged that progress toward 

reaching broad program goals has been limited. According to a number of 

indicators, the performance of the Russian economy over the past decade 

has been poor, with Russia’s economic decline among the most severe and 

its recovery among the most limited among transition countries in Eastern 

Europe and the former Soviet Union. For example, measured economic 

output in 1995 was about 65 percent of 1991 levels and remained stagnant 

through 1998 before showing some improvement. Obstacles to economic 

growth continue to exist in many areas where the international community 

has focused its efforts; these obstacles include the absence of effective 

competition in many sectors and the continuing lack of social services to 

adequately protect poor and vulnerable groups.

5

 The G-7 consists of the United States, the United Kingdom, Germany, Japan, France, Italy, 

and Canada. It has been very involved in the international community’s efforts to assist 

Russia in its transition to a market economy.
Executive Summary

Page 14 GAO-01-8 Foreign Assisstance of Russia

The success of the individual projects and other elements of the Russia 

programs of the institutions and donors GAO reviewed has been mixed, 

according to their own evaluations and the views of officials and analysts 

GAO interviewed. While the IMF has not comprehensively evaluated its 

Russia program, GAO identified a range of views on the success of IMF 

programs in Russia. A number of U.S. and Russian government officials as 

well as economists and Russia analysts at think tanks have taken issue with 

aspects of IMF programs, ranging from the exchange rate policies it 

supported to whether the IMF was “too soft” in enforcing the conditions of 

its lending program. However, a number of analysts and U.S. and Russian 

officials told us that the policy advice and high-level dialogue provided by 

the IMF has been of value to Russia’s transition in several important 

respects. World Bank officials, in their December 1999 Russia strategy 

paper, characterized the success of World Bank programs in Russia as 

mixed but overall disappointing relative to their expectations. According to 

World Bank assessments, the percentage of loans in its Russia portfolio 

meeting development and implementation objectives has ranged from 

33 percent to 82 percent over the period, showing improvement in 1996 and 

1997, falling sharply after the 1998 financial crisis, and then improving after 

post-crisis loan restructurings. According to World Bank officials, the value 

of its large adjustment loans directed at central government reforms 

remains to be seen, but some indicators of success have become more 

apparent in recent months. 

The European Bank for Reconstruction and Development has also rated 

the success of its projects in Russia as mixed. According to European Bank 

for Reconstruction and Development officials, their efforts have been most 

successful in areas of small business development and other projects 

entailing work with smaller firms. They acknowledged that the financial 

turmoil in 1998 damaged many European Bank for Reconstruction and 

Development efforts, especially in the financial sector, and it has had 

limited success in promoting restructuring in large Russian firms. Russian 

officials and analysts had differing perspectives on European Bank for 

Reconstruction and Development efforts in Russia, with some generally 

positive but others stating that the Bank’s role duplicates lending and 

investment functions provided by the private sector. 

With respect to the U.S. Freedom Support Act programs in Russia, based on 

GAO’s analysis of available evaluations, discussions with officials, and 

prior GAO work, the programs have had mixed results. GAO’s past reviews 

of U.S. assistance projects in Russia found that while some met their 
Executive Summary

Page 15 GAO-01-8 Foreign Assisstance of Russia

objectives and were seen as valuable by Russian recipients, others were 

viewed as having limited impact

The general assessment of the European Union’s Technical Assistance 

programs in Russia is also mixed, based on the EU’s own evaluations and 

on discussions with European Union and Russian officials and other 

analysts. For example, a March 2000 European Union report on its 

Technical Assistance program for Russia gave it high marks for education 

and training efforts and lower marks for enterprise restructuring and 

building the framework for a market economy. 

Obstacles to Assistance GAO identified three main interrelated obstacles to assistance programs in 

Russia attaining project and program objectives: (1) difficult conditions in 

Russia, including the lack of domestic political consensus behind reforms, 

the constant change in government officials, and the presence of vested 

interests and corruption; (2) limitations in how programs were designed 

and implemented; and (3) the vastness of the challenge and the 

interdependent nature of Russia’s transition needs.

GAO found that a common frustration among the lending institutions and 

donors, with the IMF an exception to some degree, has been the difficulty 

of establishing and maintaining effective working relationships with 

Russian government officials. This situation has been due, in part, to rapid 

turnover in officials and a distrust of or disinterest in some donor 

programs. It has also been due to a lack of effective consensus between the 

executive and legislative branches of the Russian government and among 

the broader public regarding a reform agenda. The increasing 

concentration of economic power in Russia and the rise of politically 

powerful interest groups are widely viewed as impeding progress in 

meeting economic reform objectives. For example, powerful vested 

interests have been able to block several efforts to reform the tax system. 

In addition, according to analysts, donor officials, and documents, 

corruption at different levels of government has undermined reform efforts 

and also efforts to spur private sector economic activity. 

Limitations in the design and implementation of assistance programs also 

impeded program effectiveness. Some of these limitations were directly 

related to the mandates and traditional roles of the institutions and donors 

GAO reviewed. Others stemmed from limited institutional and program 

capabilities and decisions about what stategies to pursue and how to 

implement them. Beginning in 1992, for example, international institutions 

faced pressures to lend money to Russia quickly. A tension thus resulted 
Executive Summary

Page 16 GAO-01-8 Foreign Assisstance of Russia

between taking time to study conditions and needs in Russia and 

adequately design programs, on the one hand, and trying to disburse funds 

quickly in order to have a role in the reform process, on the other. In 

addition, international institutions, particularly the World Bank, were 

concerned about Russia’s ability to repay the loans. The international 

institutions that were expected to assume the lead in providing assistance 

had never before worked in the Soviet Union and lacked staff familiar with 

Russia. Similarly, the U.S. government faced substantial pressure to 

disburse Freedom Support Act funds quickly beginning in 1993, when 

funding for bilateral assistance directed at economic transition increased. 

According to officials from the World Bank, the European Bank for 

Reconstruction and Development, the United States, and the European 

Union, the effectiveness of assistance programs often suffered from being 

too broad and inadequately focused. Assistance resources were spread 

broadly for a number of reasons, ranging from a belief that wide-ranging 

involvement was called for to pressure to respond to different 

constituencies, such as U.S. government agencies or European Union 

member countries. Donor program and Russian officials and other analysts 

also cited not having adequate personnel on the ground in Russia and 

unevenness in the quality of consultants as limiting program impact. 

GAO found that the success of assistance programs has also been limited 

by the interdependencies across Russia’s needs and by the relatively small 

scale of assistance programs in relation to the extent of Russia’s needs. 

Building a market economy and democratic society in Russia involves 

change on an immense scale and, in many instances, even very successful 

donor projects cannot have more than a limited impact.

Based on its assessment of key issues in Russia’s transition over the past

8 years and through discussions with Russia experts, GAO selected four 

policy areas—macroeconomic stabilization, social safety net protection, 

privatization, and banking sector reform—that illustrate both the range of 

challenges faced and the degree to which the amount of progress in one 

area has affected reforms in other areas. For example, while inflation was 

finally brought under control in late 1995, serious macroeconomic 

imbalances remained, which contributed to the financial crisis of 1998. 

These imbalances, including the need to finance large government deficits 

through paying very high interest rates on government securities, were due 

in part to structural problems in the economy, especially the inability of the 

government to collect taxes. With respect to macroeconomic policy 

choices, while a highly valued ruble may have helped in controlling 
Executive Summary

Page 17 GAO-01-8 Foreign Assisstance of Russia

inflation during part of the mid-1990s, it is likely also to have hindered 

economic growth through making it more difficult for Russian producers to 

compete with imported goods, according to many officials and experts. 

While privatization of state-owned enterprises was an essential element of 

Russia’s transition, the ways in which some of the largest enterprises were 

privatized increased the concentration of economic power and made 

achieving reforms in areas such as tax collection more difficult.

The international community strongly encouraged Russia’s decision to 

privatize firms quickly and was significantly involved in the design and 

implementation of the voucher privatization program. While the program 

was carried out quickly and efficiently, assessments of its ultimate impact 

are mixed. The “insider” nature of the privatization process undermined its 

economic benefits, according to many officials and analysts. The loans-forshares privatization program, carried out in late 1995, is one of the most 

controversial aspects of Russia’s transition.6

 Through the program, a 

handful of financial-industrial groups in Russia became controlling 

shareholders in some of the country’s most valuable enterprises, in return 

for providing about $1 billion in revenues for Russia to meet its budgetary 

financing needs for that year. While the international community did not 

directly support the loan-for-shares program, it did not strongly object, 

according to evidence GAO reviewed. 

Russia’s banking sector was targeted early on in donor assistance efforts; 

however, progress in strengthening Russia’s banking sector has been 

limited. The 1998 financial crisis decimated Russia’s banks and revealed 

how unsound their financial condition was. It also illustrated the need for 

better coordination between the Russian authorities and the institutions 

and donors on banking reform efforts. Views of analysts and officials GAO 

met with in Russia on the priority of banking sector restructuring efforts 

were mixed. Although there is still little bank lending to small- and 

medium-sized businesses, many experts felt that the demand for such loans 

was limited and that the lack of bank financing was not the most important 

impediment to the growth of such enterprises in Russia. 

The evolution of international assistance efforts in Russia reflects 

institutions’ and donors’ continued commitment to remain engaged in 

6

 The loans-for-shares program was a mechanism the Russian government used in 1995 to 

privatize certain government enterprises in order to raise money. The auctions were not 

transparent, and the government fell far short of its revenue targets.
Executive Summary

Page 18 GAO-01-8 Foreign Assisstance of Russia

Russia largely because of the country’s strategic importance. In some 

cases, institutions and donors have responded to similar frustrations in 

Russia by changing their programs in different ways, with shifts reflecting 

differences in the nature, mandate, and political context of the institutions. 

For example, the United States and the World Bank modified their Russia 

programs in very different ways. In response to the difficulty in 

implementing projects and in an attempt to exert greater leverage, the 

World Bank shifted beginning in 1996 from attempting numerous projects 

across multiple sectors and Russia’s regions to lending to and dealing more 

with the central government. In contrast, the United States shifted in 

1996-97 from trying to influence policy changes within the central 

government to concentrating its efforts in several regions. Substantial 

reductions in U.S. funding limiting the ability to obtain nationwide results, 

the heightened importance of demonstrating assistance results, and 

growing resistance from the Duma and federal government to enacting 

meaningful reform encouraged the U.S. shift to the regions. 

Political considerations have also affected program implementation in 

Russia. For example, despite concerns regarding poor implementation of 

the first program, the IMF executive board approved disbursement of

$1.5 billion in March 1994 to show support for the Russian government. In 

1996, the IMF frequently reviewed the Russia program and modified target 

requirements for additional disbursements. According to the IMF, weak 

macroeconomic performance was felt to reflect instability related to the 

upcoming presidential elections, and the board wanted to show continued 

support for the Russian government. 

Over time, explicit anticorruption efforts have represented a relatively 

small share of international assistance to Russia. However, many programs 

have indirect anticorruption elements. For example, funding for democracy 

and rule of law programs have represented about 24 percent of U.S. 

assistance under the Freedom Support Act. The World Bank first explicitly 

addressed corruption in its 1999 country assistance strategy for Russia, 

although, according to Bank officials, several aspects of its Russia program 

over time have had an anticorruption dimension. The World Bank cited its 

coal sector lending as one area in which limiting opportunities for 

corruption has had an increasing focus in the Bank’s program. The 

programs GAO reviewed have implemented specific procedures to increase 

protection of their program funds from corruption and theft. These 

institutions and donors have reported either that they have not suffered any 

theft, or have not suffered major theft, of funds in Russia. GAO did not 
Executive Summary

Page 19 GAO-01-8 Foreign Assisstance of Russia

independently evaluate the issue of whether there has been theft or 

diversion of program funds. 

Conclusions and 

Lessons Learned 

At the end of nearly a decade of involvement in Russia’s economic 

transition, institutions and donors have drawn a number of conclusions 

about what has and has not worked, and lessons from the experience 

(see apps. I-V for donor-specific lessons). The institutions and donors are 

generally in the process of reevaluating, with the Russian government, the 

level and design of their assistance programs. Based on GAO’s work, the 

following conclusions and lessons learned may have relevance for future 

assistance efforts. 

Conclusions • The challenge of Russia’s transition was enormous and greater than 

generally appreciated by the West. In hindsight, expectations within 

Russia and among institutions and donors of achieving quick results 

were unrealistic. 

• Some aspects of transition assistance that the international community 

identified early on as important proved difficult to provide, for several 

reasons, and have continued to be obstacles to needed reforms. In 

particular, the lack of social support to ease the cost of economic 

restructuring has increased the impact of the transition on poor and 

vulnerable groups, decreased Russian public support for reform, and 

been a limiting factor in economic restructuring. 

• Russia’s transition path has been made harder by the concentration of 

power and income in the hands of a few, a process that had begun prior 

to the transition and that was accelerated by the privatization of the 

most valuable sectors of Russian enterprise in 1994 and 1995. 

• The degree to which the international community, with different policies 

and levels of involvement, could have influenced a different path 

remains the subject of substantial debate. The question cannot be fully 

answered, because what would have happened under alternative 

policies remains unknown. However, many officials and analysts have 

stated that, in hindsight, they would have made different choices in 

some cases. These include the push to privatize the largest firms quickly 

and the failure of the international community to strongly object to the 

loans-for-shares privatization program in 1995. 

• The donors’ and institutions’ initial expectations and hopes that 

Russians would accept and quickly implement advice proved 

unfounded. The transition to a market economy and democratic society 

in Russia required grassroots support and the development of effective 
Executive Summary

Page 20 GAO-01-8 Foreign Assisstance of Russia

institutions, laws, and enforcement processes. These changes have 

profound implications for Russian society and politics and thus required 

a degree of political consensus within Russia that did not exist for much 

of the decade.

• Little progress has been made in achieving reforms in areas where there 

has not been ownership and support from the Russian government, 

including the individuals and institutions with the authority to influence 

outcomes. Working to achieve adequate ownership, and even identify 

when it exists, has proved difficult for donors.

• The unexpectedly strong performance of Russia’s economy since the 

August 1998 financial collapse, due only in part to high export earnings 

from oil, has underscored the limitations of how well the Russians and 

the international community have understood the evolution and 

functioning of the Russian economy, and have caused a reexamination 

of some policy choices. 

• The Russian government’s recent development of a long-term economic 

program demonstrates its capacity to seriously evaluate and debate the 

economic policy choices the country faces. Donors can take some credit 

for helping develop this capacity. The program also demonstrates that 

the policy choices facing the Russian government remain very hard 

ones.

Lessons Learned When taken together, these conclusions about past efforts to assist the 

transition in Russia have some important implications for future assistance 

efforts. Although there are no easy prescriptions for how to best support 

reform in Russia, the following lessons can be of value.

• In light of the realization that Russia’s transition to a market economy 

will take longer than anyone initially thought, to have the ability to make 

a significant impact, donor programs should be structured for the 

possibility of long-term involvement in Russia. For example, donors can 

help build grassroots support for the development of institutions in 

Russia to underlie a competitive market economy within a democratic 

society. This is likely to require involvement over many years. 

• In light of the fact that Russian political will is so important to the 

success of reform efforts, donors may have a bigger impact if they 

concentrate their assistance efforts on the areas in which the Russians 

are open to making reforms. Working to develop ownership as widely 

and deeply as possible within the Russian government and across 

society is likely to pay off in terms of assistance having the greatest 

benefit. 
Executive Summary

Page 21 GAO-01-8 Foreign Assisstance of Russia

• Because progress on the path to democracy and a market economy is 

not a smooth one, donors need to maintain flexibility in their programs 

to the extent possible, so that they can respond to changing conditions 

and windows of opportunity.

Agency Comments GAO received written comments on a draft of this report from the 

Department of State and the U.S. Agency for International Development, 

the Department of the Treasury, the European Bank for Reconstruction and 

Development, the International Monetary Fund, the World Bank, and the 

European Commission. These comments and GAO’s response are reprinted 

in appendixes VIII-XIII. All of these organizations also provided technical 

comments that GAO discussed with relevant officials and incorporated in 

the text of the report, where appropriate. 

In their written comments, these organizations generally agreed with 

GAO’s conclusions regarding the difficulties of the transition and lessons 

learned. Several commented that the report was fair and balanced. In 

addition, these organizations expanded on a number of points made in the 

draft about the complexity of Russia’s transition process and the reasons 

for the mixed results that institution and donor assistance programs have 

achieved. 

The State Department and the U.S. Agency for International Development 

commented that the mixed results are closely tied to the fact that Russia’s 

transition to a market economy and democratic political system is 

incomplete. They stated that much of the progress made to date is due to 

the efforts of Russian organizations and individuals, some of which can be 

credited in part to U.S. involvement through its assistance efforts. The 

World Bank noted that there is a sense of disappointment regarding the 

amount of progress made compared with the high hopes it had at the 

beginning of the 1990s, but this disappointment is due, in part, to 

unrealistic initial expectations. At the same time, the World Bank believes 

that the significant changes that have occurred have put Russia on an 

irreversible path toward a modern market economy. 

The European Bank for Reconstruction and Development commented that 

the challenge of transition in Russia has been greater than generally 

expected, but it continues to be committed to providing financing to 

Russia. It also stressed that it takes the issue of “additionality,” or not 

duplicating other financing sources, seriously. The IMF agreed that the 

transition process has been extremely complex and more so than most 
Executive Summary

Page 22 GAO-01-8 Foreign Assisstance of Russia

anticipated at the outset. For this reason, the influence of the international 

community on economic reform was somewhat limited. Nevertheless, the 

IMF believes it has had a modest, positive impact in various areas. 

The Treasury agreed that the impact of international assistance programs is 

reduced when domestic political support for reform is limited and that this 

lack of domestic support has significantly hindered a number of reforms in 

Russia. The Treasury also endorsed the conclusion that economic and 

democratic transition in Russia is a long-term process that requires 

concerted and flexible involvement by the international community over a 

number of years.

The European Commission stated that it generally agreed with the report’s 

conclusions regarding the challenges of the transition process in Russia. It 

disagreed, however, with GAO’s characterization of the general assessment 

of the European Union’s technical assistance program in Russia, and stated 

that that assessment was not substantiated by GAO’s appraisal of the 

program’s own February 2000 evaluation. GAO’s characterization of the 

success of the program reflects the views of a number of officials and 

analysts that some of the problems exhibited by the European Union’s 

assistance program have been particularly pronounced, although some had 

praise for the program’s efforts and accomplishments in several areas. The 

language in the report draft has been slightly modified to clarify different 

views of the program.
Executive Summary

Page 23 GAO-01-8 Foreign Assisstance of Russia
Page 24 GAO-01-8 Foreign Assistance to Russia

Chapter 1

Introduction Chapte1r

Since 1991, the international community has faced an uncertain political 

and economic environment first in the Soviet Union and then in the Russian 

Federation (Russia). Russia’s transformation to a market economy within a 

democratic state required fundamental changes throughout the Russian 

economy, government, and society. The transformation process has 

presented both opportunities and challenges to the Russians and to the 

institutions and donors that chose to provide economic assistance. From 

1991 through September 2000, the assistance from the five institutions and 

donors in our review amounted to nearly $35.8 billion for programs in 

Russia. 

The Political and 

Economic 

Environment in Which 

Institutions and 

Donors Have Provided 

Assistance

The official end of the Soviet Union in December 1991 was the culmination 

of several years of growing economic and political instability. The collapse 

presented the Soviet Union’s former Cold War adversaries with 

opportunities and challenges. The major organized threat to the West 

vanished, but thousands of nuclear warheads and also aging nuclear power 

plants remained in a region characterized by political uncertainty and 

economic turmoil. In addition, the international community faced the 

challenge of trying to support economic and democratic reform in a 

country that had for many years closely guarded information about its 

economy and political institutions. While Russia experienced difficult 

economic times throughout most of the 1990s, the financial crisis that 

occurred in 1998 spurred the international community to reevaluate both 

the Russian economy and the role of economic assistance.

The Collapse of the Soviet 

Union

The final years of the Soviet Union were marked by political turmoil and 

economic chaos. When Mikhail Gorbachev was named to head the 

Communist Party of the Soviet Union in 1985, he inherited a stagnant 

political system and a slowly declining economy. Recognizing the need for 

change, Gorbachev launched a series of reforms designed to bring more 

openness to the political system and to restructure the economy. However, 

the partial dismantling of systems of control within the existing Soviet state 

led to further economic decline. At the same time, the increasing political 

openness was evolving from guarded criticism to calls for rebellion against 

the system. In a series of unprecedented elections in 1989 and 1990, many 

high-ranking Soviet officials were swept from power as the general public 

overwhelmingly voted for reformers, nationalists, and anti-Communists.

By the beginning of 1991, the economic crisis in the Soviet Union had 

reached an acute phase. Spontaneously, firms began to privatize, and 
Chapter 1

Introduction

Page 25 GAO-01-8 Foreign Assistance to Russia

exports to Central Europe, Russia’s primary market, collapsed, as Central 

European countries went through their own economic transitions. In 

addition, to maintain increasingly costly imports of food and consumer 

goods, the Soviet government undertook substantial borrowing from the 

West.

In August 1991, after a failed coup attempt by Communist hard-liners, Boris 

Yeltsin, recently elected President of the Russian republic, was thrust into a 

position of political prominence. He openly called for Russia’s 

independence and, in conjunction with leaders of other Soviet republics, 

thwarted the efforts of an increasingly weakened Gorbachev to maintain a 

sense of unity within the rapidly dissolving Soviet Union. On Christmas Day 

1991, Gorbachev officially declared the Soviet Union dissolved—replaced 

by 12 independent states.1

 By the beginning of 1992, a newly independent 

Russia was in the midst of a severe economic recession. Some analysts 

openly questioned whether Russia would be able to feed its population 

through the winter. In response, Yeltsin appointed a new team of reformers, 

committed to furthering a rapid transition from a state-run, centrally 

planned economy to a private market system. They turned to western 

donors and lending institutions for financial and technical help.

Western Assistance in An 

Uncertain Environment

The first joint official reaction of western governments to Soviet requests 

for assistance with economic transition came during the July 1990 Houston 

Economic Summit of the Group of Seven countries (G-7).2

 Although the 

West had spent decades carefully analyzing the Soviet Union, western 

economists knew very little about how it actually functioned. The G-7 

countries commissioned a detailed study of the Soviet economy in an 

attempt to inform assistance efforts.3

 Donors had begun providing 

economic assistance to the Soviet Union in late 1990—largely in the form of 

loans or trade credits. Some limited technical assistance and financing 

1

 Estonia, Latvia, and Lithuania had already declared independence by this time.

2

 The G-7 is an informal group of seven leading industrialized nations including the United 

States, the United Kingdom, Germany, Japan, France, Italy, and Canada. Representatives 

from these countries meet periodically to discuss economic and political issues of common 

concern.

3

 The report, “A Study of the Soviet Economy,” known as the “joint study” was done by the 

International Monetary Fund, the World Bank, the European Bank for Reconstruction and 

Development, and the Organization for Economic Cooperation and Development and was 

issued in February 1991.
Chapter 1

Introduction

Page 26 GAO-01-8 Foreign Assistance to Russia

from the European Union (EU), the European Bank for Reconstruction and 

Development, the International Monetary Fund, and the World Bank began 

in 1991, but efforts were hampered by the Soviet Union’s political upheaval. 

U.S. assistance prior to the Soviet breakup primarily consisted of 

guarantees for Soviet loans to buy U.S. agricultural goods. In late 1991, the 

United States provided some grant food aid, as famine conditions 

threatened. European governments also provided some support. The 

largest amount of bilateral assistance through 1991 was from Germany, 

much of which came under a program to build housing in Russia for Soviet 

troops who were withdrawing from the former East Germany.

The political context of this assistance was complex. The overriding 

political goal in the West was to promote national security by maintaining 

stability in Russia. Western leaders were particularly concerned that 

instability in Russia called into question who controlled access to nuclear 

weapons. Leaders in Europe were also concerned that poor economic 

conditions in Russia, combined with political turmoil, could lead to large 

refugee flows and raised questions about Russia’s ability to safely operate 

and maintain its nuclear power plants. These concerns created political 

pressure for institutions and donors to implement programs to assist 

Russia as soon as possible.

Russia Faced Significant 

Challenges

The common assumption among western leaders was that the conversion 

of Russia from a Communist state to a market economy within a 

democratic state would bring long-term stability within Russia and 

between Russia and the West. This transformation required fundamental 

changes throughout the Russian economy, government, and society. Unlike 

other transition countries such as Poland and Hungary, Russia had no 

vestige of a democracy or competitive market economy and almost nothing 

in the way of supporting institutions, or economic relationships with 

western partners. Thus, Communist-era institutions that controlled the 

economy had to adapt to very different roles of oversight, mediation, and 

regulation.

Moreover, a government bureaucracy that had been responsible to the 

Communist Party now had to reorient itself to respond to the will of the 

people; work with an elected legislature; and determine relationships 

among the federal, regional, and local governments. At a broader level, 

mindsets developed over 70 years of Communist rule were required to 

adapt to a new system based on self-initiative and competition. Although 

new government institutions were in place and elections had occurred, the 
Chapter 1

Introduction

Page 27 GAO-01-8 Foreign Assistance to Russia

supporting framework for a democratic society did not exist. With almost 

no independent media, few public interest groups, weak political parties, 

and little legacy of pursuing grievances with the government, Russian 

society lacked the basic foundations of civil society. 

The 1998 Financial Crisis 

Caused a Reevaluation of 

Assistance Programs

While Russia had experienced severe economic decline and a series of 

economic and political crises during the 1990s, its financial collapse of 

August 1998 spurred a serious reevaluation within the international 

community about how far the Russian economy had come and the role of 

economic assistance. 

In late 1997, Russia’s economic and financial environment was 

deteriorating due, in part, to reduced investor confidence in emerging 

markets in the wake of a financial crisis in Asia and, also, to lower oil 

prices that reduced Russia’s export prices. Domestically, the Russian 

government was financing its deficit by issuing government securities. As 

investor confidence deteriorated in 1998, these had to be issued at very 

high interest rates. Russian banks had invested heavily in these securities, 

whose prices were falling rapidly, and also entered into large sales of 

dollars in forward exchange contracts, which made them vulnerable to 

ruble devaluation.4

Russia received a multilateral support package in July 1998, designed to try 

to restore investor confidence and to give the Russian government an 

opportunity to work out its financial difficulties, but this effort was not 

successful. The Central Bank of Russia used the financing to support the 

exchange rate while investors were taking their money out of Russia.5

Faced with dwindling international reserves, in mid-August the Russian 

government announced a series of emergency measures, essentially 

placing the Russian government in default, which further reduced investor 

4

 A forward exchange contract is an agreement between two parties to exchange one 

currency for another at a forward or future date. In the case of Russia, foreign investors who 

had wished to hedge (to reduce risk by taking a position that offsets existing or anticipated 

exposure to a change in market prices) against possible ruble (the ruble is Russia’s 

currency) devaluation had bought dollar forward exchange contracts from Russian banks.

5

 International, or foreign exchange, reserves are the stock of liquid assets denominated in 

foreign currencies held by the central bank.
Chapter 1

Introduction

Page 28 GAO-01-8 Foreign Assistance to Russia

confidence and increased the outflow of capital.6 These actions led to a 

collapse in the domestic banking sector and, as a result, there was a severe 

contraction in Russia’s output and trade. The crisis had serious social 

consequences, effectively depriving many Russians of their savings and 

undermining any trust in financial institutions.

Five Major Lending 

Institutions and 

Donors 

Many bilateral and multilateral international donors implemented 

programs to help Russia’s transition process. According to one estimate 

from the Central Intelligence Agency, the total value of disbursed 

international assistance to Russia from 1989 to September 1998, without 

food aid loans, trade credits, and debt rollovers, came to $66 billion. We 

looked at five major institutions and donors that provided assistance to 

Russia since its independence in late 1991: the IMF, the World Bank, the 

EBRD, U.S. bilateral support provided under the 1992 Freedom Support 

Act,7

 and the European Union’s Technical Assistance to the Commonwealth 

of Independent States (TACIS) program. From 1991 through September 

2000, these institutions disbursed nearly $35.8 billion for programs in 

Russia: $31.3 billion, or 88 percent, have been loans from the IMF, the 

World Bank,8

 and the EBRD.9 Much of the remaining $30.2 billion in 

assistance came from the German government, which contributed several 

billion dollars for the relocation of Russian troops from eastern Germany. 

Other major donors we did not review include France, Italy, Japan, the 

Organization for Economic Cooperation and Development, and the United 

Kingdom who all contributed substantially less grant assistance than the 

United States or the EU.

6

 These measures included declaring a de facto default on government debt, a de facto ruble 

devaluation, and a 90-day moratorium on commercial debt payments for the banking sector.

7

 “Freedom” in the name of this act stands for Freedom for Russia and Emerging Eurasian 

Democracies and Open Markets. Throughout this report, we refer to it as the “Freedom 

Support Act.”

8

 The International Bank for Reconstruction and Development is the only World Bank Group 

member included in this review. In addition, the International Finance Corporation of the 

World Bank has provided $458 million in financing for 46 projects in Russia, and has a 

disbursed and outstanding portfolio in Russia of $256 million. The Multilateral Investment 

Guarantee Agency has a total gross exposure of $269 million for 10 contracts of guarantee in 

Russia. Throughout this report, references to World Bank lending refer to lending by the 

International Bank for Reconstruction and Development. 

9

 Figures for the IMF, World Bank, and EBRD do not include their spending for technical 

assistance.
Chapter 1

Introduction

Page 29 GAO-01-8 Foreign Assistance to Russia

The levels of economic assistance to Russia can be compared to other 

recent transition assistance programs. For example, the German 

government has spent over $500 billion since 1989 to support the transition 

from Communism to a market economy in eastern Germany. International 

assistance to Poland from 1989 through 1994 alone was about $36 billion. 

The IMF The IMF helps countries stabilize their economies and work out balanceof-payments problems.10 Its role in Russia was to provide loans and advice 

to the Russian government to help bring inflation under control, stabilize 

its economy, and address structural issues, such as bank and industrial 

restructuring, tax policies, and trade policies. As of August 31, 2000, the 

IMF had disbursed more than $22 billion in loans for Russia, of which more 

than $8 billion had been repaid (see fig. 2). For the past 2 years, Russia has 

paid more to the IMF than it has received. Russia has not missed a 

scheduled repayment of its IMF debt.

10A country’s balance-of-payments accounts summarize its dealings with the outside world. 

A balance-of-payments problem occurs when its normal receipts from external transactions 

(e.g., export earnings, grants, loans, foreign direct investment and other financial inflows) 

are less than its payments (e.g., imports, interest and amortization). This external deficit 

may be financed by drawing down the country’s international reserves and/or seeking 

exceptional financing, for example, IMF loans and debt relief.
Chapter 1

Introduction

Page 30 GAO-01-8 Foreign Assistance to Russia

Figure 2: IMF Disbursements and Russian Repayments, 1992-2000

Source: IM F.

The World Bank The World Bank’s overall mission is to alleviate poverty and improve living 

standards in the developing world. In Russia, it provided loans and advice 

to the Russian government in a variety of economic sectors, with the 

general goal of promoting economic reform, alleviating poverty, and 

developing and strengthening institutions. Since 1992, the World Bank has 

approved more than $12.1 billion, and disbursed more than $7.5 billion, in 

loans for 46 projects in Russia. (see fig. 3).11

0

1

2

3

4

5

6

7

1992 1993 1994 1995 1996 1997 1998 1999 2000

Disbursements Repayments

Billions of dollars

11 Commitments later canceled amounted to $2.4 billion, including $1.1 billion from the 

recent cancellation of the third structural adjustment loan. 
Chapter 1

Introduction

Page 31 GAO-01-8 Foreign Assistance to Russia

Figure 3: World Bank Approved Lending and Disbursements to Russia, 1992-2000

Source: World Bank.

The EBRD The EBRD is a regional multilateral bank specifically created in 1990 to 

foster economic transition and support the development of the private 

sector in the countries of Central Europe and the former Soviet Union. In 

Russia, it lent money primarily to the private sector, invested in companies, 

and provided technical assistance to encourage development of the private 

sector and enhance the transition to a market economy. Since 1991, the 

EBRD has signed $4.4 billion worth of projects for Russia. As of August 31, 

2000, the EBRD had disbursed $2.2 billion of these funds (see fig. 4).

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1992 1993 1994 1995 1996 1997 1998 1999 2000

Calendar year

Approved lending Disbursed

Billions of dollars
Chapter 1

Introduction

Page 32 GAO-01-8 Foreign Assistance to Russia

Figure 4: EBRD Annual Funding for Russia Projects, 1991-2000

Source: EBRD.

The U.S. Program The United States has used a variety of programs to assist Russia and the 

other countries of the former Soviet Union. The programs include (1) the 

Cooperative Threat Reduction program to dismantle nuclear weapons and 

increase security over the remaining stockpile of weapons of mass 

destruction, (2) food aid, and (3) provision of assistance under the 

Freedom Support Act12 (see app. IV for a summary of assistance for Russia 

from these programs).13 Enacted in 1992, the Freedom Support Act is the 

primary vehicle for U.S. assistance to market reform and democracy 

building in the countries of the former Soviet Union. The United States has 

pursued three general goals in Russia with its Freedom Support Act 

assistance: (1) promote market reform, (2) support the creation of a 

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Signed Disbursed

Billions of dollars

12 22 U.S.C. 5801 et seq.

13 Several U.S. departments and agencies have also implemented commercial, scientific, and 

cooperative programs with Russia under a wide variety of authorizations since 1992.
Chapter 1

Introduction

Page 33 GAO-01-8 Foreign Assistance to Russia

democratic state, and (3) help alleviate the social costs of the transition 

process. Freedom Support Act programs have been implemented primarily 

through the provision of technical assistance. Since 1992, the United States 

has appropriated $2.7 billion in Freedom Support Act funds for Russia and 

disbursed $2.3 billion (see fig. 5). 

Figure 5: U.S. Freedom Support Act Annual Funding for Russia, 1992-200014

Note: U.S. disbursement data for 2000 is not available.

Source: State Department.

The EU’s TACIS Program In 1991, the European Union created the TACIS program to provide grantfinanced technical assistance to support the process of transition to market 

economies and democratic societies in the former Soviet Union. Since 

then, TACIS efforts in Russia have focused on several sectors including 

human resource development, enterprise restructuring, agriculture, and 

14 Congress appropriates Freedom Support Act funds for the former Soviet Union in a lump 

sum. The State Department then creates budgets for individual countries.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1992 1993 1994 1995 1996 1997 1998 1999 2000

Budgeted Disbursed

Billions of dollars
Chapter 1

Introduction

Page 34 GAO-01-8 Foreign Assistance to Russia

energy. Since 1991, TACIS has committed $2.7 billion and disbursed

$1.6 billion for programs in Russia (see fig. 6).

Figure 6: TACIS Annual Funding for Russia, 1991-2000

Source: European Commission.

Objectives, Scope, and 

Methodology

To help inform the continuing debate about international assistance to 

Russia, the Chairman and the Ranking Member of the House Banking and 

Financial Services Committee asked us to review the strategies of different 

donors and lending institutions in providing economic assistance to Russia 

with a view toward identifying lessons learned from this experience. 

Specifically, we examined (1) what types of assistance lending institutions 

and donors have provided, what their program strategies were, and how 

this assistance has been coordinated, (2) how successful the institutions 

and donors have been in terms of meeting their assistance objectives and 

what factors have affected their success, and (3) what lessons can be 

learned that may have relevance for future policy decisions about Russia. 

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Committed Disbursed

Billions of dollars
Chapter 1

Introduction

Page 35 GAO-01-8 Foreign Assistance to Russia

We examined programs implemented by the IMF, the World Bank’s 

International Bank for Reconstruction and Development, the EBRD, the 

U.S. under the Freedom Support Act, and TACIS because they represented 

a significant portion of assistance funds disbursed for Russia to date. These 

institutions and the U.S. also offered several types of assistance, including 

technical assistance and loans, and represented a mixture of international 

financial institutions and bilateral organizations. We looked at the 

programs these institutions and the U.S. implemented in Russia from 1992 

through September 2000. We obtained access to IMF, World Bank, and 

EBRD officials and documents through the U.S. Department of the 

Treasury and through the staff of the U.S. member of each institution’s 

executive board. We were granted access only to documents from these 

institutions that were also provided to their executive boards. Some of the 

key strategy documents we reviewed included:

• IMF staff papers and program review documents, the Russian 

government’s Letters of Intent and Memoranda of Economic Policies;15

• World Bank country assistance strategies; 

• EBRD country strategies and transition reports;

• State Department annual reports and U. S. Agency for International 

Development annual country strategies; and

• TACIS indicative and action programs for Russia.16

We also reviewed a variety of public and internal documents related to 

specific aspects of the operations and implementation of programs by all 

five donors and lending institutions.

To help understand the strategies used, actions taken, and lessons learned 

by the five donors in our review, we identified four key policy areas that 

have affected the course of the Russian reform process. We made our 

selection based on discussions with several experts and our assessment of 

key issues in the process of Russia’s transition to a market economy over 

the past 8 years. The four areas are:

15 Letters of Intent and Memoranda of Economic Policies are documents prepared by IMF 

member countries that describe the policies that a country intends to implement in the 

context of its request for financial support from the IMF.

16 Indicative programs are TACIS multiyear plans that lay out basic objectives and strategies. 

Action programs are prepared annually and spell out the specific projects that will be 

implemented to support the objectives in the indicative program.
Chapter 1

Introduction

Page 36 GAO-01-8 Foreign Assistance to Russia

• Macroeconomic stabilization. Throughout the 1990s, lending institutions 

and donors tried to help the Russian government bring inflation under 

control, develop an effective monetary policy, and reduce the budget 

deficit.

• Social safety net protection. Many analysts in the early 1990s believed 

that Russia needed to maintain a suitable social safety net to mitigate 

social hardships during the transition process and to facilitate the 

restructuring of inefficient enterprises.

• Privatization. Donors played an important role in supporting the 

implementation of Russia’s rapid, mass voucher privatization program in 

1992-94. Although not supported by the donors, the “loans-for-shares” 

privatization conducted by the Russian government in late 1995 was a 

critical event in the transition process.

• Banking sector reform. All five donors in our review provided assistance 

to support the development of a viable private banking sector in Russia 

only to see most of the banking sector wiped out in the 1998 financial 

crisis.

Provision and Coordination 

of Assistance

To determine the level of assistance provided, the strategies used, and the 

coordination of assistance among donors and with the Russian 

government, we reviewed documents obtained from all five institutions 

and donors and supplemented our analysis with discussions with officials 

from these institutions. We also met with officials from the Russian 

government, private think tanks, and universities. We assessed 

coordination by examining the extent to which donors exchanged 

information, worked together to develop common goals and objectives, 

avoided duplication, and implemented projects that complemented each 

other’s efforts.

Factors Affecting Success To determine the factors that affected the success of donors in meeting 

their broad objectives, we identified the donors’ overarching objectives 

from documents and discussions. We analyzed the relative success in 

meeting donors’ overarching objectives by comparing the general 

objectives with current conditions in Russia. Our review of the success of 

individual projects is based on the donors’ own evaluations and discussions 

with officials from the donors, the Russian government, and other analysts. 

We also relied on the results of our past work for assessing selected 

portions of the U.S. bilateral programs. We did not independently verify the 

findings presented in others’ reports or assess the effectiveness of 

individual programs as part of this review. With the exception of our own 
Chapter 1

Introduction

Page 37 GAO-01-8 Foreign Assistance to Russia

past work, our comments on project success represent a synthesis of 

others’ views. To determine the factors that affected success, we 

synthesized the information we obtained from evaluation reports, other 

documentation, and discussions with officials.

Lessons Learned To develop lessons learned, we reviewed documents we obtained from the 

lending institutions and donors to identify lessons they had formally 

identified. We supplemented this review with discussions with program 

officials, Russian officials, and representatives from think tanks, 

universities, and nongovernmental organizations.

As part of our work on all three objectives, we did our work in Washington, 

D.C.; Boston, Massachusetts; London, United Kingdom; Brussels, Belgium; 

and Moscow, Novgorod, and Samara, Russia. During these visits we met 

with senior officials from the lending institutions and donors in our review, 

including

• the IMF’s Director of the European II Department, the former heads of 

the Russia program from 1992 through the present, and the current IMF 

Resident Representative in Moscow;

• the World Bank’s current and former vice presidents for Europe and 

Central Asia, the country director for Russia, current and former 

managing directors, and Bank staff responsible for developing and 

overseeing projects in several different sectors;

• the President of the EBRD, the First Vice President, two deputy vice 

presidents, the current Russia Country Director, and other staff;

• the current Coordinator for U.S. assistance to the former Soviet Union, 

former Coordinators, the current and former U.S. Agency for 

International Development mission directors, former National Security 

Council staff responsible for developing Russia policy, former Central 

Intelligence Agency staff, former senior Treasury officials, the current 

and former directors of the Russian desk at the Department of the 

Treasury, and the U.S. Executive Directors at the IMF, World Bank, and 

EBRD; and

• the head of the TACIS office in Moscow, the Russia Administrator in 

Brussels, the head of the TACIS evaluation unit, the former EU 

Ambassador to Russia, and officials from the U.S. Mission to the EU and 

the European Parliament.

We also met with several current and former Russian government officials, 

including officials from the Ministries of Finance, Economy, and Tax; 
Chapter 1

Introduction

Page 38 GAO-01-8 Foreign Assistance to Russia

sector heads of Russia’s Gref Commission;17 a former Acting Prime 

Minister; the Chairman of the Banking Committee of the Duma; Russian 

executive directors of the World Bank, the IMF, and the EBRD; regional 

officials from Novgorod and Samara; and several project beneficiaries.

Finally, we met with analysts from a number of universities, think tanks, 

private firms, and international organizations, including in part the 

Brookings Institution, the Heritage Foundation, the Carnegie Endowment 

for International Peace, PlanEcon, Inc., the London School for Economics, 

the Center for European Policy Studies, Harvard University, the University 

of Maryland, and the University of Pittsburgh.

We conducted our work from September 1999 through September 2000 in 

accordance with generally accepted government auditing standards. 

We received written comments on a draft of this report from the 

Department of State and USAID, the Department of the Treasury, the 

EBRD, the European Commission, the IMF, and the World Bank. These 

comments and our evaluation of them are reprinted in appendixes VIII-XIII. 

These organizations generally agreed with the conclusions of the report 

regarding the challenges of the transition. In addition, the organizations 

expanded on a number of points made in the draft about the complexity of 

Russia’s transition process and the reasons for the mixed results that 

economic programs have had. The European Commission disagreed with 

our characterization of the general assessment of the TACIS program in 

Russia. Our characterization reflects the views of a number of officials and 

analysts, and the report language has been modified slightly to clarify 

differing views. All of the organizations also provided technical comments 

that we discussed with relevant officials and incorporated in the text of the 

report, where appropriate. 

17 The Gref Commission was established by then-Acting President Putin in February 2000 to 

develop a comprehensive 10-year economic strategy for the country, which was adopted in 

July. 
Page 39 GAO-01-8 Foreign Assistance to Russia

Chapter 2

Donors Have Adopted Different Strategies and 

Means for Providing Assistance Chapte2r

In its early efforts to assist Russia’s economic transition, the international 

community generally agreed on some fundamental principles concerning 

the transition, but it did not have a comprehensive strategy for the 

assistance it would provide and how its efforts would be coordinated. The 

overarching goal of the programs we reviewed has been to help Russia 

make the transition to a market-based economy. Donors have pursued 

similar objectives in their economic assistance efforts in Russia, but their 

strategies and means for providing the assistance have differed. The 

majority of the assistance has been provided through loans, while other 

funding has been given through technical assistance and grants. Over the 

decade, the institutions and donors themselves and the Russian 

government have instituted various forums for the coordination of donor 

assistance. This coordination has improved in some areas over time, but it 

is still a challenge to the institutions and donors and the Russian 

government.

The International 

Community Agreed on 

Fundamentals 

Regarding Russia’s 

Economic Transition 

but Lacked a 

Comprehensive 

Strategy for Assistance 

The international community’s early efforts to assist Russia’s economic 

transition were characterized by general agreement on some fundamental 

principles concerning the transition, but international leaders did not lay 

out a comprehensive strategy regarding what types of assistance would be 

provided and how the assistance would be coordinated. 

In their summary of the joint study of the Soviet economy issued in 

December 1990, the international financial institutions recommended a 

program of comprehensive reforms. These reforms included decontrol of 

prices, privatization of enterprises, and liberalization of trade and 

investment, consistent with what have been termed “Washington 

Consensus” principles.1

 The study also recommended creation of a social 

safety net to cushion the impact of transition on vulnerable groups and 

individuals. According to officials involved in writing the study, because it 

was carried out during a time of uncertainty about the future political 

1

 The “Washington Consensus” is a term that economist John Williamson introduced in 

articles beginning in 1990. Williamson’s original definition involved ten different aspects of 

economic policy toward developing countries. The term, however, has become associated 

more generally with the view that economic development is best served by a commitment to 

free markets, private property, and individual incentives, and with calls for specific 

measures such as freeing prices, removing trade barriers, and privatizing enterprises. The 

consensus grew out of the observation of the experience of several Latin American 

countries during the 1980s, and the term results from its link to the U.S. government and the 

international financial institutions headquartered in Washington. 
Chapter 2

Donors Have Adopted Different Strategies 

and Means for Providing Assistance

Page 40 GAO-01-8 Foreign Assistance to Russia

organization of the Soviet Union, its authors were limited in their ability to 

analyze questions regarding how the Russian economy would be operating 

independently from other republics. They did not know, for example, how 

legislative and executive powers would be divided between different levels 

of government and what specific kinds of financial support the government 

would need.

During this time, some experts within the academic and policy community 

argued against elements of rapid economic transition, but they were in a 

minority. On the need to remove price controls and barriers to international 

trade, there was little debate, but some scholars and analysts were 

skeptical of the consequences of rapidly privatizing state enterprises. They 

argued that a viable private sector required the existence of new laws and 

institutions, such as banks and courts, and questioned the assumption that 

these laws and institutions would come about relatively quickly in response 

to demand from new business owners.2

 Some analysts also pointed out that 

the way in which social services were provided under the communist 

system could result in severe social hardship and also limit the ability of 

firms to restructure and become more efficient. However, by mid-1991, 

western support for rapid economic transition in Russia was strengthened 

by early evidence from the transition experience of Central European 

countries. Poland, for example, had implemented a major stabilization 

program in 1989 that became the foundation for its later economic recovery 

and restructuring. Many aspects of the reforms already implemented or 

underway in Poland, including tightening fiscal and monetary policy, 

liberalizing prices, and privatizing enterprises, were prescribed for Russia.3

Soviet Union’s Collapse and 

Western Response

The speed of the breakup of the Soviet Union at the end of 1991 caught the 

international community by surprise, according to many officials and 

analysts we interviewed. Western response to this “window of opportunity” 

has been the subject of considerable controversy. It was a period of 

2

 The joint study, while it advocated immediate privatization of small firms, stated that the 

privatization of larger firms would take longer and that the large firms should be 

commercialized and operated as joint stock companies while they continued under public 

sector ownership.

3

 In fact, the lessons from the transition experience of Central European countries have 

become complicated over time. While Poland pursued stabilization, it also moved slowly in 

efforts to privatize its economy and reform its banking system, which some analysts 

maintain worked to its advantage.
Chapter 2

Donors Have Adopted Different Strategies 

and Means for Providing Assistance

Page 41 GAO-01-8 Foreign Assistance to Russia

fundamental ambivalence about the appropriate level and types of U.S. and 

international assistance. One of the first official acts of G-7 leaders 

following an October 1991 speech by Yeltsin asking for western assistance 

and cooperation was to send a delegation of deputy finance ministers to 

Moscow to secure claims to the Soviet foreign debt.4

 In January 1992, the 

United States convened a conference of foreign ministers and 

representatives of international institutions to coordinate assistance. Its 

focus was primarily on humanitarian assistance and not economic 

transition policies. 

In April 1992, President George Bush and German Chancellor Helmut Kohl 

announced a G-7 assistance package for Russia of $24 billion. The 

components of the package—$4.5 billion from the World Bank, the IMF, 

and the EBRD, $6 billion for a fund to support the value of Russia’s 

currency, $2.5 billion for debt relief, and $11 billion in bilateral assistance— 

primarily credits to buy food—turned out to include potential transfers that 

had already been promised and others that were not forthcoming. The 

package depended, at least in part, on agreement on a set of reforms 

between Russia and the IMF, which Russia formally joined that June. In 

their Munich summit in July of 1992, G-7 leaders issued an economic 

declaration calling for cooperation between Russia and the IMF. 

From the perspective of hindsight, many analysts and officials have 

observed that the early western response to the newly independent Russia 

did not constitute a strategy for action. Russia was encouraged to work 

with the IMF and World Bank and meet their criteria for assistance, but 

there was little direction regarding how different aspects of assistance 

would relate to and support each other. Donors and other analysts have 

attributed this to several causes. Leaders in the United States and Germany 

were at the time focused on other concerns. The United States, for 

example, engaged in a war with Iraq in 1991, and in 1992 President Bush 

was looking toward reelection in November. Germany was in the midst of 

an extremely costly undertaking to bring about the economic unification of 

the former East Germany with the West. Also, some western leaders were 

initially ambivalent about the ability of the Yeltsin government to provide 

effective leadership, according to some analysts we interviewed, and also 

whether the situation in Russia was too chaotic, for example, for additional 

financial support to have made a difference.

4

 This action resulted in Russia’s agreeing to jointly assume responsibility for all Soviet debts 

owed to western creditors in return for obtaining control over all Soviet overseas assets. 
Chapter 2

Donors Have Adopted Different Strategies 

and Means for Providing Assistance

Page 42 GAO-01-8 Foreign Assistance to Russia

The ultimate effect of the relatively slow western response in providing 

assistance for Russia’s economic transition, and the expectations of 

assistance in 1992 that went beyond what was provided, has also been 

widely debated. One argument of potential effect, made by a number of 

analysts and current and former officials, is that the lack of visible support 

from the international community may have undermined Russian 

reformers at a key point in 1992. For example, whatever actual use might 

have been made of the funds, Acting Russian Prime Minister Yegor Gaidar, 

a key reformer under President Yeltsin, had announced they would be 

forthcoming, staking personal political credibility in Russia on the 

expectations. Some officials and analysts believe that the lack of support 

from the international community undermined Gaidar’s credibility and 

contributed to his removal from office by the end of 1992. 

Assistance for Russia and the other countries of the former Soviet Union 

figured prominently in the agenda of G-7 matters at the Tokyo Summit in 

July 1993. During the summit, the G-7 called for the creation of several 

programs for Russia, including efforts to accelerate the pace of economic 

restructuring, promote the development of small- and medium- sized 

enterprises, and improve the coordination of donor assistance. This detail 

on specific aspects of assistance was unusual and not repeated at later 

summits. Since 1993, the G-7 has periodically provided general, political 

guidance for donor assistance efforts but has not offered detailed plans or 

prioritization. After Russia began attending portions of the G-7 summits in 

1994, the summits themselves became a forum for directly lobbying 

Russian leaders on the need for reform in specific areas. In April 2000, a 

draft strategy for G-7 economic support for Russia, that laid out broad 

goals and roles of different international institutions and donors, was 

circulated by some members but not adopted. 

Assistance Programs 

Have Pursued Similar 

Objectives With 

Different Instruments 

and Strategies

The institutions and donors in our review have pursued similar broad 

objectives in their economic assistance efforts in Russia, while their 

instruments and strategies for providing the assistance have differed. The 

common, broad goal of assistance efforts has been to help Russia make the 

transition to a market-based economy. IMF, World Bank, and EBRD funds 

have been provided as loans to Russia, which need to be repaid. The U.S. 

Freedom Support Act and TACIS programs have provided mostly technical 

assistance and grants. The operations of the EBRD, activities carried out 

under the U.S. Freedom Support Act, and TACIS are generally project 

based, while the IMF works with member governments to develop 

economic reform goals and monitor progress and provides financing to 
Chapter 2

Donors Have Adopted Different Strategies 

and Means for Providing Assistance

Page 43 GAO-01-8 Foreign Assistance to Russia

member central governments and central banks. The World Bank program 

has been a mix of project lending and adjustment lending tied to specific 

reform goals. 

The IMF Has Concentrated 

on Macroeconomic Stability 

in Russia

As shown in table 1, the evolution of the IMF’s involvement with Russia can 

be broken down into five periods (see app. I for more information on the 

IMF’s programs).

Table 1: Highlights of the IMF’s Assistance Strategy for Russia, 1991-2000

Time period Highlights of the strategy

Early involvement (1991) • October moratorium on Russia debt payments calls for IMF program.

• The IMF provided technical, but not financial, assistance to the Soviet Union.

• Relationship continued de facto with Russia after Soviet Union disbanded.

Efforts to control inflation (1992-95) 1992-1994

• Russia becomes an IMF member (June 1992).

• $1 billion disbursed in first agreement (August 1992), with limited macroeconomic 

conditions. 

• $1.5 billion disbursed under new facility the IMF created for transition economies (June 

1993).

• Program went off track (September 1993).

• New program agreed to despite concerns over weak Russian performance (March 

1994); $1.5 billion disbursed; program failed to meet objectives.

1995

• Russia signs agreement for $6.8 billion under first standard IMF program (April); 

monthly monitoring of performance instituted.

• The IMF concurs with Russia’s adoption of a managed exchange rate system 

(exchange rate band) as basis for monetary program.

• Inflation is brought under control for the first time.

• Russia appears to meet all of the program requirements; however, 1999 audits show 

that it missed 2 targets.

Continued emphasis on controlling inflation: 

increased stress on structural reforms: 

(Mid-1996-mid-1998)

• The IMF and Russia agree to a 3-year arrangement that contains more structural 

reform requirements (March 1996).

• Russia’s performance in meeting requirements in 1996 was weak; tax collection 

requirements continually not met.

• Continuing government budget deficits financed largely with securities issuance and 

IMF/World Bank funds.

• The IMF continued to make disbursements, in part, because the IMF felt Russia’s 

weak performance reflected instability related to the upcoming presidential elections. 

• 1997 began with increased growth; Asian financial crisis affected investor confidence 

toward the end of the year. 

• Agreement for 1998 program requirements not reached until June.

Financial crisis 

(July-September 1998): 

• A worsening financial crisis leads to interim IMF package of $11.2 billion (July); initial 

disbursement of $4.8 billion.

• No further disbursements are made under this program. 
Chapter 2

Donors Have Adopted Different Strategies 

and Means for Providing Assistance

Page 44 GAO-01-8 Foreign Assistance to Russia

Source: GAO analysis of IMF documents and discussions with IMF officials.

The primary objective of the IMF’s involvement with Russia has been to 

achieve macroeconomic stabilization, largely defined by low inflation, and 

increase economic output to facilitate Russia’s economic transition. The 

IMF’s involvement with Russia began before Russia was an IMF member 

through the provision of technical, but not financial, assistance. Once 

Russia joined the IMF in June 1992, it was entitled to obtain financing for 

balance-of-payments problems through various IMF facilities. The IMF has 

used a number of interrelated instruments in its dealings with Russia: 

financing provided to the Ministry of Finance and the Central Bank of 

Russia, technical assistance and high-level dialogue with Russian officials, 

and conditionality such as quantitative criteria to monitor macroeconomic 

performance and benchmarks for structural reform.5

 Conditionality is 

generally defined as the economic policies that IMF members intend to 

follow as a condition for the use of IMF resources. 

The IMF’s strategy for achieving macroeconomic stability in Russia has 

consistently focused on reducing and then controlling inflation. The IMF 

programs with Russia from 1992 to 1995 contained primarily 

macroeconomic conditions with limited structural reform requirements. As 

economic conditions in Russia changed, the IMF modified its strategy and 

used different mechanisms to deal with inflation, while increasing its 

emphasis on the importance of structural reforms to facilitate economic 

growth. In 1992, Russia received its first IMF disbursement under a 

5-month program with limited conditionality. In 1993, the IMF created a 

new facility, called the Systemic Transformation Facility,6

 because it 

recognized that some transition countries, including Russia, were not ready 

for the full conditionality requirements under its regular facilities. Although 

(Continued From Previous Page)

Time period Highlights of the strategy

Post-crisis era

(1999-2000)

• Russia and the IMF agree to a new $4.5 billion arrangement (July). One disbursement 

of $640 million made.

• Scheduled December program review not completed; failure to meet structural 

requirements cited; no further disbursements made.

• Russian economy grows due to increased demand for domestic production and higher 

oil prices.

• The IMF continues its involvement, including through technical assistance.

5

 Structural reforms relate to policies across the economy, including, for example, tax and 

banking sector policies. 
Chapter 2

Donors Have Adopted Different Strategies 

and Means for Providing Assistance

Page 45 GAO-01-8 Foreign Assistance to Russia

Russia’s performance in meeting the 1993 macroeconomic targets was 

poor, it did receive its second IMF disbursement in 1994. Despite Russia’s 

continuing weak performance in meeting conditions, in 1995 the IMF 

determined Russia was ready for a Stand-by Arrangement—a traditional 

short-term program with more extensive conditionality requirements—

with monthly monitoring. This was based on the IMF’s assessment that the 

chances of implementing the agreed-upon program were better than they 

had been in the past due, in part, to an improved political situation.7

 While 

Russia’s performance in meeting the conditions of this program was 

mixed,8

 Russia did succeed in bringing inflation under control in 1995 in 

part due to the government’s adoption of an exchange rate band.9

In 1996, Russia and the IMF agreed to a 3-year program under an IMF 

facility—called an Extended Fund Facility—designed to emphasize 

structural reforms because of the IMF belief that although Russia had made 

progress in stabilization, structural reform was also required.10 The 

conditions Russia was to meet were agreed to annually. The program 

focused on several structural areas including banking sector reform, 

privatization and restructuring of large enterprises, and the energy sector. 

Throughout this program, Russia’s performance was mixed, resulting in the 

IMF ‘s delaying or reducing disbursements on several occasions. However, 

the IMF frequently modified targets in the leadup to Russia’s presidential 

elections in June 1996. According to the IMF, these target modifications 

6

 The Systemic Transformation Facility is a temporary means of providing financial 

assistance to members facing balance-of-payments difficulties arising from shocks to their 

economy due to a shift from a centrally planned economy to a market-based economy.

7

 The Stand-by Arrangement provides short-term assistance for problems of a temporary 

nature, usually 1 to 2 years, provided the IMF member observes the conditions in the 

supporting arrangement.

8

 Although the IMF initially believed that Russia had met all of its targets, a 1999 

PriceWaterhouseCoopers audit showed that Russia missed 2 of its targets. In addition, 

Russia met the budget deficit targets by accumulating massive wage and pension arrears 

because budget outlays, not obligations, were used to define the deficit. Beginning in 1997, 

expenditure arrears were incorporated in definition of the deficit.

9

 A mechanism in which the Central Bank of Russia undertook supporting measures and 

policies that attempted to maintain the exchange rate within a preannounced upper and 

lower range.

10 The Extended Fund Facility provides longer-term (generally for a 3-year period) balanceof-payments assistance aimed at overcoming balance-of-payments difficulties resulting from 

macroeconomic and structural problems.
Chapter 2

Donors Have Adopted Different Strategies 

and Means for Providing Assistance

Page 46 GAO-01-8 Foreign Assistance to Russia

were made because of unexpected events, especially the large capital 

outflow in advance of the presidential elections that made those targets 

unattainable. Also, in late 1996, the IMF made revenue collection a program 

priority in an effort to reduce the budget deficit; however, Russia generally 

missed these targets.

Although in 1997 Russia began to experience economic growth for the first 

time in 6 years, the Asian financial crisis led to massive capital outflows at 

the end of the year due to a loss of investor confidence. Russia responded 

by raising interest rates and selling more domestic government securities, 

called GKOs, in order to reduce capital outflows. The IMF advised Russia 

to continue raising interest rates further, but against IMF advice, the 

government expended substantial foreign exchange to support the ruble, 

before finally raising interest rates sufficiently to stabilize the situation. 

In the leadup to Russia’s financial crisis, in July 1998, the IMF’s strategy was 

to try to increase investor confidence by providing Russia with a large, 

$11.2-billion emergency financing package, containing strengthened 

program conditions.11 Only one disbursement was made under this 

program, and it was reduced from $5.6 billion to $4.8 billion due to the 

unwillingness of Russia’s legislature to pass pieces of legislation that were 

conditions of the program. The investor community’s restored confidence 

was short-lived and massive capital outflows followed. The Russian 

government announced that it would (1) widen the exchange rate band, 

(2) implement a 90-day moratorium on commercial and banking sector 

external debt repayment, and (3) announce restructuring of the 

government’s ruble-denominated securities (GKOs). Although the Russian 

government immediately implemented the 90-day moratorium on external 

commercial debt repayment for the banking sector, it did not initially 

announce a clear plan to restructure government securities. This delay 

added to market uncertainty. At the same time, despite intervention in the 

currency market by the Central Bank of Russia,12 the ruble continued to 

depreciate within the exchange rate band until the Russian government 

allowed it to float, resulting in a sharp ruble devaluation. Russia formally 

terminated this IMF program in March 1999.

11 An overall assistance package of $22 billion announced at that time also included potential 

financing from the World Bank and Japan. 

12 The central bank intervened by purchasing rubles using U.S. dollar reserves in order to 

decrease the supply of rubles in the economy, thereby raising its value against the U.S. 

dollar.
Chapter 2

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and Means for Providing Assistance

Page 47 GAO-01-8 Foreign Assistance to Russia

In the aftermath of the crisis, the IMF’s strategy has been to continue to 

support the Russian government through policy dialogue and technical 

assistance, with little financing provided. The IMF and Russia agreed to a 

new $4.5-billion Stand-by Arrangement in July 1999 in order to focus on 

fiscal improvements and structural reforms in the difficult, post-crisis 

economic environment. Russia received the first $640 million 

disbursement; however, no additional disbursements have been made. 

Although Russia had met the macroeconomic conditions of the program, 

the IMF withheld further disbursements due to poor performance in 

meeting structural requirements. The IMF has continued to engage in 

policy dialogue, program discussions, and its usual surveillance activities 

for members with Russia. It has also provided technical assistance, 

particularly on banking sector reform, in the 1999-2000 period.

The World Bank Has 

Targeted Private Sector 

Development and Social 

Protection

The evolution of the World Bank’s program of assistance to Russia can be 

broken down into five stages, as depicted in table 2:
Chapter 2

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Page 48 GAO-01-8 Foreign Assistance to Russia

Table 2: Highlights of the World Bank’s Assistance Strategy for Russia, 1991-Present

Source: GAO analysis of World Bank documents and discussions with World Bank officials.

The World Bank’s involvement in Russia began before Russia became a 

member of the World Bank in June 1992. In 1991, the executive board 

established a $30-million trust fund to provide technical assistance grants 

to the republics of the Soviet Union. Following Russia’s independence at 

the end of 1991, the World Bank was under pressure to deliver a program of 

assistance as soon as possible. On August 6, 1992, the first World Bank loan 

to Russia was approved, a $600-million rehabilitation loan that was 

essentially for balance-of-payments support. However, the loan did not 

become effective for another 5 months. This loan was tied to the IMF’s 

initial lending program for Russia to support macroeconomic stabilization. 

Although World Bank officials supported the World Bank’s involvement in 

Russia’s economic transition, the best strategy for engagement was not 

obvious, according to Bank officials. According to these officials, there was 

a tension between the World Bank’s having a development impact in Russia 

and the financial risks that it could prudently assume. The World Bank’s 

Time period Highlights of the strategy

The initial years

(1991-92):

Establishing the Russia program

• $30 million trust fund established for the former Soviet Union republics (Aug. 1991) 

and work program for Russia issued (Feb. 1992).

• Resident mission set up (fall 1991).

• Russia became a World Bank member (June 1992).

• First $600-million rehabilitation loan approved (Aug.1992).

The early years

(1993-94):

Seeking areas for rapid buildup of the portfolio

• G-7 pressure to develop and implement projects quickly.

• Early debate on adjustment vs. investment lending.

• Approved about $2.3 billion for 9 investment loans in several sectors.

• Start-up delays in project implementation resulted in slow disbursements.

The transition years

(1995-96):

Addressing project effectiveness

and reassessing the strategy

• Project implementation is fraught with difficulties; only $278.4 million of $3.4 billion in 

approved investment lending had been disbursed (as of Dec. 1995).

• World Bank President’s Moscow visit makes project effectiveness a priority (1995).

• High-level review of projects to identify and address implementation problems (1996).

• World Bank views post-1996 election period as opportunity for comprehensive 

structural reforms and moves toward adjustment lending

The later years

(1997-98):

Shifting the strategic focus to

Federal structural reform

• Country director named, and authority decentralized to the Moscow office (1997).

• World Bank/government dialogue rises to a higher level.

• Emphasis shifts from investment projects at the regional and local level to adjustment 

lending at the federal level.

• Financial crisis adversely impacts World Bank projects (Aug. 1998).

Post-financial crisis 

(1999-present):

Focusing on long-term efforts

• Russia becomes the weakest country in World Bank portfolio due to the financial 

crisis, but intensive efforts significantly improve project performance.

• Strategy focuses on addressing systemic weaknesses that financial crisis highlighted.

• More modest funding levels.
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expertise regarding the Russian economy and institutions was limited, and 

there was very little institutional capacity within the Russian government 

to implement World Bank-financed projects. In addition, there was 

substantial debate about the proper mix, composition, and funding level of 

projects. Former senior World Bank officials characterized the situation 

during this period, both in Russia and with respect to developing the Bank’s 

program, as chaotic. 

From 1992 through 1995, the World Bank approved $4.6 billion for 20 

projects across several sectors, including energy, agriculture, and 

infrastructure. Although social protection was an explicit focus of the 

World Bank’s initial strategy for Russia, the social sector accounted for a 

small fraction of actual projects. (See app. II for a listing and status of all 

World Bank loans to Russia.) The projects were to be implemented largely 

at the regional and local level. This broad scope of early Bank efforts in 

Russia was driven, in part, by the belief that, given Russia’s size, the World 

Bank needed broad involvement to have a meaningful impact on the reform 

process. It was also dictated to a large extent by the World Bank’s limited 

access to high-level officials in Russia and thus the need to move into areas 

where the doors for World Bank involvement were open. 

At first, World Bank officials were reluctant to make adjustment loans 

beyond the initial rehabilitation loans, because they did not think that there 

was sufficient consensus in Russia to carry out and sustain reforms, and 

thus they believed that substantial adjustment lending would constitute too 

great a financial risk for the Bank. However, by 1994, serious problems with 

disbursing funds and implementing investment projects emerged and 

became increasing apparent through 1995. While the Bank undertook 

intensive efforts during 1995 and 1996 to improve project implementation, 

and the performance of the Bank’s Russia portfolio improved, it also began 

to reexamine its strategy for lending to Russia. Largely to seek greater 

leverage for reform, the Bank moved, beginning in 1996, to a strategy that 

emphasized adjustment lending rather than investment lending. According 

to Bank officials, the Bank also believed at that time that, with the 1996 

presidential elections past, political conditions for comprehensive 

structural reform were favorable. The Bank committed to a series of large, 

quick-disbursing adjustment loans, in some cases to be disbursed in 

multiple tranches, including (1) $1.3 billion for restructuring the coal sector 

between 1996 and 1998, (2) $800 million for adjustment of social protection 

programs in 1997, and (3) $2.9 billion to promote national-level reform on 

structural issues between 1997 and 1999. In some cases, these loans were 

structured to be disbursed in several tranches. As a result, as seen in figure 
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7, the World Bank’s Russia portfolio significantly shifted toward adjustment 

lending. The Bank’s overall portfolio performance ratings in Russia 

continued to improve until the August 1998 financial crisis, when many of 

the World Bank projects, particularly those involving regional loans, were 

rendered at risk. Potential World Bank financing through 1999 of $6 billion 

was part of a bailout package of more than $22-billion announced in July 

1998. However, World Bank disbursements were far less than this amount, 

with $1.5 billion committed for a third structural adjustment loan, of which 

$400 million was eventually disbursed. The financial crisis resulted in 

intensive efforts to address problem loans, including substantial 

restructuring and canceling of projects, and portfolio performance 

improved significantly by late 1999. According to World Bank officials, as 

they revisit the World Bank’s assistance strategy for Russia, they anticipate 

a long-term focus and modest levels of funding in the next few years. 

Figure 7: World Bank Approved Adjustment vs. Investment Lending, 1993-

September 2000

Source: World Bank.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

1992 1993 1994 1995 1996 1997 1998 1999 2000

Dollars in billions

Calendar year

Adjustment Investment
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The EBRD Has Focused on 

Russia’s Private Sector 

Development

The EBRD’s overall objectives in Russia have been to foster economic 

transition and promote private sector initiatives. It has used a variety of 

instruments including direct project lending, financing through 

intermediaries, equity investments, and use of technical cooperation funds. 

Direct project lending is done at market interest rates. Financing through 

intermediaries, generally called “on-lending,” is used to promote the 

development of Russian financial institutions. The EBRD’s equity 

investments are done through buying noncontrolling minority stakes in 

local firms. Technical cooperation funds generally are provided by bilateral 

donors to the EBRD to support project proposal review and preparation. 

Table 3 shows the evolution of the EBRD’s strategy for Russia (see app. III 

for more information on the EBRD’s programs).

Table 3: Evolution of the EBRD’s Strategy for Russia, 1991-2000

Source: GAO analysis of EBRD documents and discussions with EBRD officials.

When the EBRD began its operations in April 1991 in the Soviet Union, 

there were very few viable business opportunities. As a result, the EBRD 

mainly provided technical assistance for training business people, 

supporting local privatization efforts in selected cities, and advising the 

Time period Highlights of the strategy

Early EBRD efforts for Russia focused on 

technical assistance: 1991-93

• Technical assistance targeted for privatization, training, and advice on reform 

legislation.

• Initial plans for financing projects lacked focus; spread across 11 sectors.

• Poor business climate in Russia limited sound financing opportunities.

Program development and growth: July 1993-

early 1998

• Rapid growth in program; nearly $1 billion in new projects during 1996 alone.

• Dropped emphasis on technical assistance, focused on fewer sectors, and tried to 

develop more realistic goals.

• Focused on (1) financial sector, in part to promote development of small- and mediumsized enterprises; and (2) energy sector.

• Conscious effort to cluster projects in reform-minded regions.

• Relied on financial intermediaries for project implementation to encourage institution 

building.

Financial collapse and recovery: mid-1998 to 

the present

• EBRD suffered heavy losses, primarily in the banking sector, due to the crisis.

• Very few projects approved in immediate aftermath; entire country portfolio closely 

scrutinized.

• Cautious reengagement in Russia by mid-1999, with EBRD positioning self by mid2000 for possible major return to Russian market.

• Focus of operations continue to be small- and medium-sized enterprise development, 

financial sector enhancement, targeted support for larger firms, infrastructure and 

work with a small number of priority regions.

• More direct promotion of lender and shareholder rights, business standards and 

creditor, shareholder and contractual rights.
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government on drafting reform legislation. After Russia became a member 

in March 1992, much of the EBRD’s early attention focused on providing 

technical assistance, most significantly in the area of privatization; trying to 

find financing partners; and identifying potential projects. Early EBRD 

plans lacked focus. For example, in 1992, the EBRD initially planned to 

spread its operations in Russia across 11 economic sectors, including 

privatization and enterprise promotion, financial sector development, 

military conversion and agriculture in an effort to support development of 

entrepreneurs and the legal, market, financial, and public infrastructures. 

However, the EBRD’s resources proved to be relatively small compared to 

these objectives. By the end of 1993, the EBRD had approved 10 deals 

worth $362 million, with about two-thirds of these funds going to the oil 

and gas sector.

By late 1993, as it began to identify and invest in a growing number of 

projects, the EBRD’s changed its overall approach to assistance to Russia. 

The EBRD dropped its emphasis on technical assistance; developed more 

realistic goals to avoid making promises to the Russians that could not be 

fulfilled; and narrowed its primary focus to emphasize (1) strengthening 

the financial sector, especially in its support of small- and medium-sized 

enterprise development and (2) providing targeted support for the 

restructuring efforts of large firms, especially in the oil and gas sector. As 

seen in figure 8, more than half of EBRD financing to date has gone to the 

finance and energy sectors. 
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Figure 8: EBRD Funding for Russia by Sector, 1991-2000

Note: “Others” include mining, property, and public administration.

Source: GAO analysis of EBRD data.

EBRD operations in the mid-1990s were characterized by rapid growth. 

From signing two projects in Russia worth $7.5 million in 1992, the EBRD 

signed 25 projects worth nearly $1 billion in 1996. The EBRD also made a 

conscious effort to cluster its projects in regions that were more reform 

minded. The use of financial intermediaries also increased over this period. 

Many of the EBRD’s biggest programs in Russia, such as the Russia Small 

Business Fund, were actually implemented by Russian institutions. The 

EBRD believed that the use of intermediaries created opportunities for 

Russian institutions to learn how to operate in a market economy. This 

institution building aspect was an explicit part of the EBRD’s strategy. 

However, the growing reliance on financial intermediaries, especially in the 

banking sector, meant depending on Russian institutions to implement the 

programs that were supposed to achieve the EBRD’s overall objectives in 

Russia.

The August 1998 financial crisis was much worse than the EBRD and other 

institutions had anticipated and essentially destroyed the value of most of 

the assets on the balance sheets of most Russian banks. Because of the 

Finance

36%

Energy

20%

Transport

12%

Food

9%

Manufacturing

7%

Others

16%
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EBRD’s emphasis on projects in the financial sector, the collapse damaged 

the EBRD’s portfolio. Many of the EBRD’s equity investments in Russian 

financial institutions became worthless, and the viability of several other 

projects was damaged. By the end of 1998, the EBRD had taken provisions 

of over $600 million, largely due to projects in the banking sector.

In the aftermath of the crisis, new EBRD operations in Russia almost came 

to a halt.13 In the 6 months after the crash, the EBRD tried to salvage the 

projects it could and close out those that could not be saved. It signed only 

three new projects, worth $15 million. By mid-1999, as the Russian 

economy began to stabilize, the EBRD started to cautiously reengage in 

Russia. The EBRD exercised greater scrutiny of potential Russian business 

partners, with efforts supporting the development of Russia’s small- and 

medium-sized enterprise sector taking highest priority. In early 2000, the 

EBRD was positioning itself for the possibility of a major return to the 

Russian market. The goals of the EBRD’s core business in Russia reflected 

a continuation of earlier trends, with a growing focus on small- and 

medium-sized enterprise development, financial sector enhancement, 

infrastructure, targeted support for large firms, greater reliance on equity 

as an instrument, and active promotion of lender and shareholder rights in 

an effort to combat corruption and promote sound business practices. The 

EBRD’s October 2000 country strategy for Russia called for targeting its 

investment priorities in these areas.

The U.S. Program Has 

Focused on Market Reform 

and Democracy

The primary objectives under the U.S. program, authorized by the 1992 

Freedom Support Act, in Russia have been to promote market reform and 

democracy and to address urgent human needs related to Russia’s 

transition to a market-based economy. From 1991 to the present, the 

relative emphasis on these objectives has shifted. While the Coordinator’s 

Office at the Department of State oversees and coordinates U.S. assistance 

efforts, USAID has been the primary U.S. government agency involved in 

implementing Freedom Support Act programs. Table 4 shows the 

development of U.S. assistance programs for Russia (see app. IV for more 

information about Freedom Support Act programs).

13 According to EBRD officials, the lack of new projects in Russia during this period was due 

to (1) a decrease in demand for EBRD financing stemming from the depressed economic 

conditions in Russia and (2) a decision by the EBRD to halt new operations in the banking 

sector.
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Table 4: Development of the U.S. Assistance Program for Russia, 1991-Present

Legend: FSU = former Soviet Union

Source: GAO analysis of State Department and USAID documents and discussions with State 

Department and USAID officials.

Although some of the assistance that went to Russia in the early 1990s 

financed projects to support economic and democratic reforms, the main 

focus was on humanitarian assistance. The Departments of State and 

Defense collaborated on an airlift of medical, food, and other supplies to 

needy populations throughout Russia, called Operation PROVIDE HOPE, 

that has continued to the present. The economic and democratic assistance 

Time period Strategy Highlights of the program

1991-92 Humanitarian 

assistance 

predominates

• December 1991 − United States outlined program to help Russia’s transition. U.S. objectives 

paralleled those later articulated in the Freedom Support Act.

• First Coordinator of FSU assistance designated.

• February 1992 − U.S. launched Operation PROVIDE HOPE to airlift emergency food and medical 

shipments to FSU.

• October 1992, President signed Freedom Support Act.

• During 1992 and 1993, State Department prohibited USAID’s development of country strategies 

or country budgets because it wanted to develop regional approach for assistance to former 

Soviet Union states.

• Economic and democratic assistance was generally spread across several sectors in deliberate 

effort to try different approaches and find out which ones were most successful.

1993-95 Focus on market 

reform

• January 1993 − New administration brought evolutionary change in approach to providing 

assistance to Russia.

• April 1993 − U.S. pledged to provide $1.6 billion in assistance for Russia.

• July 1993 − U.S. portion of assistance package announced at Tokyo Summit totaled a new 

$1.5 billion for Russia.

• Humanitarian assistance continued, but primary emphasis now on working with Russian 

Federation to develop and implement national reforms.

• September 1993 — $1.6 billion fiscal year 1993 supplemental appropriation signed for FSU 

assistance.

• January 1994 −Coordinator published first assistance strategy for entire former Soviet Union.

• May 1994 −Coordinator published first assistance strategy for Russia.

• Budgets for Russia dropped from $1.0 billion in fiscal year 1994 to $359 million in 1995 to 

$219 million in 1996, reflecting waning congressional support.

1996 to 

Present 

Democratic reform 

becomes a priority

• Fiscal year 1996 assistance review and budget reduction forced near elimination of new budget 

authority to three USAID sectors.

• 1996 − development of Partnership for Freedom to increase impact of U.S. assistance at 

grassroots of Russian society, launched at the beginning of fiscal year 1997.

• Assistance to Russian federal government would diminish as projects at national level ended, and 

new funding focused mainly on grassroots efforts at regional, local, or individual level.

• U.S. assistance is now focused on efforts to promote (1) investment-led economic growth, 

(2) people-to-people linkages, and (3) development of civil society.

• The Regional Initiative was also launched in 1997 to demonstrate what concentrated assistance in 

reform-oriented regions could do to improve lives of individual Russians.

• 1998 − Assistance dollars budgeted to democratic reform exceed dollars for market reform.
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between 1992 and 1994 was generally spread across several sectors in a 

deliberate effort to try different approaches and find out which ones were 

most successful.14 During the pre-1993 period, the emphasis across the 

entire program was on speedy delivery and minimal effect on the U.S. 

budget. 

With the change of U.S. administrations in early 1993, the approach to 

providing assistance to Russia evolved. Although humanitarian assistance 

has continued, the primary emphasis beginning in 1993 has been on 

working with the Russian government to develop and implement national 

reforms. In 1993, the Clinton administration sought to greatly increase the 

size of the U.S. program, expecting that U.S. help in key areas would jumpstart the reform process and assist in bringing about needed structural 

changes. In response to the assistance programs announced at the 

Vancouver and Tokyo summits in 1993, Congress appropriated the money 

necessary to implement these programs in September 1993, approving over 

$2.5 billion in the Foreign Operations, Export Financing, and Related 

Programs Appropriation Act, 1994, for assistance to Russia and the other 

former Soviet Union states.15

Although the general thrust of the program had shifted to emphasize 

economic reform, the U.S. program maintained the broad and disparate 

nature of the early 1990s. Projects were developed to support reforms in 

several sectors, including privatization, housing, agriculture, and energy. A 

wide variety of U.S. departments and agencies were implementing 

programs in Russia. In the past, we reported that 23 departments and 

independent agencies were carrying out programs in the former Soviet 

Union states. The sheer magnitude of this program made coordination 

difficult and complicated efforts to focus U.S. activities in a few key areas.16

14 USAID’s grant assistance to help with the implementation of mass privatization is an 

exception. In that instance, the United States devoted relatively significant resources in a 

deliberate effort to influence a major aspect of the reform process. See chapter 3 for more 

information.

15 P.L. 103-87. Approximately $1.6 billion of the funds provided by this measure was included 

as a fiscal year 1993 supplemental appropriation that was attached to the fiscal year 1994 

foreign operations appropriation.

16 Former Soviet Union: Information on U.S. Bilateral Program Funding (GAO-NSIAD 96-

37, Dec. 15, 1995)
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During this period, the U.S. program focused on the need for quick 

implementation of assistance projects. Also, the United States moved away 

from having a single program for the entire former Soviet Union and started 

to develop formal country strategies. In mid-1993, the Coordinator of the 

U.S. program began writing the country strategy for Russia that was 

published in 1994. Country budgets for assistance were also developed.

Congressional support for assistance to Russia began to wane in 1994. 

Dramatic funding reductions were driven by two main factors. First, the 

relatively large appropriation for Russia in 1993 was presented to Congress 

as a onetime event to support what was likely to be a relatively short 

transition period. Indeed, the 1995 U.S. strategy for Russia supported this 

idea by stating that there would be no need for new funding for assistance 

after 1998. Second, Congress began to raise bipartisan concerns about the 

effectiveness of assistance to Russia and started earmarking significant 

portions of the Freedom Support Act appropriations for other former 

Soviet Union states, most notably Ukraine.

In early 1996, the Coordinator reevaluated the U.S. program for Russia, 

because of significant decreases in funding, heightened concerns about 

program effectiveness, and a growing sense of unease about the state of 

transition in Russia. This review led to a significant shift in U.S. strategy. In 

mid-1996, the Coordinator announced a new U.S. approach, called the 

“Partnership for Freedom.” Assistance to the Russian federal government 

diminished, and new funding focused mainly on grassroots efforts at the 

regional, local, or individual level. The new approach began in fiscal year 

1997 and has continued to the present, focusing on efforts to promote 

(1) investment-led economic growth, (2) people-to-people linkages, and 

(3) the development of civil society. In addition, the recipients of U.S. 

assistance changed from organizations working largely at the federal level 

to those in regions that demonstrated more reform-minded policies. Under 

this aspect of the program, known as the “Regional Initiative,” the United 

States targeted its assistance toward three Russian regions, whose local 

governments were deemed to be among the most reform minded and 

hospitable to investment. Moving to the regions was part of an approach to 

increase the bottom-up pressure for reform in Russia. 

Figure 9 shows Freedom Support Act funds budgeted to Russia from 1992 

through 2000. Although the total amount budgeted for promoting 

democracy from 1996 to the present does not exceed the total for 

promoting market reform, the amount for promoting democracy has 

increased relatively and in fiscal year 1999 exceeded the budget for 
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promoting market reform. Figure 10 shows the proportion of Freedom 

Support Act funds budgeted to each objective from 1992 through 2000.

Figure 9: Freedom Support Act-funded Activities Grouped by U.S. Objectives, 1992-Present 

Source: U.S. Department of State and GAO analysis.

0

100

200

300

400

500

600

700

800

(in milo nso fdo la rs)

Promote market reform $17.58 $988.22 $413.93

Promote democracy and rule of law $8.05 $340.19 $282.94

Address urgent human needs

related to transition

$44.86 $231.31 $113.82

Nonproliferation/ security-related

items

$16.14 $114.03 $104.35

1992 1993-1995 1996-Present

In millions of dollars
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Figure 10: Portions of All Freedom Support Act Funds Budgeted for Each U.S. 

Objective, Fiscal Years 1992-2000

Source: U.S. Department of State and GAO analysis.

The European Union Has 

Provided Technical 

Assistance Aimed at 

Russia’s Socio-economic 

and Democratic Reform 

Process

The principal objective of the TACIS program in Russia has been to 

accelerate the socio-economic and democratic reform process. The 

program relies primarily on technical assistance provided though policy 

advisers; training and advice to Russia’s private sector; funding studies 

including preinvestment plans, market research, and feasibility studies; and 

linking Russian and EU institutions.

Drawing generalizations about strategy with such a broad and diverse 

program is difficult. Since 1991, TACIS has implemented more than 500 

projects in Russia and as of August 2000 had about 100 projects underway. 

Although the TACIS strategy for Russia has evolved over time, some central 

tenants have remained. TACIS is still largely a technical assistance program 

that has delivered help to roughly the same sectors since 1991. Table 5 

shows the evolution of the TACIS strategy for Russia (see app. V for more 

information about TACIS programs).

Nonproliferation/

Security-related Items

9%

Promote Democracy

and Rule of Law

24%

Promote Market Reform

52%

Address Urgent Human

Needs Related to

Transition

15%
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Table 5: Evolution of TACIS’ Strategy for Russia, 1991-2000

Source: GAO analysis of TACIS documents and discussions with EU officials.

TACIS projects during the early years of the transition focused on having a 

quick impact, with special attention devoted to training Russians in market 

economics. Many of the early projects were small, emphasizing speed and 

meeting specific Russian needs, often involving study tours, conferences, 

or writing reports. There was also an emphasis on training as many people 

as possible in a variety of areas including banking, finance, and economics. 

From the beginning of the program, TACIS frequently implemented 

projects at the regional and local levels.

During the mid-1990s, support for economic reform and for democracy 

were the dual goals of the TACIS program in Russia. However, TACIS 

implementation continued to focus mainly on economic reform, with a 

greater emphasis on attaining systemic change at the federal level. TACIS 

shifted its focus from the regional to the federal level in an attempt to have 

greater influence on systemic reforms. TACIS implemented larger projects, 

but projects with federal institutions generally had activities in pilot 

regions. TACIS continued to operate in essentially the same sectors as it 

always had, adding environment to the initial areas of enterprise 

restructuring, human resource development, agriculture, energy, 

transportation, and telecommunications (see fig. 11).

Time period Highlights of the strategy

Early efforts focused on quick impact: 1991-94

• Main focus on economic reform, little in democratic assistance.

• Projects tended to be small and focus on quick impact.

• Special attention to training Russians in market economics.

• Many projects implemented at local level.

Greater emphasis on attaining systemic 

change: 1995-98

• Challenges of reform prove greater than expected.

• Shift to larger projects and more frequent use of federal level partners.

• Sectors largely unchanged; primary focus continues to be on economic reform.

• TACIS efforts more closely linked to broader EU political goals in Russia.

Post-crisis reflection leads to modified 

approach: 1991-present

• Crisis reinforces assumption that transition would be a decades long process.

• Greater focus on supporting development of (1) institutions for market reform, (2) rule 

of law, and (3) civil society.

• More attention to supporting change at the grass-roots level.

• Project selection begins to reflect greater emphasis on mutual benefits for EU and 

Russia.
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Figure 11: TACIS Funding for Russia by Sector, 1991-98

Source: European Commission.

The Russian financial crisis in late 1998 reinforced TACIS’ earlier 

assumption that Russia’s transition to a market economy would be a 

decades-long process. TACIS officials told us that it was clear the transition 

had not gone as well as initially expected, in part because (1) the 

institutional underpinnings for a market economy and democratic society 

were lacking and (2) the necessary political consensus within Russia on 

how to proceed was not developed. As a result, project selection began to 

include more grassroots efforts related to improving civil society and 

developing small- and medium-sized enterprises. The increased focus on 

the institutions necessary for a market economy and democratic society 

also led the European Union to add a third objective to the program: 

support for the development of the rule of law. By 2000, the TACIS annual 

program made democracy building the central focus for the first time. 

TACIS also placed greater emphasis on institution building, working at the 

grassroots level, and developing of more linkages—known as “twinning”—

between Russian and EU institutions. TACIS projects were also 

increasingly being linked to the broader EU-Russian political goal of 

increasing Russia’s integration within Europe. In practice, this meant 

development of projects like improving transportation links, upgrading 

border controls, and addressing environmental concerns in northwest 

Russia.

Energy

28%

Enterprise Support

21% Human Resources Development

20%

Agriculture

11%

Transportation

8%

Environment

3%

Telecom

2% Other

7%
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Coordination of 

Assistance Has Proved 

Difficult, With Some 

Improvements Over 

Time 

In the years leading up to and the early years after the breakup of the Soviet 

Union, formal efforts to coordinate donor assistance programs had limited 

success. Over time, informal coordination mechanisms developed within 

the donor community. The donors believe these mechanisms are working 

relatively well, in terms of sharing information and reducing redundancies 

at the project level. The coordination between the Russian government and 

the international community is still problematic but has improved over 

time, especially in the aftermath of the 1998 financial crisis.

Early Coordination Efforts 

Had Limited Success

The initial attempts at coordinating the efforts of those interested in 

providing Russia with advice and assistance were impeded by lack of a 

clear western strategy during the breakup of the Soviet Union and 

difficulties in working with the Russian government. The Russian 

government appeared uninterested in coordinating donor assistance, 

according to officials we interviewed. Also, according to Russian and some 

donor officials, donors had difficulties in coordinating their own activities, 

particularly their technical assistance. Russian officials told us that 

problems occurred in the early 1990s with duplication and lack of 

communication among donors. U.S.-sponsored donor conferences in 1992 

raised this issue but accomplished little.

In June 1993, the World Bank led an attempt to set up a consultative group 

to discuss priorities for structural reform and technical assistance needs. 

This effort was not successful. The reason given by many donor and 

institution officials who were involved at that time was that the Russian 

government did not want Russia to be treated like a third world country. 

Also, in 1993, the G-7 mandated the implementation of a formal 

coordination mechanism called the Support Implementation Group. The 

main efforts of the group were to work with the Russians to remove 

impediments to supplying assistance in the field, such as the Russian 

government’s continued attempts to tax international assistance, and to 

accumulate a database of assistance projects in Russia. The group also 

tried to formalize the donor coordination process by creating a series of 

sector-based working groups. However, the group’s efforts to formalize 

coordination proved to be cumbersome. Officials from all five institutions 

and donors in our review told us the group actually impeded the informal 

coordination process that evolved among the donors over time. Several 

told us that the data the group collected were not useful and meetings were 

not productive. As a result, the Support Implementation Group was 
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disbanded in 1997. The Russian government has taken over the group’s 

database, but it is unclear whether the data have been used.

Early coordination challenges were not limited to relations among donors. 

In some instances, donors like the United States experienced early 

difficulties in coordinating their programs internally. In February 1995, we 

reported on the ineffective coordination of the U.S. bilateral program for 

the former Soviet Union.17 We found that there were frequent, sometimes 

bitter, disputes among U.S. agencies over how the program should be 

structured and implemented and that other agencies and departments 

resisted, hindered, or overruled the State Department Coordinator’s 

efforts.18 After our report was published, the Coordinator’s role was 

expanded. In December 1995, we reported that interagency coordination, 

while still marked by periodic disputes, had improved, as had the 

Coordinator’s ability to oversee and coordinate the program.19

Informal Donor 

Coordination Mechanisms 

Have Evolved 

Donor officials in Moscow told us they prefer the informal coordination 

process that has evolved over time. According to donor officials in Russia, 

they interact frequently on an as-needed basis. They told us they did not 

believe formal coordination mechanisms like the Support Implementation 

Group were necessary. Donor officials in cities outside Moscow echoed 

similar themes. In our meetings in Russia, we found little evidence of 

serious overlap in current programs and a general agreement on 

overarching goals and relative roles.

In some sectors, donors have established informal working groups to 

coordinate efforts in a specific sector. For example, in the health sector, 

several donors provide assistance for tuberculosis/acquired immune 

17 Former Soviet Union: U.S. Bilateral Program Lacks Effective Coordination

(GAO/NSIAD-95-10, Feb. 7, 1995).

18 The Gore-Chernomyrdin Commission is one example of the complications the 

Coordinator faced. Originally established as a high-level mechanism for resolving U.S.-

Russian problems in energy, space, and science, the Commission evolved into a multiagency 

effort to advance common U.S. and Russian interests in a number of other areas including 

commerce, environment, and defense diversification. Although the Commission had no 

direct coordination role, it did develop policies that had an impact on U.S. bilateral 

assistance.

19 Former Soviet Union: An Update on Coordination of U.S. Assistance and Economic 

Cooperation Programs (GAO/NSIAD-96-16, Dec. 15, 1995).
Chapter 2

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and Means for Providing Assistance

Page 64 GAO-01-8 Foreign Assistance to Russia

deficiency syndrome (TB/AIDS) control, including the World Health 

Organization; the European Union; the Open Society Institute; USAID, and 

other bilateral donors such as Canada, Germany, Japan, the United 

Kingdom, and Sweden. According to World Bank staff, in designing a World 

Bank-funded TB/AIDS project, they took into account the experience of 

other donors working in various locations in Russia, and other donor 

representatives have participated in Bank project preparation missions. 

World Bank staff told us that the degree of coordination on the TB/AIDS 

project has reduced the possibility of duplication of efforts across donors. 

According to World Bank staff, better coordination among the 5 ministries 

and about 40 regions participating in the project has also been achieved.

Donor working groups have also been established in some cases to address 

specific needs or concerns. For example, in 1996, in order to facilitate 

information sharing and promote cooperation among donors that provide 

grants in Russia, a group of western donors initiated a Moscow donors’ 

forum. The forum is an informal coalition of representatives of about 25 

private and public international organizations including, among others, the 

Eurasia Foundation, which is funded, in large part, by USAID. Participating 

donors are active in supporting the development of non-governmental 

organizations in Russia 

Donors also sometimes work together on the same project. USAID and 

TACIS officials often help lay the groundwork, through grants and 

technical assistance, for World Bank and EBRD loans in specific areas. For 

example, in the housing sector, USAID funded $10 million in technical 

assistance in preparation for a $400 million loan by the World Bank in 1995. 

The World Bank has also teamed with USAID and the U.S. Treasury in the 

tax administration area. In addition, the World Bank manages grants from 

the Japanese government to finance startups for numerous World Bank 

operations including, for example, a $2 million grant to support the 

preparation of a legal reform project. There have been areas, too, where the 

World Bank has put programs in place when other donors, such as USAID, 

have phased down their activities. For example, in 1996, the Bank 

committed $58 million for the legal reform project when USAID expected 

most of its larger law programs to end or taper off. 

During discussions with current and former State Department 

Coordinators, USAID mission directors, and other U.S. officials, we found 

that the current state of coordination within the U.S. program has improved 

since our previous work. State Department, Treasury Department, and 

USAID officials told us that they had developed good relations and 
Chapter 2

Donors Have Adopted Different Strategies 

and Means for Providing Assistance

Page 65 GAO-01-8 Foreign Assistance to Russia

mechanisms for resolving differences of opinions about potential 

approaches. In particular, U.S. officials highlighted the improvement in the 

relationship between USAID and the Coordinator’s Office at State as being 

critical to improving the overall coordination of the U.S. program.

Coordination Is Still 

Challenging for Donors and 

the Russian Government

Some Russian government officials told us, however, that there is room for 

improvement in donor coordination efforts. Some government officials 

stated that, in some cases, donors have had competing models in mind 

when working with them to set up new programs or institutions. For 

example, questions have arisen over whether Russia’s capital markets 

would be structured more closely to that of the United States or of 

Germany. Some Russian officials we spoke with said donors did not 

necessarily consider what was best for Russia in providing their advice. 

Russian government officials also commented that because assistance 

efforts affect more than one ministry in the Russian government, one 

ministry is not always aware of what assistance donors may be providing to 

another ministry. The tax area was mentioned as one in which this problem 

has occurred. 

Donor officials told us that coordination with the Russian government 

continues to be a challenge, although they noted some improvement has 

been made. One problem many donor officials mentioned was that their 

counterparts in ministries changed frequently. In many instances, donors 

would set up a program with a counterpart but, in a short time, that 

counterpart would depart, and it was possible that his or her replacement 

would not be interested in the program. Another problem is that no central 

location exists in the Russian government that has oversight over the entire 

breadth of assistance efforts. Over the years, the Russian government has 

tried to establish some procedures for dealing with lenders and donors, but 

constant changes in the format and personalities involved have limited the 

effectiveness of these efforts. For example, in 1995, the Russian 

government established the Federal Center for Project Finance to assist the 

government with the overall coordination of projects funded by the 

international financial institutions or other external sources. The 

government also created the Interministerial Commission for Cooperation 

with the International Financial and Economic Institutions and the G-7 to 

coordinate donors’ technical assistance and the international financial 

institutions’ lending programs. With the Federal Center for Project Finance 

serving as the secretariat, the Interministerial Commission is chaired by the 

deputy Prime Minister and comprised completely of high-level Russian 

government ministry officials. 
Chapter 2

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Page 66 GAO-01-8 Foreign Assistance to Russia

Russian government and donor officials told us that the 1998 financial 

crisis demonstrated the need for more formal coordination, particularly on 

banking sector issues. In the aftermath of the crisis, the international 

financial institutions worked with the Russian government to set up a highlevel interagency coordinating committee, which is comprised of donor 

and institution representatives and is chaired by a Russian central bank 

official. The full committee has six working groups that provide advice and 

assistance on areas such as bank supervision, bank restructuring, and bank 

accounting. Progress to date appears to be mixed—officials we spoke with 

thought more had been accomplished at the working group level, rather 

than through the full committee. 
Page 67 GAO-01-8 Foreign Assistance to Russia

Chapter 3

Institutions and Donors Have Had Limited 

Success in Meeting Their Objectives Chapte3r

According to a number of indicators, Russian economic performance over 

the past decade has been poor. While there have been successes across 

individual program objectives of the institutions and donors we reviewed, 

officials have acknowledged that in many respects, there has been limited 

progress toward reaching their broad program goals. This is due to 

obstacles encountered in Russia, problems with design and 

implementation of the programs, and difficulties involving the scale of the 

challenge. Assistance efforts in four key areas—macroeconomic 

stabilization, social safety net protection, privatization, and banking sector 

reform—illustrate barriers to success and how limited reforms in some 

areas have undermined progress in other areas. Institutions and donors 

have modified their strategies and programs in Russia in different ways 

over the decade, but remaining engaged in Russia has been a common goal. 

Russia’s Economic 

Performance Over the 

Decade Has Been Poor 

According to a number of broad indicators, the Russian economy fared 

badly during the 1990s. Although declines in output during the initial 

transition period were expected and were in fact experienced across most 

transition countries in Eastern Europe and the former Soviet Union, 

Russia’s economic decline was among the most severe and its recovery 

among the most limited. By 1995, the measured output of the Russian 

economy had fallen to about 65 percent of its 1991 level and then remained 

stagnant through 1998, with some improvement in 1999 and 2000. (Fig. 12 

illustrates Russian gross domestic product (GDP) trends relative to those 

of several other transition countries.) 
Chapter 3

Institutions and Donors Have Had Limited 

Success in Meeting Their Objectives

Page 68 GAO-01-8 Foreign Assistance to Russia

Figure 12: Trends in Real Output for Russia, the Czech Republic, Poland, Romania, and Ukraine, 1989-2000 

Source: GAO analysis of data from the World Bank and PlanEcon, Inc. 

Average labor productivity in Russia fell from about 30 percent of the U.S. 

average in 1991 to about 19 percent in 1998. Trends in social indicators 

show the personal impact of the decline, with average life expectancy 

declining from 69 years in 1991 to 64 years in 1994, and then rising 

somewhat but remaining below pretransition levels. 

The problems in overall economic performance, and the hardships of many 

Russian citizens, have been linked to a number of conditions in the 

economy and society. These include, in part,

• chronic macroeconomic instability,

• the absence of effective competition in many economic sectors, 

• problems with the structure of the tax system and tax collection,

• the lack of an efficient financial system,

• the existence of widespread organized crime and corruption, and 

• the presence of a system of social services that fails to protect the poor 

and discourages economic restructuring.

0

20

40

60

80

100

120

140

160

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Russian Federation Romania Poland Czech Republic Ukraine

Index, 1990=100
Chapter 3

Institutions and Donors Have Had Limited 

Success in Meeting Their Objectives

Page 69 GAO-01-8 Foreign Assistance to Russia

Many of these weaknesses represent areas in which the international 

community has been actively engaged. While there have been a number of 

successes across individual program objectives (see the following 

sections), individual institutions and donors have acknowledged that in 

many respects there has been limited progress toward achieving broad 

program goals. For example, a 1999 USAID assessment stated, “Economic 

reform has not yet succeeded and no one should anticipate rapid 

progress.”1

 Also, a recent TACIS report concluded, “Beyond the successful 

implementation of projects, the impact on the regulatory and policy 

framework has on the whole been limited.”2

At the broadest, strategic level, assessing the impact of western 

involvement in Russia’s economic transition over the past decade is 

extraordinarily complex. Clearly, the worst fears of the initial transition 

period have not been realized: anarchy has not prevailed; the nuclear 

arsenals of the Soviet Union are under control; there has not been a return 

to Communist rule; and in April 2000, Russia experienced a peaceful and 

democratic presidential transition.

The degree to which overall transition objectives have been achieved in 

Russia must be viewed in the context of the enormity of the challenge. 

Russia entered its transition burdened with economic and political legacies 

from decades of central planning geared disproportionately toward military 

output. Specialization of production and trade patterns had only a limited 

economic basis, many state-owned enterprises were burdened with 

obsolete capital, and, perhaps most important, many basic institutions 

ranging from banks to courts either did not exist or were poorly suited to 

supporting a market economy. Recent comparisons of the transition 

experiences of a number of European countries have concluded that the 

severity and length of economic decline may be linked to external 

incentives such as the potential for membership in the European Union, 

which has not been a realistic goal for Russia. By many indicators, Russia’s 

challenge was huge. 

1

 USAID Russia Country Strategy 1999-2003, April 5, 1999.

2

 TACIS Russian Federation Indicative Strategy Paper 2000-2003 (draft) (Brussels: Dec. 

1999).
Chapter 3

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Page 70 GAO-01-8 Foreign Assistance to Russia

Success of Individual 

Projects Has Been 

Mixed 

The success of individual projects in Russia implemented by the five 

institutions and donors in our review has been mixed, according to their 

own evaluations and the views of officials and analysts we interviewed. 

While some Russian officials were highly critical of international assistance 

efforts, others told us that assistance programs have had a reasonable level 

of success, given the obstacles they have faced. 

IMF Programs Assessing the success of IMF programs is especially hard, given the IMF’s 

broad objective of stabilizing the macroeconomy and the difficulty of 

isolating the impact of its program from other factors. The IMF has not 

comprehensively evaluated its own Russia program. There is a wide variety 

of views on the relative success of IMF programs in Russia. While Russia 

was finally able to bring inflation under control by late 1995, substantial 

imbalances remained in terms of the government’s overall fiscal policies, 

which were highlighted by the 1998 financial crisis. A number of analysts 

and officials we interviewed have taken issue with aspects of IMF policies 

and programs in Russia over the period and believe that the value of the 

IMF’s assistance could have been greater. However, a number of analysts 

and U.S. and Russian officials told us that the policy advice and high-level 

dialogue provided by the IMF has been of value to Russia’s transition in 

several respects. The IMF’s technical assistance to several government 

ministries and the Central Bank of Russia is believed to have improved, for 

example, Russia’s economic statistics, its ability to conduct fiscal and 

monetary policy, and its supervision of Russian banks.

World Bank Programs World Bank officials, in their December 1999 country assistance strategy, 

characterized the success of the World Bank’s efforts in Russia as mixed 

but overall disappointing relative to their expectations. According to the 

World Bank’s periodic rating of loans in its Russia portfolio, the percentage 

of ongoing loans meeting both development and implementation objectives 

has ranged from 33 percent to 82 percent, showing improvement in 1996 

and 1997 and then falling sharply after the 1998 financial crisis. Russia 

lending has at times had the poorest performance in the World Bank’s 

portfolio, for countries with significant borrowing. The rating reported in 

June 2000—73 percent satisfactory projects—reflects a strong 

improvement following several post-crisis loan restructurings, and Bank 

staff told us that the portfolio has shown further signs of improvement 

since then. According to World Bank documents and officials, the World 

Bank achieved limited success with a number of investment loans it made 
Chapter 3

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across several areas during 1993-95, ranging from agriculture to tax 

administration. World Bank officials point to greater success in the Bank’s 

targeted structural adjustment lending, such as the productivity gains 

under the 1996 and 1997 coal sector adjustment loans and improved 

dialogue on social issues under the 1997 social protection adjustment loan. 

World Bank officials stated that the jury remains out on the successes of 

the Bank’s adjustment lending in Russia. While citing gains in the quality of 

the World Bank’s dialogue with the Russian government on structural 

policies, the December 1999 country assistance strategy concluded with 

respect to adjustment lending that “the Bank’s efforts have not borne fruit 

to date on a scale commensurate with the increase in Bank exposure.” 

According to World Bank officials, the value of the World Bank’s 

adjustment lending program has become more apparent during the 9 

months since the assistance strategy was written, based on the World 

Bank’s ability to engage in high-level policy discussions with successive 

Russian governments. 

EBRD Programs The EBRD also rates the success of its efforts in Russia as mixed. By the 

end of 1999, the EBRD’s project evaluation department had conducted 

evaluations of 31 completed EBRD projects in Russia. They rated 29 

percent as highly successful or successful, 36 percent as partially 

successful, and 35 percent as unsuccessful based on the project’s success 

in meeting a variety of goals, including transition impact, environmental 

impact and the project’s financial performance. Compared to the EBRD’s 

average across its entire portfolio, projects completed to date in Russia 

were significantly more likely to fail and less likely to succeed.3

 In February 

2000, the EBRD reported that overall, its operations had had a positive 

influence on Russia’s transition to a market economy. EBRD officials told 

us they believe they have been particularly successful in areas of small 

business development and other projects entailing work with smaller firms. 

They also acknowledged that the financial turmoil in 1998 damaged many 

EBRD efforts, particularly in the financial sector, and that the EBRD has 

had limited success in promoting economic restructuring in large Russian 

firms. 

3

 As of the end of 1999, 54 percent of EBRD projects have been rated successful or higher, 

and only 18 percent have been rated unsuccessful.
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Russian officials had differing perspectives on the EBRD. Some believed it 

had generally done good work in Russia and had made important 

contributions to the transition efforts. Others thought the EBRD was not 

efficient and had had little impact in Russia. They criticized the EBRD for 

not being careful enough when selecting its partners, losing a lot of money 

in 1998, and acting overly cautious with new projects since then. Many 

private analysts were generally positive about the success of EBRD 

projects, with some noting significant improvement over time. However, 

several stated that the EBRD’s role duplicates lending and investment 

functions that can be provided by the private sector and is therefore of 

limited value.

U.S. Freedom Support Act 

Programs

According to U.S. officials, the broad nature of the U.S. program 

complicates efforts to generalize about its effectiveness. Although no 

comprehensive evaluation of the entire U.S. program exists, our analysis of 

available evaluations, discussions with officials, and the results of our own 

prior work found that the United States has had varied results with 

Freedom Support Act projects in Russia. For example, our past review of 

nine projects showed mixed results in meeting project objectives: two 

projects—coal industry restructuring and housing sector reform—met or 

exceeded their objectives; five projects—voucher privatization, military 

officer resettlement, small business development, district heating, and 

agribusiness partnerships—met some but not other objectives; and two 

projects—health care and commercial real estate—met few or none of 

their objectives.4

 Our review of democracy projects in Russia found that 

these projects were seen as valuable by Russian recipients but had mixed 

impacts.5

 USAID evaluations and State Department reports likewise noted 

mixed results in meeting objectives. One USAID Mission Director said that 

several projects that had funding stopped in 1996 had done no harm but 

little good. Several U.S. officials stated that, however effective and 

successful an individual project, U.S. assistance as a whole helps Russia 

only at the margin. The most valuable part of U.S. assistance, according to 

some Russian and U.S. officials, has been an ongoing transfer of knowledge 

and exposure to western approaches.

4

 Foreign Assistance: Assessment of Selected USAID Projects in Russia (GAO/NSIAD-95-

156, Aug. 3, 1995).

5 Promoting Democracy: Progress Report on U.S. Democratic Development Assistance to 

Russia (GAO/NSIAD-96-40, Feb. 29, 1996).
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TACIS Programs The general assessment of TACIS projects in Russia is mixed, based on the 

EU’s own evaluations and our discussions with EU officials. Russian and 

private officials we spoke with expressed sometimes serious concerns 

about the effectiveness of TACIS projects. Over the years, the European 

Commission’s evaluations of the program have varied in their assessment 

of the program’s success and impact. In 1994, the Commission reported 

that the program was generally meeting its objectives but was 

implementing effort to speed the disbursement of funds, improve the 

quality of projects, and sharpen the focus of the program. In 1997, it 

reported that TACIS had achieved a moderate degree of success in 

effectiveness and achievement of its objectives. A February 2000 report on 

the entire TACIS program for Russia found a mixed record of impact: high 

marks for education and training efforts and lower marks for enterprise 

restructuring and building the framework for a market economy.6

EU officials told us they believed that TACIS projects were generally 

effective in meeting their objectives, although they acknowledged 

substantial constraints. They believed the program was especially effective 

at supporting the development of higher education. Russian officials we 

spoke to, as well as several analysts, focused on several problems with the 

TACIS program. Although some noted success in particular areas of 

assistance, such as education and a TACIS project that introduced foster 

parenting to Samara, these officials generally expressed concerns about 

the program’s efficiency, impact, and timeliness. 

Success of Assistance 

Programs Has Been 

Hindered by 

Conditions in Russia 

and Limitations of 

Programs 

Based on the documents we obtained from the programs in our review as 

well as discussions with institution and donor officials officials, 

representatives of the Russian government, and private analysts, we 

identified three main interrelated obstacles to attaining project and 

program objectives: (1) difficult conditions in Russia, including the lack of 

domestic political consensus behind reform, changing government 

officials, and widespread corruption; (2) limitations in the design and 

implementation of donor programs; and (3) the vastness of the scale of the 

efforts and the interdependent nature of the needs.

6

 European Commission Evaluation Unit, “Evaluation of TACIS Country Programme in 

Russian Federation” (Brussels: European Commission, Feb. 2000).
Chapter 3

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Page 74 GAO-01-8 Foreign Assistance to Russia

Institutions and Donors 

Faced Substantial Barriers 

in Implementing Programs 

in Russia 

Russia proved to be a challenging environment for assistance efforts in 

several related respects, including a lack of political and economic stability, 

a lack of commitment in critical areas of the government to reforms 

institutions sought, limited institutional capacity, the rise of powerful 

economic interest groups with political influence, and corruption at some 

levels of government. 

Political and Economic 

Instability

During the 1990s, Russia experienced a series of political and economic 

crises and distractions that diverted the energies and attention of the 

Russian government away from the transition, often leading to stagnation. 

These crises began with the struggles between the government and the 

Russian legislature, culminating in bloodshed in September 1993; the wars 

in Chechnya during 1994-95 and 1999-2000; and the efforts to attain 

President Yeltsin’s reelection in 1996. (See app. VI for a timeline of major 

political events.) Although Yeltsin retained the presidency through 1999, 

that stability was undermined by serious health crises, periodic rumors of 

impeachment, and several changes in Prime Minister and other key 

ministers toward the end of Yeltsin’s tenure. 

Lack of Commitment to Reforms In documents we reviewed and discussions with officials, a frequently cited 

obstacle to success was the lack of Russian interest in or commitment to 

program objectives. Often, this lack of commitment was from high-level 

officials. In other cases, it was from institutions and donors’ working-level 

counterparts. Lack of high-level interest was a serious problem during the 

early years of the World Bank’s activity in Russia, when World Bank access 

to senior Russian officials was limited. Achieving dialogue on social sector 

programs was particularly difficult, according to World Bank officials. It 

was not until 1995, according to senior World Bank officials, that they 

began serious discussions with high-level Russians on the direction of the 

World Bank’s program. According to World Bank staff and documents, 

commitments to World Bank lending projects were made in a number of 

areas, with little follow-through on reforms. Although dialogue with senior 

officials improved, commitment to carrying out program objectives 

continued to be problematic, as evidenced by the limited achievements in 

1997 and 1998 of the World Bank’s large structural adjustment loans. 

Lack of commitment to agreed reforms was also a problem in the technical 

assistance programs of USAID and TACIS. For example, USAID concluded 

that its efforts to support reforms in the agricultural sector generally failed, 

in large part because the Russians were not interested in implementing key 

provisions to provide for the private ownership of land or the elimination of 
Chapter 3

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government-owned or monopolized distribution chains. EU officials cited 

their frustration in efforts to combat the spread of drug-resistant 

tuberculosis, when Russian officials, after agreeing to the program, refused 

to try new approaches to fight the disease. In extreme cases, according to 

officials we met with, Russian counterparts would agree to programs 

simply to direct the training, equipment, or support to political supporters 

and not follow through on reforms. Officials from several institutions told 

us that knowing when they have had adequate Russian commitment to 

program goals and conditions has been difficult, due both to changing 

views of officials they were dealing with and changes in which individuals 

were in positions of authority. 

Closely related to limited commitment has been the lack of effective 

consensus within and between the executive and legislative branches and 

also regional governments. For most of the decade, the Duma was 

controlled by parties or groups that often opposed the reform policies of 

the administration. For example, after the Duma elections of 1993 and 

1995, a combination of nationalists, Communists, and their supporters 

controlled about half of the legislative body. This coalition has been able to 

block a number of government efforts to pass legislation in the areas of tax 

reform, land code requirements, and bankruptcy provisions. In response to 

this opposition, the administration often sought to enact change through 

issuing decrees. Although these decrees allowed certain measures related 

to banking, bankruptcy, and tax reform to become law, they did not ensure 

the measures would be implemented or enforced.7

7

 This approach proved controversial, even within donor organizations. For example, a 

USAID contractor provided extensive assistance to the Russian government’s efforts to 

draft decrees. However, in 1996 we reported that the U.S. Ambassador to Russia and the 

USAID Office of Democracy opposed the use of decrees to achieve legal reform objectives 

because, in their view, decrees did not support the democratization process. See Foreign 

Assistance: Harvard Institute for International Development’s Work in Russia and 

Ukraine (GAO/NSIAD-97-27, Nov. 27, 1996).
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Limited Institutional Capacity The lack of institutions to regulate market economic activities and provide 

the basis for a functioning democracy proved to be a significant challenge 

to reforms. Officials of the programs we reviewed told us that, in general, 

the lack of these institutions created a barrier to project success across the 

board. At the same time, it proved very difficult to help Russia to create 

new, viable institutions. In some cases, reform efforts were passed into law 

by the Duma, but little changed because the federal agencies responsible 

for implementation and enforcement lacked the capabilities to follow 

through. For example, the United States and other donors provided 

assistance to support the creation of a Russian Federal Securities 

Commission. In 1996, we reported that it was unclear whether the 

Commission had the necessary resources to fulfill its responsibilities.8

Later that year, the political status of the Commission was downgraded by 

presidential decree, then partially restored, and in 1999, the head of the 

Commission resigned to protest the government’s lack of support for the 

Commission. 

In addition, limited technical capability to implement projects has plagued 

assistance efforts across the board in Russia. For example, the World Bank 

attempted to establish familiarity with World Bank lending operations and 

develop the government’s capacity to implement projects with its 1992 

rehabilitation loan. According to World Bank officials, although the Bank 

rated the project as satisfactory in terms of meeting its specific objectives, 

the Russian government’s capacity remained far short of what was needed 

to implement Bank lending programs. Moreover, inadequate capability on 

the part of the recipient to monitor either the financial or conditional 

aspects of the World Bank lending activity became apparent by 1994.

8

 See Foreign Assistance: Harvard Institute for International Development’s Work in 

Russia and Ukraine.
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Rise of Powerful Interest Groups The increasing concentration of economic power in Russia and the rise of 

politically powerful vested interests are widely viewed as impeding 

progress in meeting economic reform objectives. According to a number of 

analysts, incomplete liberalization of price and trade policies early in the 

transition created opportunities for individuals to acquire substantial 

wealth, and later measures, such as the privatization of the largest firms, 

led to further concentration of economic resources. Individuals were able 

to translate their wealth into political power—which they used to block 

reforms contrary to their financial interests. A primary example is the area 

of tax reform. A recent article by two IMF staff says that reforming the tax 

system and strengthening tax administration have often been opposed by 

vested interests in transition countries. Vested interests have found that 

many governments in former Soviet Union countries are willing to grant tax 

exemptions and even tolerate tax evasion, especially if given financial 

inducements.9

According to analysts, program officials, and documents, corruption within 

the government, particularly at the local level, has seriously undermined 

reforms, along with efforts to spur private sector activity. Uneven 

enforcement of requirements for licensing businesses and uneven tax 

collection are prime examples of the problems. Corruption has been of 

particular concern to the EBRD, because of its private-sector focus. EBRD 

officials told us that in some cases projects could not go forward because 

donors believed they could not trust their Russian partners. Corruption and 

crime also forced many Russian firms to focus on survival. Several small 

business owners we met with in the Russian city of Samara told us that 

running a growing, profitable business only attracts attention from corrupt 

government officials and organized crime. According to a Russian report 

cited in a State Department publication, small businesses spend 10 percent 

of their income paying off corrupt officials.10

Some donor officials told us that in many respects their influence on the 

domestic political decisions of the Russian government was limited after 

the initial years of the transition period, as anti-reform elements were in 

control of the Duma; the oligarchs wielded significant power; crime and 

corruption were on the rise; and the population—after nearly a decade of 

9

 See “Political Economy of Stalled Reforms,” Finance and Development, IMF, Vol.37, No. 3 

(Sept. 2000).

10 State Department Report to Congress on U.S. Efforts to Combat Crime and Corruption in 

Russia, Feb. 1999.
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economic and democratic reform dating back to the Gorbachev era—was 

weary, cynical, and skeptical. To many Russians, reform had become 

associated with declining living standards and loss of global power and 

influence. 

Limitations in Design and 

Implementation of 

Assistance Programs

Although conditions in Russia were major impediments to project success, 

limitations in the design and implementation of international assistance 

programs also created obstacles to achieving reform objectives. Some of 

these limitations were directly related to the mandates and traditional roles 

of the institutions and donors we reviewed, and also to political guidance. 

Others stemmed from limited institutional and program capabilities and 

decisions about what strategies to pursue and how to implement them. 

By the middle of 1992, the international lending institutions we reviewed 

faced pressures to lend to Russia quickly, given early evidence its economy 

was in serious decline. The World Bank, for example, was under 

considerable political pressure from its members, led by the United States, 

to develop projects and disburse funds as rapidly as possible. The World 

Bank also faced concerns from some members about Russia’s ability to 

undertake agreed-to reforms and to repay World Bank loans. Many 

members were thus reluctant to put the Bank’s financial soundness at risk 

by devoting too large a share of its lending to Russia. In the case of the 

EBRD, pressure to provide substantial financing to Russia heightened 

conflicting pressures already built into its mandate. By design, the EBRD 

was supposed to take risks but also ensure that its financing decisions 

followed proper due diligence to protect against financial losses. The 

EBRD, moreover, aimed to have its overall portfolio turn a small profit 

every year. Both World Bank and EBRD officials told us that balancing 

these competing demands was difficult and complicated efforts to develop 

coherent strategies. 

The IMF’s mandate to provide balance-of-payments support for member 

countries was not well suited to Russia’s transition needs, according to a 

number of officials and analysts. The IMF’s role generally is to provide 

balance-of-payments support to a member country in need and help it to 

achieve macroeconomic stability to eliminate balance-of-payments 

problems. The IMF could not easily adapt its lending instruments just for 

Russia, according to IMF and other officials, although it did develop a new 

lending program, the Systemic Transformation Facility, specifically for 

transition countries. Although it needed budgetary support during its 

transition, Russia did not have a traditional balance-of-payments problem 
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because it had high levels of commodity exports. While it did have 

problems with inflation, much of the basis for its financing need was due to 

underlying structural problems, such as lack of an effective tax system and 

inefficiently structured enterprises. While the IMF tried to address Russia’s 

structural needs over time through the use of conditionality, many of those 

needs were in areas outside of the IMF’s traditional expertise.

Both the international institutions, which had the lead in providing 

assistance for Russia’s economic and political transition, and bilateral 

donors lacked significant experience with transition economies and depth 

of staff familiar with Russia. The World Bank and the IMF had limited 

experience with the region, the language, or the special challenges 

associated with transition economies. The EBRD and TACIS were brandnew organizations with no track record, simply trying to get operations up 

and running. USAID had not operated in the Soviet Union prior to 1992. 

According to some former U.S. officials, the program initially failed to 

adequately take advantage of expertise within the U.S. government on the 

unique political context of Russia’s economic transition, and relied too 

much on personnel whose experience was primarily in poor developing 

countries. This was an obstacle in some cases to achieving the respect of 

and effective communication with Russian officials, according to these 

officials. Others have emphasized that no one within the U.S. government 

had both development and transition expertise.

Some donors, especially USAID and TACIS, were required to use private 

contractors to implement projects whenever possible. Initially, the 

Russians welcomed the experts but did so less over time. Russian officials 

and several donor officials told us that although many consultants offered 

excellent advice, the overall quality was very mixed. Russians were 

particularly concerned about the high pay received by consultants, the “fly 

in, fly out” approach taken by some, or the inexperience of many experts in 

a particular sector and the treatment of Russia as though it were like any 

other developing country. 
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Institutions and donors acknowledge that in some cases early pressures to 

get funds out quickly limited the program design and effective 

implementation. In the case of the U.S. program, for example, to show that 

funds were being obligated quickly, the program used large umbrella 

contracts, which in some cases were poorly managed.11 For example, 

$300 million of U.S. assistance to Russia was overseen and strategically 

guided by the Harvard Institute for International Development with task 

execution by several U.S. contractors. This approach resulted in the 

Harvard Institute’s having substantial control over portions of the U.S. 

assistance program with relatively little USAID oversight. USAID ended its 

contractual relationship with the Harvard Institute in 1997.

The broad scope of World Bank, EBRD, U.S. Freedom Support Act, and 

TACIS programs in the early years undermined potential impact, according 

to assessments by institutions and donors. As our prior program and 

strategy descriptions illustrate, assistance funds were spread broadly for a 

number of reasons, ranging from a belief that wide-ranging involvement 

was called for to pressure from different constituencies (such as agencies 

within the U.S. government or different EU member countries). The 

consensus among Russian government and program officials we met with 

was that this broad dispersion of effort reduced impact. Unrealistic 

program objectives compounded the problem of lack of focus, according to 

Russian and program officials, with the gap between expectations and 

reality damaging the Russian perceptions of assistance programs and 

harming the credibility of later assistance efforts.

11 See Foreign Assistance: Harvard Institute for International Development’s Work in 

Russia and Ukraine.
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Interdependencies and 

Scale of Programs

Success in meeting different assistance objectives has clearly been limited 

by the interdependencies across Russia’s needs and also the relative scale 

of assistance programs. Project objectives in specific areas have often been 

difficult to attain absent progress in key supporting areas. The scale of 

transition challenges dwarfed the size of some assistance programs and 

available resources. We discuss in the following section examples of the 

interdependencies across several broad policy areas. Also on a smaller 

scale, there are many instances in which even very successful donor 

programs have had only a limited impact. For example, several donor and 

Russian officials pointed to the EBRD’s Russia Small Business Fund as a 

successful project to help promote the development of small- and mediumsized enterprises in Russia. Although EBRD officials believe the fund has 

made important contributions, they recognize the fund’s disbursement of 

$381 million in small loans since 1993 only begins to address nationwide 

Russian needs in the small- and medium-sized enterprise sector.12 Several 

U.S. officials cited the success of USAID efforts to create public access 

Internet sites—giving 12,000 Russians access to the Internet. 

Agricultural reform provides one example of how the full range of 

obstacles to program success can combine to limit effectiveness. The 

World Bank, USAID, and TACIS have undertaken agriculture reform 

projects, all with limited success. The World Bank and USAID have now 

limited their work in the sector. Program assessments and our discussions 

with officials and analysts identified the following interrelated 

impediments to program success: the scale of the problem relative to the 

size of assistance programs, the lack of adequate expertise in designing and 

implementing programs, and the lack of serious interest by Russian 

officials in providing for private ownership of land or the elimination of 

government-owned distribution chains. 

12 For a very rough order of magnitude comparison, note that the Russia Small Business 

Fund has disbursed in seven years roughly what the U.S. Small Business Administration 

lends to U.S. firms in a week.
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Four Policy Areas 

Illustrate Challenges 

and Interdependencies 

Across Assistance 

Objectives 

The successes and limitations of assistance in four key policy areas—

macroeconomic stabilization, social safety net protection, privatization 

(particularly voucher privatization and the loans-for-shares privatization 

program), and banking sector reform—illustrate both the range of 

challenges faced and the degree to which the amount of progress in one 

area has affected reform efforts in other areas. For example, the limited 

degree of social services to cushion the impact of economic restructuring 

in Russia is widely believed to have been an obstacle to economic 

restructuring and may have constrained overall economic performance. 

While privatization of state-owned enterprises was an essential element of 

Russia’s transition, the way in which some of the largest enterprises were 

privalized increased the concentration of economic power and made 

achieving reforms in areas such as tax collection more difficult. This, in 

turn, increased the fragility of Russia’s macroeconomic situation. 

Macroeconomic 

Stabilization

A stable macroeconomic environment was identified early on by the 

international community and some Russian government officials as a 

necessary condition for economic growth. Establishing such an 

environment has remained a challenge throughout the transition and has 

been the key focus of IMF programs in Russia. After 3 years of limited 

success, Russia finally brought inflation under control in late 1995. 

However, substantial macroeconomic imbalances remained, and the 

fragility of Russia’s economic policies culminated in the financial crisis and 

debt default in August 1998. The issue of how much influence and leverage 

the IMF actually had on Russia’s macroeconomic policies continues to be 

debated. 
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A stable macroeconomic environment consists of three interrelated 

elements: low, sustainable inflation; a sustainable overall balance of 

payments along with a relatively stable foreign exchange rate; and a 

government budget that does not require overly high domestic interest 

rates to finance any deficit. Macroeconomic stabilization policies in Russia 

have primarily focused on controlling inflation, with some success by late 

1995. During 1992-94, Russia’s budget deficit was largely financed by an 

expansionary monetary policy, with resulting high inflation. Between 1995 

and mid-1998, less inflationary government bonds were used to partially 

finance the deficit, and a monetary policy based on maintaining a stable 

exchange rate helped in controlling inflation.13 The inability to increase tax 

revenue, however, left a high and unsustainable fiscal deficit that made the 

Russian economy vulnerable when the external environment turned 

negative. Figures 13 and 14 illustrate trends in Russia’s federal budget 

expenditures, revenues, deficit, and inflation over the transition period.

13 In July 1995, the government adopted a managed exchange rate system. It targeted the 

growth of the money supply to maintain the ruble-dollar exchange rate within preannounced upper and lower bounds. The central exchange rate and its associated bounds 

were periodically devalued. 
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Figure 13: Russian Federal Government Budget Expenditures and Financing, 1992-2000

Note: The Russian Ministry of Finance counts noncash receipts as part of total revenue when 

calculating the budget deficit, as shown in the figure. The IMF computes the federal deficit on a cash 

basis resulting in a larger deficit.

Source: Constructed from data from the IMF.

0

5

10

15

20

25

30

1992 1993 1994 1995 1996 1997 1998 1999 2000

Percent of GDP

Expenditures Cash revenue Noncash revenue Deficit financing Budget surplus
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Figure 14: Russia’s Monthly Inflation Rate, 1990-2000

Source: Russian Economic Trends 

As illustrated in figure 13, cash revenues14 generally declined during the 

1992-1998 period, preventing budget deficits from falling below 5 percent of 

GDP despite substantial reductions in government expenditures. This 

decline in tax collections was part of a complex web of nonmonetary 

transactions throughout the economy. For example, large energy 

monopolies that failed to pay taxes also were often not paid by other firms 

or government entities such as military bases for their energy use. The 

government’s noncash receipts—which includes the overpriced value of 

goods and services the government receives in return for canceling 

delinquent taxes—have been substantial, accounting for about 21 percent 

of total revenue during 1996-98. A number of efforts by parts of the Russian 

0

10

20

30

40

50

60

70

Dec-90

Apr-91

Aug-91Dec-91

Apr-92

Aug-92Dec-92

Apr-93

Aug-93Dec-93

Apr-94

Aug-94Dec-94

Apr-95

Aug-95Dec-95

Apr-96

Aug-96Dec-96

Apr-97

Aug-97Dec-97

Apr-98

Aug-98Dec-98

Apr-99

Aug-99Dec-99

Apr-00

Percent 245%

14 Cash revenues include payments made through financial transfers and checking accounts, 

as well as payments made in actual currency.
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government, in some cases with international assistance, were made during 

1996-98 to improve tax collection and compliance, but in general, they met 

with little success prior to 1999. 

Figure 15: Real and Nominal Monthly Exchange Rate Indexes for Russia, 1994-2000 

Note 1: The nominal effective exchange rate index is a weighted average of the ruble exchange rates 

of several of Russia’s trade partners. The real effective exchange rate index adjusts for the relative 

inflation rates between Russia and these trade partners. The real index can be interpreted as the 

inflation-adjusted price of a traded unit of a Russian good or service, when the 1995 price was 100. 

Note 2: An increase in the index reflects an appreciation of the ruble.

Source: Constructed from IMF, International Financial Statistics data.

0

20

40

60

80

100

120

140

160

180

200

Jan-94

May-94

Sep-94

Jan-95

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Jan-98

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May-99

Sep-99

Jan-00

May-00

Real

Nominal

Index, 1995=100
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Two issues of continuing debate regarding IMF policies in Russia over the 

period are the questions of how much leverage the IMF had in influencing 

Russia’s macroeconomic policies, and whether the IMF supported an 

exchange rate that was too high. A number of officials and analysts, 

including IMF officials, have maintained that the IMF was “too soft” on 

Russia. For example, although the IMF delayed or reduced disbursements 

several times during 1996-98 when Russia missed some quantitative 

performance criteria requirements, it also granted waivers and made 

disbursements during this period when Russia had missed its targets.15

Some officials and analysts argue that the Russian government would have 

implemented a stricter program if it knew it could not get disbursements 

otherwise. It is not possible to determine whether holding to stricter 

disbursement criteria would have resulted in better implementation of the 

economic program, given, for example, the key role of low tax collection in 

the government’s failure to meet IMF performance criteria. Several 

international and Russian government officials we interviewed stated that 

eligibility for bilateral debt relief may have been Russia’s primary 

motivation in agreeing to IMF programs.16

The Russian government, with IMF advice and financial support, 

maintained a nominal exchange rate that was relatively stable from mid1995 to mid-1998 (see fig. 15). According to some analysts, this reduced 

inflationary expectations helping to reduce inflation. However, analysts 

have also maintained that, with the benefit of hindsight, the exchange rate 

appears to have been overvalued, based on the strong performance of the 

Russian economy since the financial crisis. While that strong performance 

is partly explained by high oil prices, it is also largely attributable to a sharp 

rise in production by Russian firms, as the prices of Russian products 

became more attractive relative to imports after the government’s move to 

a floating exchange rate in September of 1998 and the substantial 

depreciation of the currency. With high oil and export commodity prices 

and lower imports, Russia is running large trade surpluses in 1999 and 2000, 

adding to its international reserves.

15 Missed criteria include, for example, international reserve, government revenue, and 

budget deficit targets.

16 Russia or any debtor country is required to have an IMF program in place before it can 

receive debt relief from bilateral creditors through the Paris Club. The Paris Club is an 

informal group of creditor countries that meets, on an as-needed basis, to negotiate debt 

relief efforts on official debt.
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Social Safety Net Protection A social safety net to cushion the effects of transition on vulnerable 

populations, particularly dislocated workers, was identified early on by 

some in the international community as necessary to a smooth transition in 

Russia. It was recognized that enterprise restructuring, price liberalization, 

and other dislocations associated with Russia’s transition to a market 

economy would inevitably affect living standards. Some analysts argued 

that a social safety net was essential to achieving objectives of 

privatization. They pointed out that the restructuring of enterprises, one 

goal of privatization, would necessarily entail periods of unemployment. In 

addition to loss of income, workers would be hurt by the loss of social 

services such as housing, kindergartens, and hospitals, which were 

traditionally provided to workers at little cost through their employers. The 

concern was that, absent an effective system of reducing the social 

consequences of unemployment, economic restructuring would not take 

place. 

However, there was no real agreement within the international community 

about how support for an improved social safety net should be financed. 

One preliminary 1993 analysis by World Bank and IMF staff suggested 

additional international funding to help support a safety net with a very 

rough cost of $2-3 billion the first year. There was, however, little support 

among the G-7 members for directly financing social programs in Russia. 

According to several U.S. government officials, U.S. domestic political 

support for paying for pensions and other social needs in Russia did not 

exist. By the time of a summit between President Clinton and President 

Yeltsin in Vancouver in March 1993, bilateral funding for a social safety net 

was not included in plans for assistance to Russia.

The role of providing assistance to address the social impacts of transition 

thus fell to the World Bank. Within the World Bank, discussions about how 

best to provide that assistance were a part of the larger debate about the 

World Bank’s assistance strategy for Russia. That debate included the issue 

of investment lending versus adjustment lending and what level of 

exposure to the possible nonrepayment of its loans the World Bank should 

assume. 
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The social sector did not consume a significant part of World Bank 

commitments or disbursement to Russia until 1997. A key reason, 

according to both World Bank and Russian officials, was the reluctance of 

Russian authorities to borrow funds for social needs. In November 1992, 

the World Bank approved a $70 million loan to strengthen the government’s 

capacity to process unemployment benefits, in part through buying 

computers. However, the loan did not go into effect for 2 years and then 

had serious implementation difficulties.17 A $200-million community social 

infrastructure loan approved in 1996 to improve the ability of local 

governments to provide essential social services in two regions, with the 

idea of possible expansion, was subsequently restructured with more 

modest objectives. 

In June 1997, the World Bank approved an adjustment loan of $800 million 

tied to social sector reforms, and disbursed the first tranche of $300 

million. The World Bank had, in 1995, indicated its willingness to consider 

such an adjustment loan and, according to World Bank officials, the 

prospect of an adjustment loan increased the interest of Russian 

government officials in discussing social reforms. However, a substantial 

period was required to work out loan conditions, since some Russian 

officials had initially viewed the loan as a source of general budgetary 

financing without expecting serious conditionality. The objectives of the 

loan were broad—reforms in social policy, pensions, unemployment 

assistance, social assistance, and social insurance. One goal was to 

improve targeting of needy groups within the government’s existing social 

spending budget. 

17 A World Bank official cited that loan as an example of how success can take time. He 

stated that it had been a problem loan for a number of years and that the World Bank had 

wanted to cancel the loan; however, the loan had recently become an example of a very 

successful small project. 
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The World Bank disbursed a second tranche of $250 million under the 

social protection adjustment loan in December 1997, as scheduled, but the 

loan was restructured in July 1999; as of August 2000, all tranches had been 

fully disbursed and all loan conditions met. According to the World Bank, 

their most significant accomplishments under the loan have been in 

pension system reform, with little success in poverty reduction and the 

reform of social assistance. A World Bank official made several 

observations about the World Bank’s work under this loan: It was 

important to have enough funding at stake to get the appropriate attention, 

but after that, the funding amounts have not been that important; working 

with regions was surprisingly positive; and while World Bank officials had 

anticipated the ability of special interests to block change, they had 

underestimated it.18

Russia’s system of social protection remains poorly suited to protecting 

poor and vulnerable groups, according to U.S., Russian, and World Bank 

officials. Benefits are low—with unemployment benefits, for example, 

averaging 15 percent of the subsistence minimum—and badly targeted, 

with 20 percent of the poorest households receiving no benefits and the 

bulk of housing subsidies still going to those who are not poor. 

World Bank officials cited social protection components of Russia’s 10-year 

economic development plan, which was adopted in July 2000, as indicative 

of more serious discussion within Russia concerning needed economic 

reforms in this area. Some officials also indicated that proposals within the 

plan draw heavily on work done with World Bank analysts over the past 

several years, particularly in the area of pension reform. However, there 

still are serious differences of opinion within the Russian government 

regarding the priority of government spending for social needs.

Voucher Privatization and 

the Loans-for-Shares 

Privatization Program

No aspect of Russia’s economic transition has been more controversial 

than the privatization of enterprises. Privatization of over half of Russian 

state-owned industry was accomplished quickly during 1992-94, with the 

help of international funding. In Russia, specific motives for privatizing 

enterprises rapidly were to (1) decrease the chance of a communist 

18 In addition to these programs, the World Bank’s coal sector adjustment loans, with the 

primary purpose of overall restructuring of the coal sector, featured social safety net 

provisions for coal workers, their families, and communities adversely affected by mine 

closures and downsizing.
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resurgence, (2) impose some order on a process that had begun to occur 

spontaneously during the Gorbachev era, and (3) decrease the 

government’s direct financial burden of subsidizing enterprises. 

Beginning in early 1992 and ending in June 1994, the Russian government 

designed and implemented a mass voucher privatization program.19

Through this program, over 16,500 medium and large state-owned 

enterprises,20 representing more than half of Russian industry, were 

transferred to the ownership of more than 40 million Russian citizens. 

(Under the Russian privatization law, most shops and some smaller firms 

had been allocated to local governments to sell off.) This was 

accomplished through several steps: corporatizing the enterprises as joint 

stock companies; distributing vouchers to the entire Russian population; 

creating investment funds to channel purchases of larger firms; and 

organizing a system of auctions throughout Russia through which shares in 

the enterprises were distributed. 

The international community strongly encouraged Russia’s decision to 

privatize firms quickly and was significantly involved in the design and 

implementation of the voucher privatization program. In late 1991, the 

World Bank and the EBRD signed an agreement with the Russian 

government to act as lead advisers on a broad range of privatization issues. 

The World Bank began providing advice to the Russian Privatization Center 

in 1991 under its Technical Cooperation Agreement with Russia. In 

December 1992, the World Bank approved a privatization implementation 

assistance loan, for $90 million. The main objective of the project was to 

provide funding to design the voucher privatization program. However, that 

loan did not become effective until the end of 1993, due in part to legislative 

opposition, at which time the voucher program was nearing completion. 

Similarly, the EBRD did not carry out planned efforts to support the 

voucher privatization process. USAID became the primary source of 

international funding for implementing the program, providing about $58 

million. 

19 The Russian privatization law was passed in July 1991 and included a basic emphasis on 

giving away shares of enterprises. The privatization program, headed by Anatoly Chubais, 

was adopted by the government and the parliament in June 1992, after intense negotiations. 

It contained the basic elements of corporatization and insider privatization, although not 

vouchers. Vouchers were chosen by Chubais as the mechanism for mass privatization in late 

spring 1992 and adopted by presidential decree in the summer. 

20 Small enterprises were defined as having less than 200 employees, medium enterprises as 

having 200-1,000 employees, and large enterprises as having more than 1,000 employees.
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While the voucher privatization program was carried out with surprising 

speed and efficiency, assessments of its ultimate impact are mixed. The 

design of the program represented compromises to win the support of 

enterprise managers and of the Russian parliament. In particular, the 

program’s most popular option allowed workers and owners to acquire a 

majority stake in their enterprises, resulting in “insider privatization,” or 

what was effectively a management-employee buyout program. Although 

the program officially restricted privatization of the largest state-owned 

enterprises—more than 10,000 workers—a number of very large and 

strategic enterprises were ultimately privatized under the voucher 

program.21

Although many believe that the insider nature of the voucher privatization 

process was crucial for its political feasibility, there is wide agreement that 

this factor undermined to some degree the potential economic and political 

benefits of the process. It limited the incentives of new owners—managers 

and their employees—to improve the efficiency of businesses by 

downsizing or restructuring their operations. A common although not 

consensus view among officials and analysts with whom we met is that, 

with the benefit of hindsight, the privatization of the largest Russian firms 

may have proceeded too quickly. The degree to which the disappointing 

economic and political benefits of privatization that have been realized to 

date are due to the timing and manner in which parts of the voucher 

privatization were carried out, and how much are due to other factors, 

including the loans-for-shares program, continues to be debated. 

21 By June 1994, more than 300 of Russia’s largest enterprises had in fact been privatized 

through special national voucher auctions, under pressures from managers who realized the 

benefits of gaining control of their enterprises. 
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The loans-for-shares program, by far the most controversial aspect of the 

privatization of Russian enterprises, followed voucher privatization.22

Through the loans-for-shares program, a handful of financial-industrial 

groups in Russia became controlling shareholders in some of the country’s 

most valuable assets, including several large oil and metals companies. 

Under this program, carried out during the last quarter of 1995, the 

government auctioned off large stakes in these companies to banks, in 

return for loans, and in some cases, payments of firms’ tax arrears.23 This 

scheme was prompted by the government’s need for a source of 

noninflationary financing of its budget deficit and also, according to some 

officials we interviewed, by President Yeltsin’s desire to consolidate the 

support of Russia’s business elite for his 1996 election campaign. Over the 

course of 1995, as revenues from other privatization efforts fell short of 

anticipated amounts, the government was failing to meet financing targets 

that had been agreed to with the IMF. Through loans for shares, the 

government was able to provide an additional $1 billion of budget financing 

and met the financing targets. According to IMF staff, alternative forms of 

financing were available to the Russian authorities.

The loans-for-shares auctions are generally viewed as having been 

effectively rigged in favor of the large banks that were carrying them out. 

The Russian government had modified the original loans-for-shares 

proposal, made by a consortium of banks, from a closed process to 

auctions that would ostensibly be open, including to foreigners. However, 

in the actual auctions foreign investors were barred, the auctions were 

attended by a limited number of bidders, and the winning bids were lower 

than expected. The winners were generally the banks who were managing 

the auctions.24

22 Following voucher privatization, Russia began a second round of privatization, with the 

objective of selling the remaining government holdings in order to raise cash. The cash 

auctions and investment tenders (bids) used were not transparent (open) and were poorly 

advertised, and the government fell far short of its revenue goals. 

23 The government maintained the right to repay its loans and thus buy back the shares until 

September 1996 although, according to some officials, there was little expectation among 

knowledgeable individuals that the government would repay the loans.

24Only 12 of the 29 companies that were initially identified by the government as candidates 

for the program were actually auctioned, due in part to efforts by company directors to 

avoid an auction. 
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The loans-for-shares program is widely considered a major setback in 

Russia’s economic transition. It consolidated the fortunes of Russia’s new 

“oligarchs.” The program was criticized in the Russian press as evidence of 

corruption within the government and became an issue in the 1996 

presidential election.

A number of western and Russian analysts have criticized the West for not 

being more outspoken in opposition to the scheme at the time. In contrast 

to its support for voucher privatization, the international community did 

not directly support the loans-for-shares program. It did not, however, 

strongly object, according to evidence we have reviewed. 

The U.S. Executive Director of the IMF, in April 1995, in response to an 

early loans-for-shares proposal, went on record as asking for additional 

information regarding the proposal and potential negative impacts. The 

U.S. Executive Director told us she was involved in other conversations 

regarding concerns about the loans-for- shares program, but U.S. officials 

did not provide us with any other documentation on objections. In an 

October 1995 staff report, IMF staff raised concerns about the way the 

loans-for-shares scheme was designed, but stated that Russian authorities 

assured the IMF that the government would exercise strong oversight to 

ensure that the program was operated fairly. In a December 1995 staff 

report, IMF staff raised concerns about the Russian authorities handling of 

the loans-for-shares program. In both instances, the staff recommended 

and the board approved further disbursements to Russia. A senior IMF 

official told us that the IMF’s focus was primarily on macroeconomic issues 

and less on the details of particular privatization schemes. USAID officials 

told us they had objected to loans for shares during 1995 but did not have 

information regarding the specific circumstances of the objection. 

According to World Bank officials, a World Bank official in Moscow 

expressed serious concerns about loans for shares as the program was 

being implemented in 1995 and raised concerns to senior World Bank 

management, but high-level protests were not made by the World Bank. 

According to senior World Bank management, the World Bank’s dialogue 

with Russian officials was generally not at a very high level during that 

time, and the World Bank was not in a good position to put major issues 

like the loans-for-shares transactions on the table. He stated that World 

Bank management concluded there was no way to reverse the program and 

that the World Bank needed to work to make sure that privatization was 

done more transparently in the future. 
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We heard differing views regarding how much difference clear western 

opposition to loans for shares would have made in 1995 and 1996. Several 

officials expressed the view that by the time the West realized the degree to 

which the outcome could further undermine reform objectives, it was too 

late. According to a former World Bank official, the only possible effective 

influence would have to have come from the U.S. President. Others stated 

that effective opposition would not have had to come from that level, with 

one former senior Russian official describing the overall western reaction 

to the program at the time as a conspiracy of silence.

Banking Sector Reform During the Soviet period, the state bank had wide responsibilities for all 

banking-related activities in the Soviet Union. Five specialized banks 

carried out some of these tasks under the supervision of the state bank. 

Russia’s banking sector began to evolve with the reform laws of 1988 and, 

with the dissolution of the Soviet Union in 1991, Russia introduced its own 

banking laws and created the Central Bank of Russia (which replaced the 

Soviet state bank) to issue currency and supervise banks. The new central 

bank followed a liberal policy of bank licensing, resulting in a rapid 

increase in the number of commercial banks. For example, in 1993, Russia 

had licensed 2,000 new commercial banks. Banks benefited from operating 

in an environment where there was limited prudential regulation, and 

inflation and currency depreciation created opportunities for quick profits. 

Although the vast majority of Russia’s banks remained small and 

undercapitalized, the sector became dominated by a number of large banks 

that are at the center of industrial groups. Virtually all lending by Russian 

banks is short term. Banks concentrate their activities on trading in the 

treasury bill and foreign currency markets, lending to related entities, and 

on trade finance, and real estate activities.

Early on, several institutions and donors targeted Russia’s banking sector 

as an area for providing transition assistance. However, for a variety of 

reasons, progress in strengthening Russia’s banking sector has been 

limited. The 1998 financial crisis decimated Russia’s banks and revealed the 

extent of their unsound financial condition. It also illustrated the need for 

better coordination between the government and donors on banking 

reform. Since the crisis, institutions and donors have provided substantial 

technical assistance on bank restructuring, but have been hesitant to 

commit significant financial resources for banking reforms, although some 

planning efforts were underway in summer 2000.
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The financial institutions development project was approved in 1994 to 

support the institutional development of commercial banks, modernize the 

regulatory framework, and improve bank and enterprise accounting 

practices. The project was financed by a $200 million loan from the World 

Bank and $100 million loan from the EBRD, with some supporting grants 

from the EU and the Japanese government. In hindsight, the World Bank 

believes the accreditation process for financial institutions development 

project banks proceeded too rapidly. The project banks and outside 

investors saw the accreditation as the World Bank’s “seal of approval” 

when, in reality, these banks were not necessarily following prudential 

banking practices. Implementation of these projects came to a halt 

following the 1998 financial crisis. The project was restructured in August 

2000, with some small disbursements approved. 

Under the Freedom Support Act program, USAID funded bank supervisor 

and commercial bank training programs in Russian cities. In its most recent 

country strategy document, USAID acknowledged that the success of such 

efforts has depended in part on the Russian government’s commitment to 

specific reforms. USAID officials say they are working with other donors 

and government representatives on the Coordinating Committee to 

determine a useful role for its assistance. In addition, the U.S. Treasury 

provided resident advisers to work with the Central Bank of Russia; their 

activities included, among other things, helping to draft bank legislation. 
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From its earliest involvement with Russia, the IMF has targeted Russia’s 

banking sector as an area that needed reform in order to support the 

country’s economic growth. In the early years of its involvement with 

Russia, IMF staff provided technical assistance to the Central Bank of 

Russia on banking supervision, monetary and exchange operations, the 

payments system, public debt accounting, and bank accounting. In 1993, it 

also posted three resident advisers with the central bank. Although banking 

sector reform was mentioned in the government’s March 1995 request for a 

Stand-by Arrangement, it was not until 1996, with the Extended Fund 

Facility program, that banking reform became a stronger focus of an IMF 

arrangement. In its February 1996 request for the Extended Fund Facility, 

the Russian government outlined its strategy for a comprehensive 

approach to strengthening the banking system. However, laws regarding 

bankruptcy and bank license revocation, identified as necessary for bank 

restructuring, were not passed or implemented. In addition, although all 

donors believed it was necessary to introduce the use of international 

accounting standards into Russia’s banks, the Central Bank of Russia and 

the banks themselves resisted this change.25 Only in 2000 did the 

authorities agree to introduce international accounting standards 

accounting for the Central Bank of Russia by year end-2000 and in 

commercial banks by year end-2001.

Experts have identified several factors specific to banking business that 

contributed to the breakdown of the market in 1998, including the use of 

Russian accounting norms rather than international accounting standards; 

inadequate credit risk analysis; and investment concentration in related 

borrowers, foreign exchange, and government securities.

The government’s default on its securities, banks’ failure to properly hedge 

their foreign exchange risks, and the sharp ruble devaluation are the 

factors that threw nearly all Russian banks into insolvency when the crisis 

hit. In addition, these measures resulted in a serious disruption in the 

payment system and a collapse of the domestic banking system. There 

were severe liquidity shortages as banks were unable to make payments or 

obtain liquidity through the usual channels, such as the sale on the open 

market of a portion of their portfolio of government securities.

25 Russia’s 1999 IMF program continued to acknowledge basic legislative needs related to 

the banking sector. It laid out a plan for bank restructuring that included developing a bank 

restructuring law and amending the central bank law, bank bankruptcy law, and civil code. 
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In the aftermath of the August 1998 financial crisis, the World Bank and the 

IMF convinced the Central Bank of Russia to conduct detailed reviews 

using western accounting standards of the financial condition of 18 large 

banks representing about 50 percent of the assets of the privately owned 

banking system. The audits found that 15 of the 18 banks were insolvent. 

According to World Bank officials, these results helped strengthen the 

credibility of the international financial institutions’ advice in the eyes of 

the Central Bank of Russia.

In the wake of the financial crisis, two new bodies were formed to help deal 

with Russia’s banking reform. One, the Interagency Coordinating 

Committee on the Restructuring of the Banking System, was established by 

the Central Bank of Russia with the multilateral donors as members. The 

Coordinating Committee, as well as the working groups formed under it, 

provide a forum for carrying out technical discussions between the Russian 

authorities and international experts on a wide range of issues and a means 

for coordinating technical assistance from the donor community. 

The second, the Agency for Restructuring of Credit Institutions, was 

established in November 1998, with the task of restructuring large and 

insolvent banks. It has made progress in restructuring regional banks that 

voluntarily submitted to its oversight, but according to several officials 

from programs we reviewed, progress in dealing with large, Moscow-based 

banks has been limited. Several officials we spoke with in Russia told us 

that the restructuring agency has been relatively ineffective, due, in part, to 

a lack of political will on the part of the Russian authorities and, in part, to 

a lack of consensus on how these large banks should be treated as well as 

the limited financial resources for bank restructuring.

According to representatives from the World Bank/IMF technical 

assistance team, since the financial crisis, progress has been made in 

establishing the enabling environment for banking restructuring, but 

Russian authorities have failed to use this environment with full 

effectiveness. The team has identified areas in which the Russians must 

choose their strategy on fundamental issues, including the role of public 

versus private banking, the role of national versus regional banking, the 

role of domestic and foreign-owned banks, and the question of whether 

banks should be limited to traditional banking practices, such as taking 

deposits and making loans, or be permitted to conduct investment banking. 

Pending agreement on these fundamental issues, the World Bank/IMF team 

has proposed an action plan for 2000 that is divided into three strategic 

areas: (1) continued consolidation of the banking sector, (2) creation of a 
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small number of viable core banks, and (3) establishment of a competitive 

and transparent environment for banking. 

Views of officials we met with in Russia were mixed on the priority level of 

banking sector restructuring and reform. Although there is still little bank 

lending to small- and medium-sized enterprises, many experts felt the 

demand for such lending did not yet exist and that those needing finance 

were obtaining it from other sources, such as retained earnings. Many 

officials we spoke with felt that the power of state banks impedes progress 

in creating a well-functioning commercial banking sector because it is hard 

for private commercial banks to compete with state banks. Also, 

restrictions on foreign banks limit citizens’ choices. The Russian 

population in general is still suspicious of Russian commercial banks and is 

more likely to deposit its money with the state banks than with private 

commercial banks.

Changes in Assistance 

Programs Reflect 

Commitment to 

Staying in Russia

The evolution of international assistance efforts in Russia since 1992 

reflects institutions and donors’ continued commitment to remain engaged 

in Russia because of the country’s strategic importance. While donors have 

faced a series of obstacles, they have never considered halting assistance 

programs altogether. Changes in the programs and assistance strategies 

have reflected responses to these obstacles, learning from experience, 

changing needs in Russia, and political guidance. 

The rationale for continued engagement varies across institutions and 

donors depending on mandates and objectives. World Bank and IMF 

officials note Russia’s strategic importance, and also their mandate to 

support member countries. Officials of these institutions have stated that 

they will continue to support Russia’s process of reform, which they 

believe is likely to take a number of years. U.S. officials told us that they 

will continue to implement projects in Russia as long as the Russians show 

continued commitment to supporting the process of economic reform and 

democracy building. The EBRD and TACIS were specifically created to 

help support reform in transition countries, of which Russia is the largest 

and most important. According to senior-level EBRD officials, the EBRD 

has remained engaged in Russia during times of crisis like 1998 and will 

continue to be engaged there. When the EU reauthorized its TACIS 

program in December 1999 for another 6 years, its Commissioner for 

External Relations noted that the program would help build closer and 

more constructive relations.
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Changing Resources and 

Political Guidance Have 

Affected Assistance 

Strategies

Some shifts in donor strategy reflect differences in the nature, mandate, 

and political context of the institutions themselves. For example, the 

United States and the World Bank modified their assistance programs in 

sharply different ways over the decade. Their shifts are explained in part by 

differences in available resources, instruments, and mandates and may also 

reflect different perceptions of conditions and prospects in Russia.

• The World Bank’s shift, beginning in 1996, away from subnational 

lending for investment projects to providing mostly large structural 

adjustment loans to the central government reflected an increasing 

emphasis on the importance of nationwide reforms and the obstacles to 

achieving reform objectives at the regional level. The shift also reflected 

institutional issues. For example, because the World Bank’s charter 

requires it to lend only to, or obtain a sovereign guarantee from, national 

governments, implementing regional projects required complex 

negotiations regarding who would pay back loans and how funds would 

flow through the federal government before going to the regions.

• In contrast, in 1996-97, the United States changed its focus from working 

primarily with the federal government to working largely in specific 

regions on grassroots projects. U.S. officials told us this change was 

driven by a number of factors, including (1) substantial reductions in 

U.S. funding which, in their opinion, greatly reduced the ability to obtain 

nationwide results; (2) the growing resistance within the Duma and 

federal government to enact meaningful reform, exacerbated by 

corruption within parts of the government; and (3) the importance of 

showing results of U.S. assistance to Congress and the White House. 

Several U.S. officials told us that by 1994 or 1995, it was becoming clear 

that many U.S. efforts to promote change at the federal level were not 

achieving success. In addition, by the mid-1990s, Congress was placing a 

growing number of restrictions on Freedom Support Act assistance for 

the national government—restrictions that did not apply to assistance at 

the regional or local level. In addition, in contrast to requirements for 

World Bank loans, implementing Freedom Support Act projects at the 

regional level does not require detailed negotiations with the Russian 

federal government. 

Political considerations have affected program implementation in a variety 

of ways for the institutions and donors we reviewed. 

• IMF decisions regarding Russia have been affected by political 

concerns. For example, despite concerns regarding poor 

implementation of the first program, the IMF Board approved 
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disbursement of $1.5 billion in March 1994 to show support for the 

Russian government. The December 1993 Duma elections had been 

widely viewed as a sharp repudiation of reform efforts and of the federal 

government by the Russian people. U.S. officials told us that the political 

stakes in this decision outweighed concerns about lack of progress in 

meeting IMF requirements. In 1996, the IMF frequently reviewed the 

Russia program and modified target requirements for additional 

disbursements. According to the IMF, weak macroeconomic 

performance was felt to reflect instability related to the upcoming 

presidential elections and the board wanted to show continued support 

for the Russian government. Several Russian officials, however, told us 

they were concerned that this action contributed to the belief that 

Russia did not have to comply with IMF requirements since Russia was 

too important to fail. 

• In response to reports of massive civilian casualties and widespread 

human rights violations in connection with the war in Chechnya, the 

European Council adopted a resolution in December 1999 limiting new 

TACIS projects for 2000 to human rights, rule of law, and support for 

civil society. 

Institutions and donors have recently reported the need to alter their 

approach for assistance to Russia because of changing Russian needs. 

According to a number of Russian and donor officials, Russia’s assistance 

needs have changed to some extent away from basic transfer of know-how 

to assistance in implementing specific reforms. For example, in December 

1998, a meeting of G-7 technical experts on assistance to Russia concluded 

that assistance projects showed the greatest success when they made use 

of both Russian expertise and western support. A February 2000 report on 

the TACIS program in Russia recommended that future assistance move 

away from the past focus on explaining the “right way” to the Russians and 

instead help them find “the best way in their conditions.” IMF and World 

Bank officials told us they will expect the Russian government to have 

greater input into formulating its own program than in the past, and that 

they believed that their future programs with Russia would be more closely 

linked to supporting the government’s implementation of reform packages 

than in the past.

Donors’ Response to Crime 

and Corruption 

Over time, resources allocated directly to developing judicial and law 

enforcement institutions in Russia have represented a relatively small 

share of international funding, reflecting the greater focus on economic 

policies and institutions. For example, $632 million, or 24 percent, of funds 
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budgeted under the Freedom Support Act have been under the broad 

objective of promoting democracy and rule of law. In terms of a percentage 

of annual funding, however, funding for this objective has increased to 36 

percent of funds budgeted for 2000. Specific programs include anticrime 

training and training Russian law enforcement officials. Some programs 

under the broad objective of promoting market reform have had direct 

anticorruption aspects, such as providing training to Russian businesses in 

western accounting standards. In the case of the World Bank, the structural 

adjustment loans it has extended to Russia have provisions that could 

reduce the potential for corruption, such as strengthening tax 

administration, and reforming key infrastructure monopolies and the 

banking sector by fostering competition.

The World Bank first explicitly addressed corruption in its 1999 country 

assistance strategy for Russia,26 although according to Bank officials, 

several aspects of its Russia program over time have had an anticorruption 

aspect. A recent report of the World Bank’s progress to help countries fight 

corruption indicates that, since the executive board endorsed an 

anticorruption strategy for the World Bank in 1997,27 four of its active 

investment projects, involving $128.8 million in loans, relate to 

governance.28

26In January 1999, the World Bank issued new policy guidance that required every country 

assistance strategy to examine governance issues, including the extent of corruption. This 

was part of the anticorruption initiative that the Bank President launched in 1997.

27 See World Bank: Management Controls Stronger, but Challenges in Fighting Corruption 

Remain (GAO/NSIAD-00-73, Apr. 6, 2000).

28 The World Bank, Helping Countries Combat Corruption: Progress at the World Bank 

Since 1997 (Washington, D.C.: The World Bank, June 2000).
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World Bank officials pointed to its coal sector lending as an example of a 

program where limiting opportunities for corruption has had an increasing 

focus over time. The World Bank’s $500 million 1996 adjustment loan was 

designed to reduce the impact of the coal sector on the federal budget by 

decreasing subsidies to the sector. While progress was made toward this 

objective, including institutional changes to improve the targeting of 

subsidies, there was insufficient monitoring of funds from the Russian 

government that went to pay subsidies to coal companies and some 

evidence that such subsidies were not necessarily being allocated or used 

for their intended purposes. As a result, the World Bank’s second coal 

sector loan approved in 1997, designed to further sector restructuring and 

promote privatization, more explicitly addressed controls over public 

funds. As a precondition for the loan, for example, the government made 

changes in sector governance and management of coal subsidies. This 

included changing its method of distributing coal subsidy payments.29

According to World Bank officials, this change has substantially decreased 

the possibility of corruption within the government’s system of coal 

subsidy payments.

The institutions and donors we reviewed have also implemented specific 

procedures to increase protection of their own funds from corruption and 

theft. These institutions and donors have reported either that they have not 

suffered serious theft or diversion of funds or that they have not suffered 

any theft or diversion of funds in Russia. We did not attempt to 

independently verify these claims during our review. 

• Because technical assistance funds, which comprise the bulk of 

assistance under Freedom Support Act and TACIS assistance, have been 

paid to U.S. and European contractors, the potential for diversion has 

been limited. Since the early 1990s, State Department and USAID 

officials have testified and reported that the vast majority of the funds 

for the Freedom Support Act program in Russia were obligated to U.S. 

contractors, universities, and private organizations. Since 1995, USAID 

has implemented increasingly stringent financial controls for its 

operations in Russia. TACIS officials told us they believed their funds 

were adequately protected from misuse.

29 They are now distributed through earmarked accounts in the regional offices of the 

federal Treasury and delivered directly to the intended beneficiaries.
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• In 1999, the IMF called for an investigation by an independent 

international accounting firm into allegations that its funds for Russia 

had been stolen or misused. The firms reported that they found no 

evidence that IMF funds were stolen, but they did find that Russia had 

misreported information to the IMF during 1995-98. This misreporting 

may have enabled Russia to obtain funds it may not have been entitled 

to. Based on these findings, the IMF determined that Russia had violated 

mandatory reporting requirements established in the IMF’s Articles of 

Agreement. As a result, Russia agreed that new IMF funds would be held 

in an account at the IMF and go directly to repay Russian debt to the 

IMF. This procedure would apply to any new IMF program negotiated in 

2000.30

• EBRD officials told us that an outside review of their Russia portfolio by 

an independent accounting firm in late 1999 found no egregious misuse 

of funds in any of its Russia programs and that the EBRD had instituted 

changes to tighten the EBRD’s procedures for disbursing funds after the 

review.

• According to World Bank officials, none of their reviews have revealed 

any diversion of funds in Bank-supported projects in Russia. In June 

1999, the World Bank, in response to concerns from its Executive Board, 

introduced new procedures to improve controls over the tracking of 

counterpart funds in adjustment lending disbursements. In addition, the 

World Bank has completed a draft country procurement assessment 

review, which is under discussion with the government. While World 

Bank policy now calls for country financial accountability assessments 

for its borrowers, such an assessment has not been completed for 

Russia. This was a matter of concern to some executive directors when 

the board discussed Russia’s country assistance strategy in December 

1999. In May 1998, the World Bank posted a procurement specialist to its 

Moscow office, and he was later joined by a financial management 

specialist in August 1999. 

30 See International Monetary Fund: Status of Efforts to Strengthen Safeguards Over 

Lending (GAO/NSIAD-00-211, Sept. 1, 2000).
Page 105 GAO-01-8 Foreign Assistance to Russia

Chapter 4

Conclusions and Lessons Learned Chapte4r

After nearly a decade of experience, a number of conclusions can be drawn 

about what has and has not worked in the international community’s 

efforts to aid Russia’s economic transition, some with implications for the 

design of future programs. The overarching lesson is that without some 

degree of consensus and political will within Russia, the impact of donor 

programs is generally limited. Expectations of quick results at the 

beginning of the transition process were unrealistic, and the international 

community now realizes that Russia’s transition will be a lengthy one. In 

some areas, conclusions about what policies are appropriate remain 

difficult to draw. The surprisingly strong growth of Russia’s economy 

during the past 2 years, for example, illustrates that, in some respects, the 

evolution and functioning of the Russian economy is still not well 

understood and Russia and the international community will need to work 

together to determine how policies should evolve. 

Donors Assessing 

Status of Russia 

Programs

As of September 2000, the institutions and donors we reviewed are 

generally in the process of reevaluating, with the Russian government, the 

level and design of their assistance programs. Factors playing into these 

evaluations include: (1) the extent of Russia’s current need for foreign 

funding; (2) Russia’s desire for debt relief from bilateral creditors, which is 

conditional on having an IMF program; (3) the determination of what 

macroeconomic policies are appropriate at this point; (4) Russia’s choice of 

direction for the government in terms of a number of reforms ranging from 

restructuring inefficient enterprises to overhauling social protection 

policies; and (5) the Russian’ government’s commitment and ability to 

address fundamental obstacles to change caused by corruption and vested 

interests.

Of great interest to the international community has been the 10-year 

economic strategy adopted by the Putin government in July 2000. The plan 

lays out ambitious reforms that address many donor concerns about 

structural impediments to reform. Developed by Russian officials, the plan 

was discussed with representatives of the international financial 

institutions and other analysts during its formulation. Although the Duma 

has adopted some reforms called for in the strategy, it is too early to 

conclude the degree to which needed changes will be approved, 

implemented, and enforced. 

The international community is also closely watching political changes in 

Russia, with concerns about how proposals to alter the central-regional 

balance of power, for example, will play out. While some changes have 
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Conclusions and Lessons Learned

Page 106 GAO-01-8 Foreign Assistance to Russia

been viewed positively, such as Duma approval of systemic tax reform, 

others are being viewed with serious concern, particularly moves against 

independent media, nongovernmental organizations, and political 

opposition. Given the complexities of Russian politics and economics, and 

an 8-year track record of periods of optimism followed by frustration, both 

donors and the Russian government have been approaching the design of 

future assistance cautiously.

Conclusions Based on our work looking at the programs of five major institutions and 

donors over the period, the following conclusions appear to have strong 

support and particular importance. In some cases, they have clear 

implications for future assistance programs. 

• The challenge of Russia’s transition was enormous, greater than 

generally appreciated by the West, and far greater than those faced by 

Central European countries such as Poland and Hungary. Russia began 

the period with almost no exposure to the western market culture and 

principles it set out to adopt, and with a vacuum in terms of internal 

institutions to support a democratic society and market economy. In 

hindsight, expectations within Russia and among the donors of quick 

results were unrealistic. The transition process is likely to continue for 

many years. 

• Some aspects of transition assistance that the international community 

identified early on as important proved difficult to provide, for several 

reasons, and have continued to be obstacles to needed reforms. In 

particular, the lack of a social safety net to cushion the impact of 

transition on workers and vulnerable groups has increased the social 

cost of transition, decreased Russian public support for reform, and 

contributed to the difficulties of economic restructuring. 

• Russia’s transition path has been made harder by the concentration of 

power and income in the hands of a few, which had begun prior to the 

transition process and was accelerated through the privatization of 

some of the most valuable enterprises in Russian industry. Donors agree 

that, in some respects, opportunities for reform and openness to 

international influence had diminished by the mid-1990s. 

• Whether the international community, with different policies and levels 

of involvement, could have influenced a different path remains the 

subject of substantial debate. This question cannot be fully answered 

because what would have happened under alternative policies remains 

unknown. At different points, complicated political choices were made 

by international players. However, many officials and scholars admit 
Chapter 4

Conclusions and Lessons Learned

Page 107 GAO-01-8 Foreign Assistance to Russia

that, with hindsight, they would have made different choices in some 

cases. These include the push to privatize the largest firms quickly and 

the failure of the international community to object strongly to the 

loans-for-shares privatization program in 1995. 

• The donors’ initial expectation that Russians would accept and quickly 

implement advice proved unfounded. The transition to a market 

economy and democratic society in Russia required grassroots support 

and the development of effective institutions, laws, and enforcement. 

These changes have profound implications for Russian society and 

politics and required a degree of political consensus within Russia that 

did not exist for much of the decade.

• Little progress has been made in achieving reforms in areas where there 

has not been a commitment to reform and support from the Russian 

government, including the individuals and institutions with the authority 

to influence outcomes. It is ultimately up to those individuals to pass, 

implement, and enforce needed laws and develop and effectively 

operate the required institutions. Working to achieve and even identify 

adequate ownership has proved a challenge for all donors, however, 

because of change in Russian officials and government priorities. 

• The unexpectedly strong performance of Russia’s economy since the 

August 1998 financial collapse, due in part to high oil prices but also to 

increases in domestic production, underscores the limitations of how 

well the international community and Russians have understood the 

evolution and functioning of the Russian economy and demonstrates the 

lack of clarity regarding some policy choices. 

• The Russian government’s recent development of a long-term economic 

program demonstrates its capacity to seriously evaluate and debate the 

economic policy choices the country faces. Donors can take some credit 

for helping develop this capacity. The program and the debates 

surrounding its preparation also demonstrate that the policy choices 

facing the Russian government remain very hard ones.

Lessons Learned When taken together, these conclusions about past efforts to assist the 

transition in Russia have some important implications for future assistance 

efforts. Although there are no easy prescriptions for how best to support 

reform in Russia, the following lessons can be of value.

• In light of the realization that Russia’s transition to a market economy 

will take longer than anyone initially thought, to have the ability to make 

a significant impact, donor programs need to be structured for long-term 

involvement in Russia. For example, donors can help build grassroots 
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support for the development of institutions in Russia to underlie a 

competitive market economy within a democratic society. This is likely 

to require involvement over many years. Donor-sponsored exchange 

programs have been frequently mentioned as an effective mechanism 

for transferring to the Russians knowledge about and support for how 

market economies and democracy function. The impact of exchange 

programs can be felt over time.

• The Russian government should be encouraged to develop and 

implement policies that will lessen the impact of restructuring on 

vulnerable groups, which should strengthen public support for needed 

reforms in the economy. 

• Because progress on the path to democracy and a market economy may 

continue to remain uneven, donors need to maintain flexibility in their 

programs to the extent their mandates and instruments allow, so that 

they can respond to changing conditions and windows of opportunity.

• In light of the fact that Russian political will and consensus is so 

important to the success of reform efforts, donors may have a bigger 

impact if they concentrate their assistance efforts on the areas in which 

the Russians are open to making reforms. In many areas across the 

transition agenda, successful reforms may be geared toward policies 

and institutions that are in some respects different from western norms 

and reflect Russian priorities and experience. Working to develop 

commitment and buy-in as widely and deeply as possible within various 

levels of the Russian government and across society is likely to pay off 

in terms of assistance that will have the greatest benefit to the largest 

number of people.
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Page 110 GAO-01-8 Foreign Assistance to Russia

Appendix I

Additional Information on International Apendxies

Monetary Fund Programs in Russia ApendxiI

Background The International Monetary Fund, established in 1945, is a cooperative, 

intergovernmental, monetary and financial institution whose purpose is to 

promote international monetary cooperation. As of July 2000, it had 182 

member countries. The IMF’s Articles of Agreement (as amended), or 

charter, provides that it may make resources available, under “adequate 

safeguards,” to members experiencing balance-of-payments problems.1

 The 

resources are intended to shorten the duration and lessen the degree of 

these problems. 

Member countries govern the IMF through the Executive Board, which 

comprises 24 members, who are appointed or elected by one or more IMF 

member countries. The Executive Board is the IMF’s permanent decisionmaking body and conducts the institution’s day-to-day business. The United 

States is the largest contributing member2

 and therefore has the largest 

single share of voting rights on the IMF’s Executive Board (17.67 percent).3

Overall Objectives and 

Initial Assumptions

The IMF‘s broad objective in Russia, to assist the country to (1) achieve 

macroeconomic stabilization, (2) increase sustainable output growth, and 

(3) facilitate the transition to a market-based economy has remained 

generally consistent from the beginning of Russia’s transition period in 

1991 to the present. The IMF intended to gain macroeconomic stabilization 

through controlling inflation and achieving sustainable fiscal budgets and 

balance of payments.

The main assumptions that guided the IMF’s program for Russia were that

• the IMF would be Russia’s main adviser in the international community’s 

effort to promote macroeconomic stabilization and

1

A country’s balance-of-payments accounts summarize its dealings with the outside world. A 

balance-of-payments problem occurs when its normal receipts from external transactions 

(e.g., export earnings, grants, loans, foreign direct investment and other financial inflows) 

are less than its payments (e.g., imports, interest and amortization). This external deficit 

may be financed by drawing down the country’s international reserves and/or seeking 

exceptional financing, for example, IMF loans and debt relief.

2

When a country joins the IMF and later when IMF members agree to an increase in the 

IMF’s capital, the country pays a quota, or capital subscription, to the organization.

3

Japan (6.33 percent), Germany (6.19 percent), France, and the United Kingdom (5.11 

percent each) follow the United States in the number of voting shares allocated to them. 
Appendix I

Additional Information on International 

Monetary Fund Programs in Russia

Page 111 GAO-01-8 Foreign Assistance to Russia

• Russia did not require a fundamentally different approach than that for 

any other country transition country despite its unique history. 

The IMF’s Instruments The IMF uses a variety of instruments designed to deal with the specific 

nature of the problems facing member countries. These instruments 

generally contain three elements: (1) conditionality, or required policy 

measures; (2) technical assistance and high-level dialogue; and (3) 

financing. IMF staff work with the member country’s government to design 

a program that is mutually agreeable. Then the IMF’s Executive Board 

approves programs before they go into effect and before any 

disbursements are made.

Conditionality “Conditionality” is an important part of the IMF’s agreement with a member 

country. Access to and disbursement of IMF resources are conditional on 

the recipient country’s adoption and pursuit of economic and structural 

policy measures. Russia’s IMF programs have generally contained 

quantitative conditions including, for example, requirements for the level of 

net international reserves held by the central bank and the level of the 

federal budget deficit. Structural conditions, or benchmarks, such as 

banking sector, tax, and legal reform, have been included as well. 

Technical Assistance The IMF provides technical assistance to members to assist them in 

building technical expertise and competency in a variety of government 

functions. Most of the IMF’s technical assistance is given to the technical 

areas of the central bank, the Ministry of Finance, the Ministry of Trade, 

and the Ministry of Tax. The types of technical assistance provided include 

training in bank supervision, foreign exchange regulation, public debt 

management, and central bank. The assistance has been given in the form 

of seminars, workshops, training in the United States, and long- and shortterm visiting experts.

IMF Financial 

Arrangements Used In 

Russia

For member countries using most types of IMF financing arrangements, the 

resources are provided in increments. The IMF periodically reviews the 

IMF programs, at which time the country’s progress in meeting the agreedto conditions is examined, and the IMF Executive Board makes decisions 

on future disbursements. Although the IMF generally provides financing to 

countries’ central banks, in Russia’s case, on some occasions, the funds 
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went instead to the Ministry of Finance and were used to finance the 

government budget’s deficit. 

The IMF’s general instruments are as follows:

First Tranche Agreement: The First Tranche Agreement can be used 

provided that a member is making reasonable efforts to solve its balanceof-payments problems. A member can make use of IMF resources up to the 

limit of the first credit tranche, or 25 percent of its IMF quota, under fairly 

liberal conditions. 

Systemic Transformation Facility: Established in 1993, the Systemic 

Transformation Facility is a temporary means of providing financial 

assistance to members facing balance-of-payments difficulties arising from 

shocks to their economy due to a shift from a centrally planned economy to 

a market-based economy. Use of the facility was limited to loans up to 50 

percent of a member’s quota. New loans were not possible under the 

Facility after December 1995 and the Facility no longer exists. 

Stand-by Arrangement: A Stand-by Arrangement provides short-term 

assistance of generally one to two years for problems of a temporary 

nature, provided that the IMF member observes the terms set out in the 

supporting arrangement. This arrangement has conditionality requirements 

that a country is to meet in order to continue receiving disbursements. 

Extended Fund Facility: The Extended Fund Facility provides longer-term, 

balance-of-payments assistance aimed at overcoming balance-of-payments 

difficulties resulting from macroeconomic and structural problems. 

Typically, an economic program, which includes conditionality 

requirements, for use of this facility states the general objectives for a

3-year period and the specified policies for the first year; policies for 

subsequent years are spelled out in program reviews, or annually. 
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Funding History for 

Russia

The IMF has approved loans of around $37 billion for Russia and has 

disbursed $22 billion as of August 2000. Currently, Russia has repaid 

around $8.3 billion.4

 (See table 6 for the funding history of IMF programs 

with Russia.)

Table 6: Funding History of IMF Programs for Russia

Source: GAO analysis of IMF documents.

Strategy The IMF first began its involvement with Russia prior to Russia’s 

membership in the organization by participating in the 1991 “joint study” 

that reviewed the Soviet economy.5

 After the joint study was completed, the 

Soviet-IMF relationship was based on the Special Association of the Soviet 

Union to the IMF signed in October 1991, which led to the provision of 

4

The IMF’s lending amounts to its members are fixed in Special Drawing Rights (SDR)—an 

international reserve asset created by the IMF in 1969 as a supplement to existing reserve 

assets, whose value is defined in terms of a basket of major international currencies that 

fluctuates with market conditions. As of August 31, 2000, Russia owed the IMF $12.4 billion, 

or Special Drawing Rights 9.5 billion, based on an exchange rate of $1.305 per SDR. Since 

the 1990s, the value of the dollar has generally increased against the Special Drawing Right. 

Thus, to the extent that the dollar-Special Drawing Right rate is stronger at the time of 

repayment than at the time of borrowing, it requires fewer dollars to pay off the Russia 

Special Drawing Right debt.

Type of IMF program 

IMF board 

approval date

Amount 

approved

Amount 

disbursed

First Tranche Agreement August 5, 1992 $1 billion $1 billion 

Systemic Transformation Facility

First Tranche

June 30, 1993 $1.5 billion $1.5 billion 

Systemic Transformation Facility

 Second Tranche 

March 22, 1994 $1.5 billion $1.5 billion 

Stand-by Arrangement April 11, 1995 $6.8 billion $6.8 billion 

Extended Fund Facility (3 years) March 26, 1996 $10.1 billion $6.2 billion 

Interim financing package July 20, 1998 $11.2 billion $4.8 billion 

Stand-by Arrangement July 28, 1999 $4.5 billion $640 million 

5

 The report, “A Study of the Soviet Economy,” was done by the IMF, the World Bank, the 

European Bank for Reconstruction and Development, and the Organization for Economic 

Cooperation and Development and was issued in February 1991.
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technical assistance by the IMF. Russia joined the IMF in June 1992 and has 

negotiated seven agreements with the institution.

In Russia, the IMF has generally followed its traditional approach of 

requiring conditionality. Several aspects of IMF policies and conditionality 

in Russia, however, have been subject to recent debate, particularly given 

Russia’s 1998 financial crisis and the country’s subsequent relatively strong 

performance since the last quarter of 1998. 

Some of these debates have to do with “technical issues” such as the 

exchange rate policies supported by the IMF. Others relate to whether the 

IMF paid adequate attention to the structural problems in the economy, 

such as indirect government subsidies and low tax collection rates. A 

controversial aspect of the IMF policy debate is whether the IMF was “too 

soft” on Russia, providing additional disbursements when Russia did not 

necessarily meet requirements. In addition to conditionality and financing, 

the IMF has also given technical assistance to Russian ministries and the 

Central Bank of Russia.

The IMF’s task in Russia was complicated by several factors. Russia’s 

economic transition was politicized both in Russia and abroad, and the 

Russian political consensus and will required to implement reforms were 

often nonexistent or difficult to attain. This situation dominated decisionmaking and reform implementation during the course of the IMF’s 

involvement in Russia. While the IMF’s initial broad strategy of controlling 

inflation and achieving sustainable budgets and balance of payments 

remained generally consistent over time, actually achieving these goals has 

proven elusive. Despite repeated difficulties in achieving macroeconomic 

stabilization, the IMF Executive Board has made the decision to remain 

engaged in Russia.

As discussed in chapter 2 and later in this appendix, the evolution of the 

IMF’s strategy can be broken down into four stages: (1) efforts primarily to 

control inflation to bring about macroeconomic stabilization from 1992 to 

1995; (2) continuing efforts to control inflation with increased stress on 

structural reforms from 1996 to mid-1998; (3) efforts to support the Russian 

government to help it deal with a growing financial crisis from July to 

September 1998; and (4) continued support of the Russian government 

with little funding in 1999 and 2000. 
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Efforts to Control Inflation: 

1992-1995

During 1992-95, the IMF’s primary goal in Russia was to reduce 

macroeconomic imbalances, particularly inflation, and to stabilize the 

macroeconomy. According to an IMF official, controlling inflation was 

paramount because inflation adds to uncertainty in the economy and 

discourages investment. Although the focus of the IMF’s programs was to 

reduce inflation, the structure of the programs evolved according to 

agreements made between Russia and the IMF concerning Russia’s 

perceived needs. 

The first agreement, in August 1992, was a first tranche agreement of

$1 billion—a 5-month package with a relatively limited number of 

conditionality requirements that sought to reduce inflation. To do so, 

Russia agreed to (1) cut its budget deficit by 11.5 percent of its gross 

domestic product (GDP), (2) limit money creation by the central bank, and 

(3) support a flexible exchange-rate policy within the framework of a ruble 

zone.6

 In addition, the program stipulated that the entire amount of the IMF 

loan was to be held as reserves by the Central Bank of Russia. The IMF 

funds could not be used to support the budget. The central bank financed 

the budget deficit by supplying credits, which was inflationary. According 

to IMF documents, Russia did not consistently implement the program. 

Moreover, Russia failed to achieve the goal of reducing inflationary 

pressures and progress on structural measures was mixed, particularly in 

the area of privatization. 

1993 The IMF created a temporary Systemic Transformation Facility in 1993 

because it recognized that some transition countries, including Russia, 

were not ready to meet the terms for full conditionality required under a 

Stand-by Arrangement. In June 1993, the IMF’s Executive Board approved a 

$1.5 billion loan to Russia from the Systemic Transformation Facility. IMF 

documents stated that the main goal was to reduce the monthly percentage 

rate of inflation to a “low single digit level.” Russia was to do so by limiting 

credit creation and reducing the government deficit to 10 percent of GDP. 

6

 Following the collapse of the Soviet Union, Russia and the other former Soviet republics 

(except the Baltics) agreed to maintain the ruble as their common currency, with the money 

supply controlled by the Central Bank of Russia. The newly created central banks from the 

republics were eager to expand their domestic credit, largely by obligating the Central Bank 

of Russia to provide financing and trade subsidies borrowing from the Central Bank of 

Russia. This indirect source of inflationary pressure led to Russia’s withdrawal from the 

ruble zone in July 1993, contributing to its ultimate collapse. The Russians decided to 

discontinue making automatic extensions of credit to other central banks in July 1, 1992, 

which led to the creation of separate currencies. 
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In addition, Russia agreed to meet some limited structural measures under 

the program, including further liberalizing the exchange rate and trade 

system and continuing with privatization and financial reforms. 

According to IMF documents, the Systemic Transformation Facility 

program went seriously off track because the Russian government failed to 

abide by key commitments such as meeting the budget deficit target. 

According to a Russian government official, in September 1993, the 

Minister of Finance asked the IMF to discontinue the program because it 

was clear that the program had gone off track and that he would have more 

leverage within the government to improve the situation if there was no 

IMF financing. In late 1993, there was a marked shift in the political 

environment in Russia. Between October’s attempted parliamentary 

rebellion and December’s parliamentary elections, the government was 

briefly able to make some economic policy moves, bringing the Central 

Bank of Russia under executive control, reducing the budget deficit to 10 

percent of GDP, breaking up the ruble currency zone, and abolishing most 

export quotas. However, the decline in the deficit was problematic: it was 

achieved by not paying wages and pension benefits to the Russian people. 

In the December 1993 parliamentary elections, the Russian public voted 

against the government “reformers” who, in turn, suffered heavy losses to 

the ultranationalists and Communists.

1994 In March 1994, despite concerns regarding poor implementation of the first 

program, the IMF Board approved a new $1.5 billion Systemic 

Transformation Facility program to show support for the Russian 

government. According to an IMF official, the IMF Managing Director was 

under heavy pressure to approve the program. This agreement was reached 

with a Russian government that had changed significantly. The December 

1993 Duma elections had been widely viewed as a sharp repudiation of 

reform efforts and of the federal government by the Russian people—

Communists and ultranationalists who had gained seats in the December 

1993 parliamentary elections were not supportive of the IMF’s reform 

efforts. According to a Russian government official, a key reason for 

agreeing to go ahead with the Systemic Transformation Facility program, 

however, was the general concern at the time that without western support 

for Russia, there would be a heightened possibility of Communists taking 

over the government. 

The main goals for the second Systemic Transformation Facility were to 

reduce the monthly rate of inflation to 7 percent by the end of 1994 and to 

increase gross international reserves to approximately $10 billion by that 
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time. To achieve these objectives, the program conditions called for 

reduced expansion of the money supply by the Central Bank of Russia and 

a significant decrease in the budget deficit. However, by the end of the year, 

the IMF staff viewed Russia’s overall performance as significantly worse 

than programmed. End-year inflation was more than twice as high as 

targeted, the net international reserve target was missed by a significant 

margin, and fiscal policy began to move considerably off track starting midyear due to continued weak revenue collection and an increase in 

government expenditures. In addition, the Russian currency devalued by 20 

percent against the U.S. dollar in one day in the October 1994 exchangerate crisis known as “Black Tuesday.” This crisis, however, had the positive 

effect of leading to greater Russian government resolve to achieve 

macroeconomic stabilization in 1995.

1995 The IMF Board approved a new 1995 Stand-by Arrangement of $6.8 billion 

for Russia based on its assessment that the chances of implementing the 

agreed-upon program were better than they had been in the past. Russia 

had a more favorable political situation—the Russian President had 

replaced his economic policy team with more reform-minded players. At 

this point, the IMF changed from the limited conditionality and financing of 

the Systemic Transformation Facility to a stricter approach with 

considerably more financing under the Stand-by Arrangement. Not only 

were the conditions stricter, but also monitoring was also more frequent as 

Russia agreed to unprecedented monthly and quarterly IMF program 

reviews. 
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The key objectives of the 1995 program were to bring the monthly rate of 

inflation down very quickly to a rate of 1 percent. Russia was to achieve 

this by limiting the growth of the central bank credit to the government to

3 and restricting the government and Central Bank of Russia from 

extending credits or government loans to clear interenterprise arrears.7

 The 

government agreed to nearly halve the government deficit to 6 percent of 

GDP. The program also called for a continuation of the privatization 

program, including sales of public enterprises and large blocks of shares of 

those companies for cash. Privatization revenues were to be used to 

finance part of the budget deficit. During the 1995 Stand-by Arrangement, 

Russia’s primary goal of reducing inflation was achieved, despite internal 

political pressures. The IMF reported that Russia was able for the first time 

to meet all of its macroeconomic targets, including its budget deficit 

target.8

 In addition, the Russian government passed the 1995 Budget Law 

that prevents the Central Bank of Russia from providing direct credit to the 

government. Also, in July 1995, in an attempt to stabilize market 

expectations, the IMF agreed to Russia’s proposal to shift from a flexible to 

a banded exchange rate.9

Although there were significant positive changes in Russia in 1995, 

underlying problems in the economy began to emerge. Although Russia 

met its 1995 budget deficit targets, it was recognized at that time that the 

underlying budgetary situation was problematic and complicated by 

several factors. Russia met its budget deficit target by accumulating 

politically unpopular wage and pension arrears due to a shortfall in budget 

revenues. Although tax evasion was common, the shortfall in tax revenue 

collection in 1995 was also related to the lower inflation rate. In previous 

years, the nominal ruble revenue receipts were higher than expected 

because actual inflation was higher than projected. Expenditures were not 

indexed to inflation, and the budget deficit in ruble terms was reduced. 

With lower than projected inflation in 1995, the amount of nominal revenue 

receipts was less than projected, leading to a higher than anticipated ruble 

7

 Interenterprise arrears occur when one enterprise does not pay another enterprise for 

goods or services.

8

 A 1999 PriceWaterhouseCoopers audit shows that in 1995, Russia misreported required 

information pertaining to performance criteria to the IMF. The corrected figures show that 

Russia missed 2 targets during 1995.

9

 A “banded exchange rate” is a mechanism in which the Central Bank of Russia undertook 

supporting measures and policies that attempted to maintain the exchange rate within a 

preannounced upper and lower range.
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deficit. According to the IMF, Russia was able to meet its 1995 targets since 

the budget used outlays, not counting arrears, to measure the deficit. After 

the IMF recognized this trend, and as timely information on arrears became 

available, it changed the definition of budget expenditure so that arrears 

were also accounted for as part of the deficit, according to an IMF official. 

Inflation was reduced in part through the government’s adoption of a 

banded exchange rate and in part by the government’s pursuing supporting 

macroeconomic policies such as controlling the growth of the money 

supply and using government securities, called GKOs/OFZs, yielding high 

interest rates, for nonmonetary financing of the budget deficit. Although 

the exchange rate was relatively stable during this period, some argue that 

the Russian government maintained an overvalued exchange rate. While 

such a rate may have been suitable for the overall balance of payments, it 

made domestically produced goods less competitive with imported goods 

for the Russian consumer. In hindsight, the exchange rate issue became 

increasingly important because it led to a decline in domestic industrial 

output. 

Toward the end of 1995, the Russian government faced serious pressures to 

raise revenue to pay increases in pensions and wage arrears and to finance 

reconstruction after the war in Chechnya in the runup to the 1995 

parliamentary elections. In October 1995, the Russian government began its 

loan-for-shares program,10 which resulted in privatizing some of Russia’s 

most lucrative metal and energy enterprises for significantly less revenue 

than their market value—about $1 billion was raised. The loans-for-shares 

program dramatically altered the Russian economy, placing wealth in the 

hands of a few politically well-connected businessmen, called “oligarchs.”

10 The 1995 loans-for-shares scheme auctioned ownership of some of Russia’s most valuable 

companies (oil, metals, shipping) as collateral for hard currency loans and, in some cases, 

payment of some of the firms’ tax arrears. Although the original plan called for open 

auctions, foreign investors were barred, while banks acting as the manager for a particular 

auction were allowed to submit bids −those managers won 2 of the 12 auctions. Suspicions 

of corruption were heightened by unexpectedly low bids: the loans yielded only 60-90 

percent of the market value of the shares −and in eight cases, the winning bids were within 6 

percent of the preestablished minimum bid. Although the scheme was presented as 

reversible, as of August 2000, the government had not repaid any of the loans nor had banks 

resold the shares they obtained. Donors, international financial institutions, Russian and 

U.S. officials, and academics we met with described the loans−for-shares scheme as highly 

corrupt.
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A Russian official we spoke with referred to the program as the “giving 

away of the family silver.” According to IMF documents, the IMF raised 

concerns about potential abuses of the loans-for-shares program when it 

was initially presented by the Russian government, but were assured that 

the government would exercise strong oversight to ensure the program 

operated fairly. The final scheme differed in important respects from the 

one discussed with the IMF, and was implemented in a nontransparent and 

collusive manner. IMF staff noted these concerns in their staff reports in 

the fall of 1995 prepared for board reviews of the program, but 

recommended that the reviews be completed, and that disbursements 

continue to be made. The board approved these recommendations. In light 

of concerns over the loans-for-shares operation, the 1996 IMF program 

included Russian government commitments to transparency and an evenhanded privatization methodology. 

Continued Emphasis on 

Controlling Inflation and 

Increased Stress on 

Structural Reforms: 1996 to 

Mid-1998

In March 1996, Russia and the IMF agreed to a 3-year Extended Fund 

Facility arrangement that signified a shift to focusing more on structural 

reforms than in previous programs. In the run up to the June presidential 

elections, a number of developments caused Russia difficulties in meeting 

fiscal targets, and the IMF modified the targets. The 1997 program 

emphasized tax collection targets to try to address Russia’s budget deficit 

problem. As for the 1998 program, it was affected by a worsening economic 

situation in Russia.

1996 In 1996, Russia and the IMF embarked on a 3-year, Extended Fund Facility 

arrangement of $10.1 billion that marked a strategy shift from a focus on 

stressing macroeconomic stability to one that now included greater 

emphasis on implementing structural reform measures. The conditions for 

each year of the 3-year program were negotiated at the beginning of that 

year. According to an IMF official, the move from a Stand-by Arrangement 

to an Extended Fund Facility was predicated on the IMF Board’s belief that 

Russia had made progress in stabilization and should focus on needed 

structural reforms. This agreement was the second largest loan the IMF 

had ever extended to one of its members.
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At the time the 1996 program was being negotiated, serious budgetary 

imbalances existed. At the heart of the fiscal deficit problem was poor tax 

collection and government deficit spending. In addition, while many of the 

macroeconomic conditions negotiated in this program were similar to 

those of previous programs, meeting structural benchmarks played a much 

larger role in this arrangement.11 Compared to earlier programs, the 

requirements for making structural reforms in the Extended Fund Facility 

were broader and more numerous than in previous programs, focusing on 

areas including strengthening the banking sector, privatization and 

restructuring of public enterprises, and energy sector taxation. At the same 

time, non-resident access to GKOs was officially permitted to provide an 

additional source of budgetary financing.

For the first half of 1996, Russian presidential election concerns dominated 

western decision-making toward Russia. According to a Russian official, 

President Yeltsin’s reelection over Communist opposition was important to 

the west and the IMF and, despite Russia’s poor performance, the IMF 

could not delay or suspend the program. According to the IMF, fiscal 

discipline eroded as the government increased spending to pay back wage 

and pension arrears. The IMF staff visited Russia on a monthly basis and 

frequently modified targets. According to the IMF, these target 

modifications were made because of unexpected events, especially the 

large capital outflow in advance of the presidential elections that made 

those targets unattainable.

Another factor that contributed to Russia’s poor performance, according to 

an IMF official, was that in 1996, government leadership had changed and a 

less experienced team was attempting to implement the measures. As a 

result, while Russia had success in moderating inflation−the monthly 

average inflation rate for 1996 was 1.7 percent—it achieved less success in 

meeting its fiscal goals. After Russia’s repeated failures to address its 

budget deficit, the IMF included a cash revenue receipt target as one of its 

quantitative performance criteria. For 1996, however, the federal budget 

deficit registered 6.3 percent of GDP instead of the planned 4 percent. In 

addition, federal revenues fell from 10.5 percent of GDP in 1995 to only 9.5 

percent in 1996. Furthermore, although Russia had achieved limited 

structural reforms in instituting banking and tax-related fiscal measures 

and meeting many of the IMF macroeconomic conditions, progress in 

11 “Benchmarks” are points of reference against which progress may be monitored, but 

disbursements are generally not dependent upon meeting them.
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meeting IMF program goals generally fell short of its targets. IMF staff 

noted that, in hindsight, the structural work plan might have been too 

ambitious for Russia to manage, given Russia’s limited institutional 

capacity. 

1997 Approval of the 1997 Extended Fund Facility program came after Russia 

implemented a series of “prior actions,”12 all of which were structural 

measures. These included submission of the tax code and a new 1997 

spending plan to the Duma,13 a crackdown on large tax debtors, and the 

announcement of transparent privatization measures. Russian tax revenues 

were targeted to increase, on average, to 8.3 percent of GDP in 1997, 

compared to 7 percent in 1996. 

Despite measures to improve tax collection, the lack of collection had 

become a perennial problem and, according to IMF officials, constant 

changes in government leadership and unclear federal government 

authority had contributed to the difficulties. In addition, an IMF official 

also stated that some government leaders fundamentally did not believe 

that tax collection was a priority and, at times, hindered efforts to collect 

taxes from large debtors. 

According to an IMF official, over time, there was extreme concern that tax 

revenues in cash were not being recovered in Russia and that “tax 

offsets”— allowing firms to pay in-kind rather than in cash—promoted a 

culture of barter and nonpayments. The business community in Russia 

argued that it’s total tax burden, should it fully comply with the tax laws, 

would leave an enterprise with almost no after-tax profit.14 However, 

according to an IMF document, a firm’s total tax obligation was widely 

viewed as a “negotiated settlement” between a firm and its tax inspector. 

The inspectors exploited the ambiguities in the tax code to adjust a firm’s 

assessment and extract bribes. As a result, IMF documents state that tax 

12 “Prior actions” are policy measures that the IMF views as key to the effectiveness of a 

country’s program. They may have to be implemented before the IMF board approves an 

IMF arrangement or disbursement. Such actions are particularly important if severe 

macroeconomic imbalances exist or in cases where the record of policy implementation has 

been weak.

13 The Duma is the lower house of Russia’s parliament.

14 IMF documents state that for a firm to give an employee a take-home wage of $1,000 each 

month, the firm’s total cost after taxes would be around $1,903.
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evasion, by concealing income or nonpayment, had become increasingly 

sophisticated.

A stronger economic reform team; lower interest rates; and a large, 

transparent privatization venture increased Russian optimism despite fiscal 

imbalances and constant political conflicts between the President and the 

Duma. According to preliminary data, after 6 years of deep output declines 

the Russian economy had begun to turn around in 1997. This led to 

discussions in September 1997, in some circles, about the IMF’s ending its 

assistance to Russia. In late 1997, however, the Asian financial crisis 

quickly spread to Russia, and Russia’s economic recovery was halted. 

In November 1997, a combination of domestic factors, such as a continuing 

large budget deficit, and external factors such as the aftermath of the Asian 

financial crisis and a sharp decline in world oil prices, led to pressures on 

the exchange rate. To support the ruble exchange rate, Russian authorities 

intervened in both the government securities (GKO) market by raising 

interest rates and the foreign exchange market. According to an IMF 

official, the IMF advised the authorities to support the exchange rate by 

continuing to raise interest rates in an effort to stem capital outflows, 

rather than expending reserves. The rise in interest rates was insufficient to 

stem the capital outflows and, in 3 weeks, the Central Bank of Russia 

expended approximately 25 percent of its international reserves before 

raising interest rates more decisively, which succeeded in stabilizing the 

situation. The rise in interest rates, however, also had the effect of 

weakening the commercial banks because it reduced the value of their 

current GKO securities holdings. Despite these efforts, there was 

significant capital outflow at the end of 1997. 

According to IMF documents, at the end of 1997 the IMF and Russia 

created a fiscal action plan focused on tax collection and expenditure 

measures in order to bring the fiscal side of the program on track. On the 

revenue side, the plan included a measure to eliminate tax offsets, improve 

compliance by large tax debtors, and establish the right to seize and sell 

assets. Limits on energy consumption and administrative sanctions on 

officials who overspend their budgets were included on the expenditure 

side. By the end of 1997, however, IMF staff conceded that little had been 

accomplished on fiscal issues, particularly in the area of tax collection. 

Early 1998 The 1998 Extended Fund Facility program was negotiated against the 

backdrop of pressures in Russia’s financial markets, weaknesses in oil 

prices, and unexpected changes in government leadership. Due to Russia’s 
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poor performance in 1997, the 1998 IMF structural reform program 

required that Russia take a wide range of measures as prior actions before 

the IMF board would consider a disbursement. Structural reforms that 

would have important macroeconomic impact over the medium term were 

designated benchmarks. Some of the structural measures were taken from 

the November 1997 action plan and included (1) collecting taxes from large 

tax debtors, (2) identifying additional expenditure cuts needed to observe 

the program targets, and (3) establishing better monitoring and controls 

over expenditure.

Despite a developing crisis in Russia and reversal of market confidence, the 

1998 Extended Fund Facility package was not agreed to until June 13, 1998. 

According to a Russian official, a change in government in March led to 

further discussions and renegotiations that delayed the process. On June 

30, 1998 Russia received its first financial disbursement in 6 months. Only a 

few weeks later, a massive financial crisis hit Russia.

Support Government 

Efforts to Deal with a 

Growing Financial Crisis: 

July-September 1998

On July 20, 1998, in support of strengthened Russian government policies, 

the IMF agreed to lend Russia $11.2 billion in an interim package to ease 

the financial crisis that threatened to collapse the country’s fragile 

economy; the IMF immediately disbursed $4.8 billion. In addition to IMF 

assistance, other sources announced additional financing bringing the 

entire package to over $22 billion. The announcement of the IMF’s 

additional policy package had a positive, but very short-lived, effect on 

Russia’s financial markets.
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Prior to the first disbursement of the July 20 interim package, IMF and 

Russian government officials agreed to seek implementation of several 

prior actions including tax revenue, government budgeting, and pension 

measures. While President Yeltsin issued presidential decrees to ensure the 

implementation of many of the measures, the Duma delayed passing 

personal income tax and pension legislation. As a result, the IMF reduced 

the amount of the first disbursement from $5.6 billion to $4.8 billion. The 

government also offered to investors a voluntary debt exchange of 

government securities (GKOs) for longer-term Eurobonds in July 1998. 

Only about $6.5 billion of these government securities out of approximately 

$40 billion were exchanged.15 The lack of significant response was 

interpreted as demonstrating that the markets had regained some 

confidence, according to a Russian government official. A Russian 

government official stated that overall, the package had temporarily 

increased investor confidence and the Russian government had believed 

that the crisis was temporarily halted.

In mid-August, however, market sentiment changed. As a result, domestic 

investors who had lost confidence in the government’s ability to undertake 

reform led the massive capital outflow by converting their rubles into hard 

currency. Foreign investors—who may have believed that Russia was too 

big or too much of a nuclear power to fail—followed. IMF officials told us 

that, in hindsight, they recognize that no package may have been large 

enough to overcome investor concerns regarding Russia’s fiscal and 

balance-of-payments situation. In addition, the IMF reduced the initial 

tranche based on the Duma’s unwillingness to take action on key 

legislation. Investor confidence in the government’s ability to deliver on the 

overall package fell. During this time, the Russian President announced 

that the government would maintain the value of the ruble.

15 Of this amount, $4.5 billion was exchanged by Sberbank, a Russian government bank.
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On August 15, the Russian government and IMF officials met to negotiate 

strategies for handling the ensuing crisis. According to a former official of 

the Central Bank of Russia, the Russian government’s major concerns at 

the time were related to the (1) government’s inability to service its 

government securities (GKO) debt, (2) cost of maintaining the ruble band, 

and (3) foreign banking sector/external debt. The Russian government 

initially suggested a plan that provided for unequal treatment of domestic 

and foreign investors;16 however, the IMF advised against it. Instead, the 

Russian government decided unilaterally to restructure the government’s 

ruble denominated securities (GKOs). In addition, it decided to widen the 

exchange rate band in order to allow the ruble to depreciate within the 

band and to declare a 90-day moratorium on external commercial debt for 

the banking sector. The Russian government informed the IMF of its plans.

Although the government placed a 90-day moratorium on 

commercial/banking external debt repayments, the remaining actions were 

more complicated. The government failed to clearly articulate a 

government securities (GKO) debt conversion scheme, adding to rising 

market uncertainty and upheaval after the Prime Minister was fired. 

Political factors at play within Russia during that period had a serious 

impact on the financial crisis. Although a new candidate for Prime Minister 

was nominated to replace the current Prime Minister, the Duma twice 

rejected his nomination. While the President and the Duma were engulfed 

in a political battle over the prime ministership, and despite heavy 

intervention by the Central Bank of Russia, the ruble continued to 

depreciate until the central bank finally allowed the ruble to float; the ruble 

then sharply devalued by over 40 percent in early September.

During this time, Russia missed interest payments due on August 20 on 

sovereign (government) debt dating from the Soviet era. In addition, the 

Central Bank of Russia offered a line of credit to the government because 

the 1995 central bank law prevented direct financing to the government. 

Meanwhile, the central bank continued to provide liquidity to the banking 

16 The Central Bank of Russia viewed the key issue for residents as that government 

securities (GKOs) were the only liquid financial instrument available to banks and finance 

companies and the key issue for nonresidents as minimizing currency loss and maintaining 

the value of the investment. Thus, the central bank proposed that residents would receive 

20-25 percent cash, exchanging the remaining value into 1-, 2-, or 3- year ruble securities 

with 50, 40, and 30 percent interest rates. For nonresidents, the central bank proposed to 

convert ruble securities into dollar-denominated securities with low interest coupons and 

maturities of 5-7 years. 
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system while, at the same time, it was selling dollars for rubles to maintain 

the exchange rate band in the face of capital flight. 

Immediately after the financial crash and before the July 1999 program, 

IMF officials stated that their primary post-crisis strategy was to remain 

involved in Russia to stabilize the situation. The IMF provided Russia with 

assistance and advice and conducted assessments of the post-crisis 

situation in the country. In addition, the IMF was attempting to negotiate a 

new program. According to an IMF official, the new government’s 

announced monetary policy was geared toward creating money to pay off 

budgetary arrears. However, the government modified its intended policies 

because of concerns about hyperinflation and exchange rate pressures. 

Continued Support of the 

Government, with Limited 

Funding Provided: 

1999-Present

On July 28, 1999, almost 1 year after the financial crisis in Russia, the IMF 

approved a 17-month stand-by credit under a Stand-by Arrangement for 

Russia for approximately $4.5 billion to support the government’s 1999-

2000 economic program. The first—and only—disbursement of $640 

million for this program was retained in Russia’s account at the IMF to be 

used for servicing Russia’s debt to the IMF. According to IMF documents, 

the IMF executive directors were willing to approve the 1999 program 

because they wanted to focus the program on fiscal improvements and 

structural reforms in light of the difficult, post-crisis economic situation in 

Russia. 

For the 1999 program, both structural and macroeconomic measures were 

included. The ruble exchange rate policy strategy shifted back to a flexible 

exchange rate policy allowing only limited intervention from the Russian 

authorities. New taxes, raising existing tax rates, as well as measures to 

improve tax compliance, were also stipulated. The IMF also required the 

Central Bank of Russia to undergo an investigation of its financial 

transactions with its subsidiaries due to allegations of the inappropriate 

use of funds.17 The program targeted an annual inflation rate of 50 percent 

in 1999, compared to 84.5 percent in 1998. Net international reserves were 

to increase by $2.2 billion in 1999, with gross reserves to be at least $1.7 

billion during the last three-quarters of the year. Moreover, real GDP was 

assumed to decline by 2 percent in 1999. 

17 See International Monetary Fund: Status of Efforts to Strengthen Safeguards Over 

Lending.
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The 1999 program was short lived. In December 1999, for the first time, the 

IMF, delayed a scheduled disbursement based on Russia’s failure to meet 

structural benchmarks, while all macroeconomic requirements had been 

met. According to IMF staff, structural reform has become increasingly 

important in the task of achieving macroeconomic stabilization and, as a 

result, they held performance on these benchmarks to a higher standard. 

The IMF later stated that Russia had been required to meet several 

benchmarks related to financial audits of government agencies, tax 

collection, and legislation, which it had missed. Russia did not complete 

those structural benchmarks, and no further disbursements have been 

made. 

Although the IMF has not made any disbursements to Russia since July 

1999, it has continued to remain engaged in Russia through policy dialogue, 

program discussions, technical assistance, and its usual surveillance 

activities for members. IMF and World Bank staff have worked together on 

technical assistance missions, primarily to assist Russia with banking 

sector reform and restructuring.

Despite dire economic projections, however, in mid-1999, the Russian 

economy began to experience economic growth, largely due to a stronger 

than expected increase in domestic production. The increase in domestic 

production has been led by higher demand for less expensive domestically 

produced goods, as the devalued ruble made imported goods relatively 

more expensive. In addition, oil prices had begun to rise from their 

historically low 1997 prices. Although the IMF states that Russia’s future 

balance-of-payments outlook is uncertain, Russia has emerged from these 

changes in 1999 with a substantial balance-of-payments surplus,18 a budget 

deficit of only 1.7 percent of GDP, and a real GDP growth rate of 3.2 

percent. For 2000, the IMF forecasts a balance-of-payments surplus 

exceeding 13 percent of GDP, a budget surplus of more than 4 percent of 

GDP, and real GDP growth of 7 percent.

As of August 2000, the IMF was in the process of negotiating a new 

program with Russia. While the specifics of the program are unclear, IMF 

officials cited that the IMF program would seek structural reforms in three 

main areas: tax reform, banking reform, and barter and arrears. In addition, 

the IMF program will continue to focus its attention on macroeconomic 

stabilization and fiscal and monetary policy.

18 The 1999 current account surplus was $25 billion, more than 11 percent of Russia’s GDP.
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Lessons Learned Unlike donor agencies and some international institutions, the IMF has not 

formally identified institutional lessons learned from its years of 

involvement in Russia. However, through our review of IMF documents and 

discussions with IMF officials about their own experiences with Russia, 

some relevant lessons learned have surfaced. 

• The IMF underestimated the complexity of Russia’s transition process, 

in which the economic and political dimensions were intertwined. 

• Russian political will is necessary for IMF programs to succeed.

• Russia’s economic program is more likely to succeed if it is designed by 

the Russians themselves. The IMF’s worldwide experience shows that 

economic programs are most likely to succeed when they are “owned” 

by the country implementing them.

• Achieving sustained, equitable growth in Russia will take a 

strengthening of macroeconomic stability and an intensification of 

sectoral structural reforms, including improving the social safety net. 
Page 130 GAO-01-8 Foreign Assistance to Russia

Appendix II

Additional Information on World Bank 

Assistance to Russia ApendxiI

Background Since its inception in 1945, the World Bank has grown into a family of five 

related institutions known together as the World Bank Group.1

 In addition 

to the International Bank for Reconstruction and Development, the 

International Finance Corporation—the arm of the World Bank established 

in 1956 to finance private sector investments in developing countries—has 

also been active in Russia.2

 We did not specifically examine the 

International Finance Corporation’s lending program for Russia in this 

review.3

 Rather, our work focused on assistance provided by the 

International Bank for Reconstruction and Development.

Today, the World Bank is the largest source of market-based loans to 

developing countries and is a major catalyst for similar financing from 

other sources.4

 Its stated purpose is “to reduce poverty and improve living 

standards for people in the developing world.” The World Bank has 182 

members and a 24-member Executive Board—the Bank’s primary oversight 

and decision-making body. The board decides overall World Bank policies, 

reviews country assistance strategies, and approves specific project 

proposals presented by the President of the Bank. As the largest 

contributing member of the World Bank, the United States holds the 

greatest number of voting shares (16.5 percent) on the Bank’s Executive 

1

 The World Bank Group comprises the International Bank for Reconstruction and 

Development, the International Development Association, the International Finance 

Corporation, the Multilateral Investment Guarantee Agency, and the International Center for 

Settlement of Investment Disputes. 

2

 The focus of the International Finance Corporation’s efforts in Russia has been 

privatization and capital markets. From the time Russia became a member in 1993 through 

August 31, 2000, the Corporation has approved $458 million in financing for 36 projects in 

Russia: $276 million in loans, $154 million in equity, $11 million in quasi-equity, and $17 

million in a risk-held portfolio. As of August 31, 2000, the Corporation’s disbursed and 

outstanding portfolio in Russia stood at $256 million; $54 million in disbursements were 

pending.

3

 We also did not review the Multilateral Investment Guarantee Agency, which has an 

outstanding portfolio in Russia consisting of 10 contracts of guarantee for a total gross 

exposure of $269 million (net exposure of $127 million). The Agency has facilitated a total of 

$1.17 billion in foreign direct investment in Russia. Its portfolio is composed of 

manufacturing (47 percent), financial (40 percent), and mining sectors (12 percent).

4

 The World Bank obtains most of its funds through the sale of bonds in international capital 

markets. Its lending terms are the average cost of borrowings plus a spread (typically less 

than 1 percent) for 12- to 20-year maturities, with a 3- to 5-year grace period for repayment 

on most loans.
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Board.5 Russia, which has 2.8 percent of the voting shares, is also 

represented by an executive director on the Board. 

Overall Objectives and 

Initial Assumptions

The World Bank’s stated broad strategy for Russia has focused on three key 

objectives:

• Support Russia’s transition to a market economy based on private sector 

initiative.

• Protect the poor and vulnerable groups.

• Develop and strengthen institutions.

The main assumptions that guided the World Bank’s program of assistance 

for Russia in the early years included the following:

• To shore up support for reform, the World Bank needed to move quickly.

• To have meaningful impact, the World Bank had to implement 

concurrent programs in several sectors because of Russia’s size.

• To encourage change, Bank projects were to be implemented at the 

regional and local levels.

The World Bank’s 

Instruments

To help Russia and other member countries with their development needs, 

the World Bank offers two basic types of lending instruments:

1. Investment or project loans that support investment activities with a 

long-term focus of 5 to 10 years. Most of the World Bank’s lending has 

historically been for investment projects such as building roads and 

bridges, providing basic services in health and education, and 

increasing agricultural production.

2. Adjustment loans that provide quick-disbursing external financing to 

support policy and institutional reforms, generally with a short-term 

focus of 1-3 years. These loans are often used to finance balance-ofpayments support while policy and institutional reforms are being 

implemented and to foster long-term economic growth.

5

 Japan (7.9 percent), Germany (4.5 percent), France and the United Kingdom (4.3 percent 

each) follow the United States in the number of voting shares allocated to them. 
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The World Bank also offers guarantees to cover risks that the private sector 

is not normally in a position to absorb or manage. The first such project 

guarantee for Russia was approved in May 1997. The guarantee, for

$100 million, protects commercial banks that lent funds to a joint 

international space launch vehicle venture. The guarantee provided 

protection against the possibility of nonpayment of the loan due to political 

risks in Russia. 

In addition to making loans and guarantees, the World Bank also provides 

nonlending services, including economic and sector work and technical 

assistance. Through the World Bank Institute6

 the World Bank also 

provides training programs, which over the years have included such topics 

as macroeconomic management, intergovernmental fiscal relations, and 

governance.7

Finally, the World Bank administers trust funds that provide grants for 

specified purposes such as to cofinance some investment projects and 

provide technical assistance. For example, since 1994, more than 

$127 million in grant funds has been approved for Russia, including

$83.3 million from the Global Environment Facility and about $34 million 

from the Policy and Human Resources Development Fund financed by the 

Japanese government.

Funding History for 

Russia

As of September 30, 2000, the World Bank had approved $12.1 billion for 46 

projects in Russia (see table 7). 

6

 Formerly the Economic Development Institute, the external training arm of the Bank, that 

was merged in March 1999 with the Learning and Leadership Center, the internal training 

unit for World Bank staff.

7

 The Institute has been involved in Russia since the beginning of the Bank’s program, 

participating in the first World Bank mission to Russia. An office was established in Moscow 

as a separate operation in 1992 and staffed by locally hired employees, the only fully staffed 

unit of the Institute overseas.
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Table 7: Status of World Bank Loans for Russia, From Fiscal Year 1993 Through September 2000

Fiscal year and project title

Loan

approved

(in millions

of dollars)

Date of

Board

approvala

Date of loan

effectivenessb

Cancelled

(in millions

of dollars)

Disbursed

(in

millions of

dollars) Closing datec

1993

Rehabilitation Id $ 600.0 08/06/92 12/29/92 None $600.0 Closed 9/30/94

Employment services and social protection 70.0 11/24/92 09/09/94 14.4 55.6 Closed 04/30/00

Privatization implementation assistance 90.0 12/17/92 12/07/93 3.95 86.1 Closed 6/30/99

Oil rehabilitation e 610.0 06/17/93 11/15/93 196.0 414.0 Closed 12/31/98

1994

Highway rehabilitation and maintenance 300.0 02/17/94 10/21/94 19.2 280.8 Closed 12/31/999

Financial institutions developmente 200.0 05/19/94 07/28/95 59.5 73.0 12/31/02

Land reform implementatione 80.0 06/16/94 04/26/95 None 28.7 10/31/00

Agriculture reform implementatione 240.0 06/16/94 11/21/94 115.2 110.4 12/31/00

Enterprise support 200.0 06/21/94 07/31/95 None 39.9 06/30/01

Oil rehabilitation II 500.0 06/29/94 05/25/95 153.5 346.5 Closed 12/31/00

1995

Environmental management 110.0 11/08/94 08/30/95 None 49.5 12/31/02

Management and financial training 40.0 12/15/94 07/03/95 0.01 40.0 Closed 11/1/99

Portfolio development 40.0 02/16/95 01/02/96 None 21.2 12/31/00

Housinge 400.00 03/07/95 07/27/95 30.0 166.8 12/31/01

Tax administration modernization 16.8 03/09/95 07/03/95 None 12.0 12/31/00

Emergency oil spill recovery and mitigatione 99.0 04/25/95 06/29/95 None 82.6 09/30/01

Urban transporte 329.0 05/16/95 03/28/96 55.0 245.9 06/30/01

Rehabilitation IId 600.0 06/06/95 09/28/95 None 600.0 Closed 6/30/96

1996

Standards development 24.0 11/30/95 06/05/96 None 17.7 12/31/00

Bridge rehabilitatione 350.0 03/28/96 08/19/96 158.0 106.6 12/31/01

Community social infrastructuree 200.0 04/30/96 01/31/97 43.5 40.2 12/31/02

Energy efficiencye 70.0 05/02/95 12/26/96 None 15.2 06/30/01

Enterprise housing divestituree 300.0 05/07/96 11/18/96 23.2 30.1 12/31/03

Capital markets development 89.0 05/30/96 12/17/96 None 14.6 06/30/03

Medical equipment e 270.0 06/04/96 01/30/97 37.7 196.1 06/30/01

Legal reform 58.0 06/21/96 09/09/96 None 20.9 12/31/00

Coal sector adjustment loand 500.0 06/27/96 07/02/96 None 500.0 Closed 12/31/97

Coal sector restructuring implementation 

assistance

25.0 06/27/96 07/25/96 None 13.7 12/31//01
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Legend: N/A=Not applicable

a The date that the Executive Board voted to approve the loan and the Bank is authorized to sign the 

loan agreement.

b

 The date when disbursements can be made under the loan.

c

 The date when all financial activities related to the project stopped.

d

 These are adjustment loans.

e

 Projects that had sublending to regional entities, including governments and private sector 

companies in the regions.

f

 These projects were allowed to lapse and were closed before they became effective.

Source: World Bank.

(Continued From Previous Page)

Fiscal year and project title

Loan

approved

(in millions

of dollars)

Date of

Board

approvala

Date of loan

effectivenessb

Cancelled

(in millions

of dollars)

Disbursed

(in

millions of

dollars) Closing datec

1997

St. Petersburg center city rehabilitatione 31.0 03/27/97 04/13/98 None 16.7 12/31/01

Structural adjustment loand 600.0 06/05/97 06/17/97 None 600.0 Closed 3/31/98

Enterprise restructuring servicesf 85.0 06/05/97 N/A 85.0 None Lapsed 8/3/98

Education innovatione 71.0 06/05/97 04/20/98 3.0 7.9 12/31/03

Bureau of Economic Analysis 22.6 06/05/97 12/18/97 None 13.3 09/30/03

Electricity sector reform support 40.0 06/05/97 08/12/98 None None 12/31/01

Health reform pilote 66.0 06/05/97 04/17/98 None 13.6 04/30/04

Sea Launch guarantee operation 100.0 05/29/97 05/12/98 N/A N/A 12/31/06

Social protection adjustment loand 800.0 06/25/97 06/26/97 None 800.0 Closed 9/30/00

1998

Social protection implementation 28.6 10/07/97 07/01/98 None 9.9 12/31/01

Second structural adjustment loand 800.0 12/18/97 12/22/97 None 800.0 Closed 12/31/98

Second coal sector adjustment loand 800.0 12/18/97 12/19/97 None 650.0 03/31/01

1999

Third structural adjustment loand 1,500.0 08/06/98 08/07/98 1,100.0 400.0 Canceled 8/5/00

Second highway rehabilitation and 

maintenancef

400.0 12/22/98 N/A 400.0 None Lapsed 9/27/99

State statistical system 30.0 05/13/99 05/31/00 None 0.3 06/30/04

2000

Regional fiscal technical assistance 30.0 12/22/99 08/30/00 None 0.8 12/31/04

Sustainable forestry pilot 60.0 05/23/00 Not yet effective None None 09/30/04

2001

Coal and forestry guarantee facility 200.0 09/00 Not yet effective N/A N/A

Total $12,075.0 $2,497.2 $7,520.3
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As shown in figure 16, a rapid buildup of the World Bank’s portfolio 

occurred in the early years of the program. During fiscal years 1993 and 

1994, the World Bank approved 10 loans worth nearly $3 billion for 

Russia—the fastest increase in World Bank operations for a new member 

country. Annual approved lending to Russia has been in the $1.3 billion-$1.9 

billion range, except in fiscal year 2000,8

 when the World Bank approved 

only $90 million in new lending.

Figure 16: Trends in Approved World Bank Lending and Disbursements to Russia, Fiscal Year 1993 − September 2000

Note: Fiscal Year 2001 reflects data for only one quarter, from July 1 to September 30, 2000.

Source: World Bank.

8

 World Bank reporting generally goes on a fiscal year basis, starting from July 1 to June 30.

0.0

0.5

1.0

1.5

2.0

2.5

1993 1994 1995 1996 1997 1998 1999 2000 2001

Fiscal year

Approved lending Disbursed

Dollars in billions
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Figure 17 illustrates the percentage of lending by type of instrument that 

the World Bank provided as of September 30, 2000.

Figure 17: World Bank Lending to Russia, by Type of Instrument, Fiscal Year 1993 

Through September 2000.

Source: World Bank.

Investment loans

$5.9 billion Adjustment loans

$6.2 billion 49% 51%
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Of the $12.1 billion in total lending that has been approved for Russia, $9.3 

billion has been committed as of September 30, 20009

—$3.1 billion for 

investment projects and $6.2 billion for adjustment loans. About $2 billion 

has been cancelled, and $485 million for two loans was allowed to lapse 

before the loans became effective. The two most recently approved loans 

for $260 million had not yet become effective. Figure 18 shows the status of 

the World Bank’s lending activity to Russia as of September 30, 2000.

Figure 18: Status of World Bank Approved Loans to Russia as of September 2000

Note: Approved lending since 1992 totals $12.1 billion.

Source: World Bank.

The World Bank had disbursed about 62 percent of approved loans—or 

$7.5 billion—as of September 2000. This makes Russia among the World 

Bank’s largest borrowers in terms of commitments and disbursements to 

date. About $2.6 billion of the $7.5 billion in disbursements was for 

investment projects, and $4.9 billion for adjustment loans. The relatively 

slow disbursements, particularly during 1993-95, reflect the 

9

 Commitments in this case include fully disbursed and closed loans, as well as effective 

loans after cancellations. Newly approved but not effective loans are not included.

Cancellation

$2 billion

Lapsed

$485 million

Not yet effective

$260 million

Committed

$9.3 billion 77%

2%

4%

17%
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implementation delays that were commonly experienced in a number of 

projects in the Russia portfolio. These disbursements spiked in 1997 and 

1998, following intensive efforts to improve the portfolio, and then declined 

with the deterioration of the portfolio after the Russian financial crisis in 

1998 (see fig. 16).

Strategy The evolution of the World Bank’s program of assistance to Russia can be 

broken down into five stages: (1) the initial years between 1990 and 1992, 

which primarily involved activities to prepare the World Bank for a 

program of lending to Russia; (2) the early years of engagement between 

1993 and 1994, which saw a rapid buildup of projects; (3) the transition 

years, between 1995 and 1996, when addressing poor project performance 

became a high priority, and the World Bank began to move toward 

adjustment lending; (4) the later years from 1997 to 1998, when the World 

Bank expanded its program of adjustment lending and the financial crisis 

hit; and (5) the post-financial crisis period, from 1999 to the present, when 

portfolio performance declined to its lowest levels as a result of the 

financial crisis and then rebounded following intensive efforts to improve 

it. Today, the World Bank is looking toward a long-term strategy to assist 

Russia address systemic weaknesses that remain.

The Initial Years (1990-92): 

Establishing the Russia 

Program

Russia became a member of the World Bank on June 16, 1992, although 

World Bank efforts to prepare for Russia’s membership began prior to that 

time. In July 1990, in response to a request made by the Group of Seven (G7) industrialized countries at its Houston Summit, the World Bank—along 

with the International Monetary Fund, the Organization for Economic 

Cooperation and Development, and the European Bank for Reconstruction 

and Development—participated in a joint study of the Soviet economy.10 In 

the fall of 1991, the Executive Board established a trust fund to provide 

technical assistance grants to the former Soviet Union republics. The $30-

million technical cooperation program funded work on economic issues 

and culminated in a February 1992 report to the board. The report 

proposed undertaking the work and specific measures necessary to enable 

the World Bank to provide assistance for Russia and the former Soviet 

republics soon after they joined the Bank. These studies provided the basis 

for developing the Bank’s initial assistance strategy for Russia. The trust 

10 The report, entitled “A Study of the Soviet Economy,” was issued in February 1991.
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fund also enabled the World Bank to set up a resident mission in Moscow in 

the fall of 1991, and on December 1, 1991, the Bank established a new vice 

presidency for the Europe and Central Asia region. 

Shortly after Russia’s independence at the end of 1991 and its membership 

in the World Bank in mid-1992, the Bank faced immediate pressure to 

organize itself and build its capacity to deliver a program of assistance as 

quickly as possible. On August 6, 1992, the first loan to Russia was 

approved—a $600-million rehabilitation loan that was essentially for 

balance-of-payments support. It was tied to the IMF’s first credit tranche 

arrangement to support macroeconomic stabilization. However, the loan 

did not become effective for another 5 months. The rehabilitation loan was 

extended to finance imports needed to maintain production capacity and 

limit the decline in output while enterprises adjusted to the rapid 

devaluation of the ruble at the beginning of the transition. One objective of 

the loan was to initiate dialogue with the Russian government for longerterm reform and to build Russia’s capacity to implement World Bank 

projects. Two other projects were approved later that year—an 

employment services and social protection loan for $70 million and a 

privatization implementation assistance loan for $90 million.

The Early Years (1993-94): 

Seeking Areas for Rapid 

Buildup of the Portfolio

As Russia’s economic decline continued, pressure grew on the World Bank 

from western donors to quickly develop and implement projects. However, 

according to World Bank documents and officials, project implementation 

early on was fraught with difficulties. To some extent, this was due to the 

lack of institutional capacity on the part of both the World Bank and the 

government of Russia. Specifically, World Bank staff had limited expertise 

and experience regarding the Russian economy and institutions, while 

government officials did not know how to deal with international donors 

and how to implement World Bank-financed projects. Bank officials told us 

that they were frustrated with “bureaucratic inertia” and the lack of highlevel engagement by their Russian counterparts. One World Bank official 

told us that their Russian counterparts changed roughly twice a year or 

about six times between 1992 and 1995, so it was often not clear who the 

World Bank was supposed to be working with. An additional impediment 

was the requirement early on that each individual project be approved by 

the Duma,11 which was time-consuming. For this reason, the effective dates 

for first two investment loans approved for Russia were substantially 

delayed—it took about 1 year for the privatization loan to go into effect and 

nearly 2 years for the employment services loan to take effect.
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Although it was clear to World Bank officials that they were expected to be 

engaged in Russia’s transition to a market economy, the specific strategy 

for doing so was less obvious. According to these officials, it was difficult 

to strike the right balance between the World Bank’s having a development 

impact and the financial risks that the World Bank could prudently assume, 

as well as what the proper mix, composition, and funding level of projects 

should be. The situation early on was chaotic, and a number of obstacles 

stood in the way of systematically implementing projects. In the end, the 

World Bank decided to implement concurrent projects, including 

operations at the regional and local level. This approach was driven, in 

part, by the belief that, given Russia’s size, the World Bank needed broad 

involvement in order to have meaningful impact and a credible voice in the 

reform process. It was also borne out of the frustrations that World Bank 

officials faced as they tried to work with their Russian counterparts.

According to World Bank officials, the Bank’s initial approach was dictated, 

to a large extent, by areas where the doors for World Bank involvement 

were open. Between 1993 and 1994, the World Bank approved about $2.3 

billion for nine projects in several sectors ranging from energy and 

infrastructure to privatization, agriculture, and institutional development. 

Although social protection12 was an explicit focus of the World Bank’s 

initial strategy for Russia, the social sector accounted for a small fraction 

of actual projects. However, by the end of 1994, only $655 million, or 23 

percent, of the $2.9 billion approved for Russia had been disbursed due to 

start-up delays in project implementation. About 90 percent of these 

disbursements represented the $600-million rehabilitation loan; only

$56 million were for investment projects. World Bank officials stated that a 

major factor that impeded their effectiveness during the early years was the 

Bank’s limited presence and role in Moscow. Although the World Bank had 

a resident mission in Moscow since 1991, up until 1997, the Bank’s 

operations in Russia, including project oversight functions, were primarily 

managed by staff at its Washington headquarters.

11 The Law on External Borrowing was approved in 1995. It clarified the procedures for 

obtaining parliamentary authority for borrowing from the World Bank. While the Duma still 

authorizes an overall ceiling for borrowing, responsibility for approving the World Bank’s 

lending program and reviewing the country assistance strategy has been placed with the 

Interministerial Commission for Cooperation with International Financial and Economic 

Institutions and the G-7.

12 The World Bank defines “social protection” as a collection of measures to improve or 

protect human capital, including labor market interventions, unemployment or old-age 

insurance, and income support.
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The Transition Years 

(1995-96): Addressing 

Project Effectiveness and 

Reassessing the Strategy

In June 1995, the World Bank approved the second adjustment loan of 

$600 million.13 According to World Bank officials, the Bank was unwilling to 

make additional adjustment loans at the time because it did not think that 

there was sufficient consensus in Russia to carry out and sustain reforms, 

and it believed that large-scale lending would leave Russia with debt but 

little reform to show for it. Thus, between 1995 and 1996, the World Bank 

approved $2.3 billion for 14 investment projects in numerous sectors 

including transportation, energy, housing, public sector management, and 

the environment. Yet, even as new loans were being approved, delays in 

actual project implementation continued. By the end of 1995, less than

10 percent of lending approved for investment projects, had been 

disbursed. Improving the World Bank’s Russia portfolio, especially the 

implementation of existing projects, became a priority of the World Bank 

beginning in late 1995. By the end of 1996, $875 million, approximately 

19 percent of the $4.7 billion approved for investment projects, had been 

disbursed.

In 1996—following the presidential elections in July of that year—the 

World Bank began to shift the focus of the Bank’s program and the lending 

instruments it employed. In response to encouraging political and 

economic developments, and the poor performance of many of the 

investment projects underway, the World Bank began to move in 1996 

toward large, quick-disbursing adjustment loans. According to World Bank 

officials, it was becoming increasingly evident that investment loans—

including those that funded regional projects such as urban transport, 

bridge rehabilitation, housing, and medical equipment—were not 

addressing systemic structural issues. Furthermore, the lack of legal 

frameworks made it difficult to manage projects. 

The Later Years (1997-98): 

Shifting the Strategic Focus 

to Federal Structural 

Reform

To support policy reform and institutional development, the World Bank 

extended adjustment lending to Russia in some key areas. Specifically, it 

approved (1) coal sector restructuring for $1.3 billion between 1996 and 

1998, (2) social protection adjustment for $800 million in 1997, and

(3) structural adjustment for $2.9 billion between 1997 and 1999. With these 

loans, the World Bank’s emphasis shifted away from financing regional 

activities to providing support to the federal government with fewer but 

larger adjustment loans.

13 The second rehabilitation loan was fully disbursed by October 1995.
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By the spring of 1998, there had been substantial improvement in the 

performance of the World Bank’s Russia portfolio. According to World 

Bank officials, the improvement achieved in project implementation was 

due to the improved and higher-level dialogue with Russian officials. In 

addition, World Bank officials told us that the relocation of their work to 

the field in 199714—including elevating the Bank’s resident representative 

to the position of country director—increased their effectiveness. It has 

enhanced their ability to establish a high-level dialogue with Russian 

officials and work more closely with them to improve the implementation 

of projects. However, much of the progress they had made was wiped out 

when the financial crisis hit in August 1998. Potential World Bank financing 

of $6 billion was part of a bailout package of more than $22 billion 

announced by the World Bank, IMF, and the Russian government in July 

1998, also including financing by the Japanese government. This included 

funds to be distributed through 1999, under a new third structural 

adjustment loan. However, World Bank disbursements over this period 

were far less than this amount with only $1.5 billion actually committed 

before the financial crisis and only $400 million eventually disbursed. 

Post-Financial Crisis 

(1999-Present): Focusing on 

Long-term Efforts

The Russian financial crisis in August 1998 caused disruptions in project 

implementation and a deterioration in the Bank’s Russia portfolio rating. In 

a review of the Bank’s country portfolio performance in July 1999, only

33 percent of Russia’s portfolio was rated “satisfactory”—down from 

74 percent prior to the crisis. The remaining two-thirds of the portfolio 

(67 percent) were actual problem projects and were rated “unsatisfactory.” 

Thus, the Russia portfolio performance became the Bank’s weakest for any 

country with a significant portfolio. Three of the largest operations that 

were considered “at risk”15 were adjustment loans for Russia, and half of 

the Bank’s largest investment projects at risk were Russia projects. The 

World Bank has decided that, in order to qualify for any new investment 

lending, the Russian project portfolio must demonstrate satisfactory 

progress in meeting specified performance targets. Specifically, at a review 

of Russia’s portfolio in July 1999, the World Bank and the government of 

Russia agreed to increase the share of satisfactory projects to 70 percent by 

14 As part of the World Bank’s “Strategic Compact” initiative in 1997, the World Bank 

reorganized and decentralized many of its headquarters staff to the field. In addition, 

responsibility for the day-to-day supervision of project and management activities were 

largely delegated to the field.

15 “At risk” includes actual and potential problem projects.
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January 2000, 80 percent by January 2001, and 85 percent by June 2001. 

According to World Bank officials, concerted efforts to address problem 

loans in the past year are showing encouraging results with 73 percent of 

the projects rated satisfactory in June 2000 and further improvement 

reported since then. See figure 19 for a review of Russia’s portfolio 

performance from 1993 through June 2000. 

Figure 19: Russia’s World Bank Portfolio Performance, 1994 to June 2000

Source: World Bank.

0

10

20

30

40

50

60

70

80

90

1994 1995 1996 1997 1998 1999 2000

Percent of projects

Fiscal year
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As of June 30, 2000, Russia’s projects and commitments at risk—despite 

marked improvement in overall project performance—were higher than 

the average for all World Bank projects worldwide and regionwide for 

Europe and Central Asia countries. See figure 20 for a comparison of 

Russia’s World Bank projects and commitments considered to be at risk 

and those of the World Bank and the region overall.

Figure 20: Russia’s World Bank Projects and Commitments Considered to Be at 

Risk, June 2000 .

Source: World Bank.

On a project basis, few evaluations have been conducted because of the 

limited number of projects that have been completed.16 World Bank staff 

prepare an implementation completion report after a project closes, and as 

of September 30, 2000, reports for 9 out of the 15 projects that have been 

16 As of the end of September 2000, out of the 46 loans approved for Russia, 12 had been fully 

disbursed and closed; 2 projects had lapsed; and 1 has recently been canceled. There are 

presently 31 active projects in the portfolio.

0

10

20

30

40

50

60

70

80

90

100

Russia Region Bank

Percent at risk

Projects at risk Commitments at risk
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completed, had been issued. In addition, the Bank’s Operations Evaluation 

Department routinely conducts independent assessments of individual 

projects upon their completion and periodically conducts country 

assistance evaluations. According to World Bank officials, that department 

is expected to complete audits of several completed projects within several 

months, and is now undertaking a country assistance evaluation of the 

Russia program. In addition, in the spring of 1999, Bank staff conducted an 

internal retrospective review of the Bank’s Russia program at the Board’s 

request,17 and according to Bank officials, a number of conclusions from 

that review are reflected in the December 1999 country assistance strategy.

Current Status of the 

World Bank’s Russia 

Program

Today, the World Bank’s program of assistance to Russia is at a crossroads. 

The Bank’s overarching objectives—promoting structural reform, 

protecting the poor, and developing institutions in Russia—are expected to 

remain largely the same. However, the strategy that the World Bank uses to 

implement its program of assistance for Russia—in terms of the type of 

lending instruments, the level of funding, and the mix and composition 

projects—will need to be revisited in light of changing conditions, 

according to World Bank officials.

World Bank officials have told us that the strategy for their involvement in 

Russia must be long term. Yet, at a time when some donors are looking to 

the World Bank to take the lead in the structural reforms that must take 

place in Russia, more modest levels of lending are anticipated. During the 

past fiscal year, which ended June 30, 2000, the World Bank approved a 

program of lending that was its lowest ever—$90 million for two projects, 

just a fraction of the Bank’s lending program in years past.18 While this 

decision appears to signal a dramatic shift in the Bank’s strategy, World 

Bank officials pointed out that this level of funding is consistent with the 

reduced lending levels that the latest country assistance strategy calls for. 

Moreover, they believe that the Russians, in the years ahead, will look to 

the World Bank not so much for financial support but for the policy advice, 

analytical advice, and assistance that the Bank can provide as the country 

moves further with transition.

17 This paper was not formally presented to the Board and therefore was not available to 

GAO.

18 Since then, a coal and forestry guarantee facility for $200 million has also been approved. 

Because it was approved in September 2000, this loan is reflected in fiscal year 2001 data.
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Lessons Learned The World Bank routinely documents and disseminates “lessons learned” 

from its past work, operations, and strategies. The following discussion 

highlights some of the themes from key lessons learned during the course 

of the Bank’s experience with its Russia operations over the years.

• Ownership is key to success. Numerous World Bank officials 

emphasized that Russian government commitment to and ownership of 

reform is needed to achieve success. For instance, a World Bank 

evaluation of the structural adjustment loans it provided to Russia in 

1997 and 1998 indicated that the implementation of reforms was 

“complicated by extremely strained political relations—among and 

between the President, the Prime Minister, the Federation Council, the 

State Duma, and regional governments.” As a result, implementation of 

the reforms in some areas proved more difficult than anticipated. 

• Consensus-building efforts are needed. The lack of consensus building 

around World Bank-financed programs made early reform efforts 

difficult to implement. In addition, the government must reach out to the 

public and be more open and transparent in explaining its programs to 

the public. For example, the coal sector adjustment loans—cited by 

World Bank and government officials as relatively successful—enjoyed 

broad support from the central government. High subsidies, somewhere 

in the order of $2 billion to $3 billion per year, provided the incentive for 

the government’s commitment to restructure the coal sector. While the 

road to reform was not easy, with numerous vested interests at stake, 

ownership improved as even initially reluctant parties began to see the 

benefits of coal restructuring.

In contrast, the World Bank’s experience in the social sector is generally 

viewed as somewhat less successful due to little government ownership 

and cooperation. The motivation to borrow money to address this 

important area did not come about until 1996 with the promise of an 

adjustment loan. But even with a substantial amount on the table, 

according to World Bank officials, progress on social reform has been slow, 

albeit steady. 

• Financial support provides limited leverage. World Bank officials we 

spoke with generally agree that money itself is not the most important 

factor in assisting a transition process. For instance, while financial 

support was an important incentive to move along on reforms in the 

coal sector and on social protection, it did not seem to make much of a 

difference on effecting reforms under the third structural adjustment 
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loan, which was stalled last year after the first disbursement. 

Nonetheless, as was the case with the first rehabilitation loan, World 

Bank officials told us that financial assistance helps open doors. For 

example, in the second half of the 1990s, the World Bank put more 

money on the table directly to support core ministries such as the 

ministries of finance and economy. A senior World Bank official said this 

was one of the factors that facilitated a closer relationship with these 

ministries. Moreover, the financial investment lends credibility to the 

Bank’s efforts and advice. For example, the intensive dialogue that took 

place to turn around the Russian portfolio in 1999 made it clear that the 

World Bank was serious about not making disbursements until project 

performance improved. Furthermore, in some cases, World Bank 

financing attracts additional financing from other donors and lending 

institutions, thereby increasing the Bank’s leverage. For example, on the 

second coal sector restructuring adjustment loan, the Japan Bank for 

International Cooperation provided $800 million in cofinancing, thus 

having the effect of doubling the World Bank loan. 

• Long-term World Bank involvement will be necessary. World Bank 

officials now acknowledge that expectations for rapid results were 

unrealistic and that its long-term involvement will be necessary. 

According to a World Bank assessment, the devastating impact the 1998 

financial crisis had on Russia showed that not enough progress had 

been made in addressing major structural problems such as the issue of 

corruption, the lack of fiscal and financial discipline, and the 

deterioration of the social safety net. Further progress in building 

institutional capacities also needs to be made, and addressing these and 

other systemic weaknesses will take years. As a result, the World Bank 

will need to plan on more modest levels of financial support in the years 

ahead in order to ensure that Russia remains well within its lending 

ceiling.19

• Finally, a number of people we met with suggested that what needs to 

happen is a “generational change.” A former senior World Bank official 

stated that transformation must go beyond the transfer of knowledge, 

technical know-how, and institutional development—it will require 

Russians believing and behaving entirely differently than they have in 

the past. Not only must old systems of control be abolished, but also 

19 The lending ceiling is determined by the Executive Board annually. For the fiscal year that 

ended June 30, 2000, the limit was set at $13.5 billion for any single country. The limit for this 

fiscal year, which ends June 30, 2001, remains the same.
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new institutions must be built and the legal and regulatory frameworks 

established—all of which take time.

• World Bank lending needs to be more selective. The latest country 

assistance strategy for Russia emphasizes the need to be more selective 

in the programs that the World Bank supports in the near future, 

particularly in light of an anticipated reduction in new lending. This 

means focusing on projects that seek to achieve the Bank’s overall 

objectives—structural reform, social protection, and institution 

building. For example, in an effort to develop a positive investment 

climate, the strategy calls for reforms in financial management and 

administration to improve the performance of public institutions such 

as the ministries of finance and taxation. The U.S. Executive Director 

has also advocated public sector reform as a way to fight corruption—

viewed by many as a symptom of weak institutions and lack of 

transparency—and for an independent judiciary and the rule of law.

Other Lessons The World Bank has drawn a number of lessons learned from its 

experience in working with the regions. The 1999 country assistance 

strategy states that support for regional projects may have been premature 

for several reasons:

• Implementation capacity, especially fiscal management, is still weak.

• Results are localized and do not address systemic problems.

• Supervision of projects is resource intensive and costly.

We note that a number of the local government officials in Novgorod and 

Samara—the two regions we visited—expressed interest in increased 

lending from the World Bank despite their complaints about the lengthy 

delays they experienced in implementing Bank-financed projects.

Regarding adjustment loans, the World Bank has learned that

• those loans need to be disbursed in association with significant 

structural reform;

• loan conditions should be based not on interim steps but on outcomes, 

so that disbursements, for instance, would be based on legislation 

enacted by, rather than simply submitted to, the Duma; and

• multiple disbursements for loans seem to be effective in certain 

situations, such as in the second coal sector adjustment loan, where 

splitting the loan into “bite-size chunks” enabled the World Bank to be 

engaged in the sector longer and resulted in better compliance.
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Several Russian officials we met with expressed a preference for sectorspecific adjustment loans over structural adjustment loans. They felt that 

the sector adjustment loans are more focused and, as such, they are easier 

to manage and implement, and the results are more measurable. 
Page 150 GAO-01-8 Foreign Assistance to Russia

Appendix III

Additional Information on European Bank for 

Reconstruction and Development Programs in 

Russia ApendxiI

Background In May 1990, representatives from 40 countries, including the United States 

and most European nations, signed an agreement creating the European 

Bank for Reconstruction and Development.1

 When the EBRD began its 

operations in April 1991, it was specifically tasked with assisting formerly 

communist nations with their transition to market economies, with a 

particular focus on promoting the development of the private sector. In 

developing strategies, the EBRD must balance several competing aspects 

of its mandate. The charter requires the EBRD to devote at least 60 percent 

of its total portfolio to financing private sector projects and forbids 

concessional (below market interest rate) loans or grants. The EBRD must 

also follow sound banking principles in its investment decisions, and 

achieve profitability. At the same time, the EBRD must be willing to take 

risks and make sure its projects further the recipient country’s transition 

efforts. The EBRD frequently works in concert with private sector 

investors and lenders to help share the costs of projects but ensure that its 

efforts do not crowd private sources of financing out of the market.

Overall Objectives and 

Initial Assumptions

At the broadest level, the EBRD is supposed to “foster the transition 

towards open market-oriented economies and to promote private and 

entrepreneurial initiative in...countries committed to and applying the 

principles of multiparty democracy, pluralism and market economics.” The 

EBRD’s focus on the private sector is supposed to complement the 

International Monetary Fund’s work on macroeconomic stabilization and 

the World Bank’s sectoral work.

Throughout its operations in Russia, the EBRD’s strategy has been guided 

by a relatively stable set of assumptions:

• The ability to achieve reform depends on the desire of the Russians to 

change. Since most of the EBRD’s financing in Russia goes to the private 

sector, the EBRD relies heavily on the recipient’s government to 

establish and enforce the proper legislation necessary for an enabling 

environment. It must also rely on the recipients of its financing to make 

promised changes.

• The EBRD recognized that it could not expect to have a major influence 

on national-level reform efforts. While its resources can play a 

1

 The United States has 10.3 percent of the voting share at the EBRD. Institutions and 

member countries of the European Union have a combined voting share of 58.0 percent.
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significant role for an individual project or company, they are small 

relative to the size of Russia and its transition needs. Consequently, 

assistance needs to be focused on particular sectors or regions to 

ensure transition impact beyond the individual project.

• Since 1993, the EBRD has assumed that it will have greater impact 

working directly with the private sector in reform-minded regions. Like 

other donors, the EBRD has targeted its work in a number of regions.

• The EBRD has also assumed that it can influence the process of 

institution building in Russia by encouraging or requiring recipients to 

meet western financial standards. Indeed, institution building has been 

an explicit goal of its strategy since 1992. EBRD financing can directly 

support institution building or provide an inducement to convince 

existing institutions to change.

The EBRD’s 

Instruments

The EBRD has primarily relied on four instruments to achieve its goals in 

Russia: direct project lending, equity investments, financing through 

intermediaries, and technical cooperation funds.2

Project lending: The EBRD loans money to mainly private sector firms at 

market interest rates.3

 Although the terms can vary depending on the 

project, the EBRD typically requires repayment within 5-10 years. About 

three-quarters of the EBRD’s total commitments for projects in Russia to 

date have been through loans. For example, in May 2000, the EBRD 

approved a $150 million loan to Lukoil, a large Russian oil company. Lukoil 

will use the funds for export-related payments, crude-oil production, and 

oil processing. As a condition for receiving EBRD financing, Lukoil agreed 

to increase its financial transparency, implement an initial public offering 

of its shares, and improve its environmental standards. 

Equity investments: The EBRD also buys noncontrolling stakes in firms. 

Its charter generally prohibits the EBRD from taking a controlling interest, 

although in some cases the EBRD will work with other western investors to 

obtain a majority interest and thus have an important voice in how the firm 

is organized and run. The EBRD sees itself as a medium-term investor and 

generally plans to hold equity investments for 5-6 years before selling and 

2

 The EBRD has also provided a small number of guarantees for projects in Russia.

3

 Actual rates for private sector projects vary depending on the EBRD’s assessment of 

project risk.
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hopefully turning a profit. For example, in July 1996, the EBRD approved a 

$30 million investment in the Russian Black Earth Regional Venture Fund. 

This fund invests in Russian companies in southwestern Russia to help 

them modernize and restructure their operations.

Financing through intermediaries: Many of the EBRD’s lending and 

finance projects are implemented via Russian financial intermediaries. The 

EBRD believes this not only contributes to the primary goal of developing 

the private sector in Russia, but it also promotes the development of 

Russian financial institutions. Some of the EBRD’s most well-known 

projects, such as the Russia Small Business Fund and Regional Venture 

Funds, are implemented on the ground by such intermediaries as 

contractors, private firms, and Russian financial institutions. For example, 

in July 1999, the EBRD invested $6 million in a bank in which it was the 

principal shareholder, reorganized it into a bank that finances micro- and 

small enterprises, then provided it a $30 million loan. Since then, the EBRD 

has used this bank to lend to small- and medium-sized enterprises through 

its Russia Small Business Fund. 

Technical cooperation funds: The EBRD has provided a significant amount 

of technical assistance to Russia—nearly $300 million for 425 projects from 

1991 to1999. Most of this assistance supports preparing projects and 

improving project implementation. About 95 percent of the EBRD’s 

technical assistance efforts are financed through reimbursement by clients 

or grants from other donors, including the European Union’s Technical 

Assistance for the Commonwealth of Independent States (TACIS) program. 

For example, in 1992, the EBRD approved a $7-million technical assistance 

program, financed entirely with funds from TACIS, to provide advice to the 

Russian government on the implementation of its mass privatization 

program.

The EBRD also pursues its objectives in Russia through methods not 

directly tied to specific projects. For example, recipients have to comply 

with EBRD requirements about transparency or corporate governance to 

receive funding, a tool the EBRD frequently uses to advance transition 

efforts. The EBRD also provides advice to government officials at the 

national and regional level. And since the financial crash of 1998, the EBRD 

has aggressively sought legal channels to obtain repayments from 

defaulting loan recipients. EBRD officials told us they believe this 

approach protects their interests, forces the Russian judicial system to 

operate, and sheds possibly unwelcome light on its activities if cases are 

not handled fairly.
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Funding History for 

Russia

Since 1991, the EBRD has approved $5.5 billion worth of projects for 

Russia, of which $4.4 billion were eventually signed.4

 Roughly half of the 

signed projects—$2.2 billion—has been disbursed, and about $600 million 

has been repaid as of May 2000. Most of the EBRD’s projects with Russia 

were signed in the mid-1990s, with new activity falling off dramatically 

since the 1998 financial crisis (see fig. 21).

4

 After the EBRD’s executive board approves financing for a project, EBRD staff negotiate 

the specific terms of the operation with the Russian recipient. When agreement is reached 

on these terms, the project is signed, and disbursements can begin. In some instances, the 

amount of financing changes between approval and signature. In other instances, approved 

projects are not signed.
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Figure 21: Annual EBRD Funding for Russia Projects, 1991-2000

Source: EBRD.

More than half of the EBRD’s signed projects to date have been for the 

financial and energy sectors, with transportation and food production also 

getting significant amounts.5

 However, the EBRD has financed projects in 

over two dozen sectors across the Russian economy (see fig. 22).

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Signed Disbursed

Billions of dollars

5

 EBRD activities in the food sector primarily represent investments in and loans to firms 

that manufacture food or drink products.
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Figure 22: EBRD Lending and Equity Investment for Signed Projects by Sector in 

Russia, 1991-2000

Source: EBRD.

Note: “Others” include mining, property, and public administration.

Strategy The EBRD’s strategy for providing assistance to Russia has changed over 

time. Its initial approach stressed engagement across several sectors, 

relying heavily on technical assistance due to the lack of viable projects. 

Later, the EBRD narrowed its primary focus to emphasize the financial 

sector, especially as it pertains to supporting small- and medium-sized 

enterprise development, and to provide targeted support for the 

restructuring efforts of large firms, especially in the oil and gas sectors.

Early EBRD Efforts for 

Russia Focused on 

Technical Assistance: 

1991-93

When the EBRD began its operations in April 1991, the Soviet Union was 

one of its charter members. However, the charter allowed the EBRD to 

provide no more than $300 million worth of assistance to the Soviet Union 

over 4 years—an amount equal to the initial Soviet capital contribution.6

 As 

it turned out, there were very few viable business opportunities in Russia at 

that time, so the EBRD mainly provided technical assistance for training 

business people, supporting local privatization efforts in selected cities, 

and advising the government on drafting reform legislation. It also 

Finance

36%

Energy

20%

Transport

12%

Food

9%

Manufacturing

7%

Others

16%
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approved two small loans in late 1991. By the end of 1991, the EBRD had 

approved $17.5 million in financing and spent about $8.3 million on 

technical assistance for the Soviet Union.

After the formal dissolution of the Soviet Union in December 1991, Russia 

became a member of the EBRD in March 1992. The EBRD began operations 

in Russia facing significant challenges. The EBRD was a new organization 

starting programs in a new country in the midst of rapid and dramatic 

political and economic changes. With no road map, no historical 

precedents, and no institutional history or experience to fall back on, the 

EBRD found that its early plans lacked focus. For example, in 1992, the 

EBRD initially planned to spread its operations in Russia across 11 

economic sectors, including privatization and enterprise promotion, 

financial sector development, military conversion, and agriculture, in an 

effort to support development of entrepreneurs and the legal, market, 

financial, and public infrastructures.

However, the EBRD’s resources proved to be relatively small compared to 

these ambitious objectives. Much of the EBRD’s early attention was 

focused on identifying potential projects, trying to find financing partners; 

and providing technical assistance, most significantly in the area of 

privatization. By the end of 1993, the EBRD had spent more than $68 

million for 122 technical assistance projects, largely in the area of private 

sector development, and signed 7 loans and 3 equity investments worth 

$362 million, with about two-thirds of these funds going for the oil and gas 

sectors.

Program Development and 

Growth: July 1993-early 

1998

The EBRD had not been set up to provide technical assistance, and its own 

reports questioned the wisdom of devoting so much energy to this area. By 

late 1993, as it began to identify and invest in a growing number of projects, 

its overall approach to assistance to Russia changed. The EBRD shifted its 

emphasis from technical assistance, tried to narrow its focus to fewer 

sectors, and developed more realistic goals to avoid making promises to 

the Russians that could not be fulfilled. 

6

 The United States had resisted allowing the Soviet Union to join the EBRD, on the grounds 

that the Soviet Union was not part of Europe. However, the European countries believed it 

was important to include the Soviet Union, and their position prevailed. As a compromise, 

the United States insisted on including limitations on the amount of assistance the Soviet 

Union could receive from the EBRD.
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The foundation for much of the EBRD’s new approach in Russia was laid at 

the G-7 Tokyo Summit in July 1993. Coming into the meeting, the EBRD 

hoped to play a central role in Russia’s ongoing privatization efforts, smalland medium-sized enterprise development, nuclear energy safety, and oil 

and gas sector support. Several of the EBRD’s major programs for Russia 

were launched at the Tokyo Summit. For example, the EBRD felt it had a 

comparative advantage in finance and banking and attempted to directly 

shore up the Russian financial sector by providing advice and equipment 

through the Financial Institutions Development Project.7

 The EBRD also 

pursued the dual objectives of small- and medium-sized enterprise 

development and institution building in the banking sector in several 

projects, most notably the Russia Small Business Fund. Through this 

program, the EBRD provided funds to Russian banks, which then lent them 

to small- and medium-sized enterprises. According to EBRD, Treasury, and 

State Department officials, Russian banks learned how to lend to small 

businesses, small businesses learned how to organize their operations and 

pay loans, and the small- and medium-sized enterprise sector began to 

grow. The EBRD also provided financing for some larger firms such as 

Kamaz and GAZ (major Russian truck manufacturers) and Chernogoreft 

(oil production) to improve production and the company’s environmental 

programs.

In addition, the EBRD made a conscious effort to cluster its projects in 

regions such as St. Petersburg, Vladivostok, and Samara that were more 

reform minded or more open to investment. In general, the EBRD believed 

it could have a better impact by supporting three good projects in one 

region than by spreading three good projects across three different regions. 

This approach required the EBRD to learn more about the various regions 

and led to greater deployment of resources and authority in the field.

The use of financial intermediaries also increased over this period. Many of 

the EBRD’s biggest programs in Russia, such as the Russia Small Business 

Fund, were actually implemented by Russian institutions. The EBRD 

viewed this as an inexpensive way to have greater impact at the smaller end 

of the economic scale. Almost as important was the belief that use of 

intermediaries also created opportunities for Russian institutions to learn 

how to operate and flourish in a market economy. This institution-building 

aspect of the program was central to the EBRD’s strategy for having an 

impact on the transition to a market economy.

7

 The EBRD and the World Bank jointly implemented this project.
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Additional Information on European Bank 

for Reconstruction and Development 

Programs in Russia

Page 158 GAO-01-8 Foreign Assistance to Russia

EBRD operations during this period were characterized by rapid growth. 

For example, the EBRD added 25 projects to its portfolio in Russia worth 

nearly $1 billion in 1996. At the same time, the growing reliance on financial 

intermediaries meant placing a lot of trust in Russian counterparts and 

relying on Russian institutions to implement the programs that were 

supposed to achieve the EBRD’s overall objectives in Russia.

By late 1997, the EBRD was the largest single foreign investor in Russia; 

had seats on the boards of several Russian enterprises and banks; and, 

through its various operations, had staff on the ground throughout Russia. 

The country strategy for 1997 noted that Russia had made important 

progress in the transition but continued to be dogged by persistent 

economic problems and a mixed record on political commitment to reform.

Financial Collapse and 

Recovery: mid-1998 to the 

present

By mid-1998, the EBRD realized that its rapidly growing portfolio in Russia 

could be threatened by the escalating financial trouble in Russia. In April 

1998, Tokobank, a major Russian bank in which the EBRD had taken a 

$32 million equity position in 1994, collapsed. In June 1998, the EBRD 

updated its Russia strategy due to the increasing financial and economic 

uncertainty there, calling for continued engagement, retaining the 

emphasis on institutional development, setting standards for business 

practices, attracting foreign and domestic investment, and engaging in 

policy dialogue.

Although the June 1998 EBRD strategy update noted the potential for a 

crisis, what happened 2 months later was much worse than the EBRD and 

other institutions had anticipated. The collapse in the value of the ruble 

made it more expensive for Russian firms and banks to repay dollardenominated debt. A moratorium on foreign exchange payments by 

domestic banks led to defaults on foreign debt, and the Russian 

government’s defaulting on domestic debt essentially ruined the domestic 

government securities market. The combination of these factors essentially 

destroyed the value of most of the assets on the balance sheets of Russian 

banks. Many of the EBRD’s equity investments in Russian financial 

institutions became worthless, and the viability of several other projects 

was damaged. By the end of the year, the EBRD took provisions of over 

$600 million for loans and investments for the year, primarily for banking 

sector projects in Russia.8

 Some of the EBRD’s Russian partners defaulted 

8

 The EBRD’s operating loss for 1998 was $293 million.
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for Reconstruction and Development 

Programs in Russia

Page 159 GAO-01-8 Foreign Assistance to Russia

on loan repayments or stripped assets from institutions partially financed 

by the EBRD. In a few months, the overall state of the EBRD’s portfolio in 

Russia and the region suffered as the Russian economy went into a tailspin.

The EBRD responded to the collapse by evaluating the quality of its 

investments in the region, increasing provisions, restructuring its Russia 

portfolio, and almost entirely halting new operations in Russia. In the

6 months after the crash, the EBRD only signed three new projects for 

Russia, worth $15 million. According to EBRD officials, the lack of new 

projects in Russia during this period was due to (1) a decrease in demand 

for EBRD financing stemming from the depressed economic conditions in 

Russia and (2) a decision by the EBRD to halt new operations in the 

banking sector in Russia. The EBRD also tried to salvage the projects it 

could, and close out those that could not be saved. The EBRD immediately 

took advantage of its rights as a preferred creditor to protect most of its 

investments outside the financial sector.9

 This action allowed the EBRD 

eventually to salvage much of its investment outside the banking sector. 

Without these rights, the EBRD could have been in an even worse position.

By mid-1999, as the Russian economy began to stabilize, the EBRD started 

to cautiously reengage in Russia. The EBRD exercised greater scrutiny of 

potential Russian business partners. Guided by a May 1999 country strategy 

update, the EBRD noted that its role in Russia was now even more 

important, since the transition would take longer than initially envisioned. 

Its operations focused on portfolio management and selection of only the 

highest-quality projects, with efforts supporting the development of 

Russia’s small- and medium-sized enterprise sector taking highest priority.

In early 2000, the EBRD was positioning itself for a major return to the 

Russian market, pending the outcome of presidential elections and 

potential change in the overall reform environment. The goals of the 

EBRD’s core business in Russia reflected a continuation of earlier trends, 

with a growing focus on small- and medium-sized enterprise development, 

financial sector enhancement, infrastructure, targeted support for large 

firms, greater reliance on equity as an instrument, and active promotion of 

its lender and shareholder rights in an effort to combat corruption and 

promote sound business practices. 

9

 This step enabled the EBRD to obtain an exemption from the Russian government’s halting 

of foreign exchange payments.
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Page 160 GAO-01-8 Foreign Assistance to Russia

In recent months, the EBRD has restated its commitment to remain 

engaged in Russia and has announced several new projects there. During 

January-June 2000, the EBRD had approved about $300 million in new 

projects for Russia, or more than in all of 1999. In addition, senior EBRD 

officials have publicly stated that the EBRD could commit about $1 billion 

per year for Russia, in an effort to provide an inducement for reform and 

change by the Russians. At its annual meeting in May 2000, the EBRD board 

approved a medium-term plan to devote 30 percent of the Bank’s portfolio 

to Russia, provided the Russian government establishes the proper reform 

framework and Russian enterprises adopt more transparent and fair 

business practices. A shift to 30 percent would represent a substantial 

increase from the current level of 22 percent.

However, EBRD officials noted the difficulties in identifying and securing 

deals within Russia. Because the EBRD generally seeks co-financing, it has 

to find viable Russian business partners and private sector co-investors 

willing to share the financing and risks with the EBRD. This has been 

difficult to do ever since the crash of 1998 and raises questions about the 

EBRD’s ability to meet its 30-percent medium-term financing goal. 

In addition, the EBRD’s strategy toward Russia is part of a larger debate 

within the EBRD on the relative level of resources to devote to Central 

Europe versus the former Soviet Union. Investments in Central Europe to 

support countries like Poland and Hungary can help their efforts to meet 

EU standards for eventual membership in the EU. Investments in these 

countries may also be more profitable, since they are further along in the 

transition process. However, most Central European countries are capable 

of raising finances on the private capital markets, and some argue that 

EBRD resources should be shifted out of these countries and into the 

former Soviet Union where the greater transition challenges lie. This 

approach emphasizes the EBRD’s mandate to support transition but entails 

greater risks and possibly lower profit. How the EBRD decides to balance 

these conflicting objectives will have important implications for its future 

strategy for Russia.

In October 2000, the EBRD publicly released its new country strategy for 

Russia. The EBRD plans to commit from $300 million to $1 billion per year 

for projects in Russia, depending on government actions to improve the 

investment climate. Future investments will be targeted to improve 

corporate sector governance and transparency, promote financial sector 

competition, rapidly build-up small business financing, and increase 

support for infrastructure. The EBRD also intends to:
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for Reconstruction and Development 

Programs in Russia

Page 161 GAO-01-8 Foreign Assistance to Russia

• increase the share of equity and public sector projects in its Russia 

portfolio, 

• develop long-term strategic partnerships with selected companies, and

• continue to aggressively defend its legal rights in Russian courts. 

The EBRD plans to remain realistic about its ability to affect change within 

Russia. Although it will continue efforts to promote national level change 

through high-level policy dialogue and technical assistance, the EBRD’s 

main focus will be on achieving change at the corporate level.

Lessons Learned According to the EBRD’s 1999 Transition Report, which assesses the 

EBRD’s experience with transition since 1989, countries that pursued rapid 

liberalization and sustained macroeconomic stabilization were able to lay 

the basis for economic reform and gradual institutional change. However, 

countries such as Russia that did not follow this path suffered slow and 

uneven progress and faced threats to economic stability from continued 

soft budget constraints. The report also found that corruption was a major 

impediment to transition in several countries, including Russia.
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Additionally, the EBRD also has a formal, institutional “lessons learned” 

process. EBRD staff identify and enter lessons learned into a large 

database.10 A summary of these lessons is presented annually in evaluation 

overview reports, with additional lessons noted in country strategies and 

individual evaluation reports. Based on our analysis of these lessons and 

our discussions with EBRD officials, the following lessons regarding the 

EBRD’s experience in Russia have broad application.

• The ability to create and sustain transition in Russia depends on a 

demonstrated commitment to reform, sound macroeconomic 

conditions, transparent and consistent rule of law, and progress in 

furthering institutional reform.

• Sustainable transition requires strong grassroots support.

• Russia and the problems it faces are so large that EBRD cannot expect 

to have major, nationwide impact. The EBRD can play an important role 

in supporting transition by developing projects that can have important 

demonstration effects or by clustering projects in reform-minded 

regions to enhance the impact at the local level.

• Good, consistent monitoring of the project enhances impact, maintains 

important lines of communication, and builds trust.

• Projects with clearly defined objectives tend to be more successful than 

projects with broad, vague objectives.

10 The EBRD does not currently allow access to this database, but plans to put an amended 

version on its website in 2001. Some of the main themes each year are presented in the 

Annual Evaluation Overview Report, which is distributed to the board but not the public. 

However, the EBRD’s lessons from the 1998 financial crisis in Russia were publicly 

presented in its 1999 annual report.
Page 163 GAO-01-8 Foreign Assistance to Russia

Appendix IV

Additional Information on the U.S. Freedom 

Support Act Program in Russia ApendxiIV

The United States began providing limited assistance to the Soviet Union in 

December 1990 to support the reform effort and then increased its aid after 

the Soviet Union dissolved in December 1991. U.S. assistance has taken 

many forms: the Cooperative Threat Reduction program, which provides 

aid to safeguard and dismantle nuclear weapons and other weapons of 

mass destruction; support for programs provided through international 

financial institutions; food aid provided by the U.S. Department of 

Agriculture; and programs authorized by the Freedom Support Act, 

implemented mainly by the U.S. Agency for International Development 

(USAID). In addition to these funding sources, many federal agencies have 

used funds from their regular appropriations to provide technical 

assistance and other types of aid to Russia. Figure 23 shows the budget1

and spending patterns for the major U.S. programs with Russia since 1992.

1

 The Coordiator allocates funds appropriated for the former Soviet Union to each of the 

countries, creating country budgets.
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Figure 23: Funding Levels for Major U.S. Programs With Russia Since 1992 (Budgeted and Expended, Respectively)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Other 0.02 0.04 0.03 0.02 0.14 0.19 0.22 0.42 0.25

Agriculture 0.13 1.03 0.03 0.03 0.02 0.01 0.00 1.16 0.20

CTR Nunn-Lugar DOD 0.01 0.17 0.26 0.15 0.17 0.25 0.28 0.39 0.43

Freedom Support Act 0.09 0.31 1.00 0.36 0.22 0.14 0.21 0.16 0.18

1992 1993 1994 1995 1996 1997 1998 1999 2000

In billions dollars

Fiscal year
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Legend: CTR = Cooperative Threat Reduction; DOD = U.S.Department of Defense

Source: U.S. Department of State and GAO analysis

The Freedom Support Act, enacted in October 1992, signaled a change in 

the character of U.S. aid to the former Soviet Union, from a period of ad 

hoc assistance, including agricultural commodity credit guarantees and 

food and medical aid, to a long-term development effort characterized by 

provision of technical assistance in a variety of sectors and by U.S. private 

sector investment support. Nearly half of all expenditures related to the 

Freedom Support Act for the former Soviet Union from 1992 through 1999, 

or $2.26 billion, went to programs with Russia.

The goal of the Freedom Support Act was to provide the expertise and 

support necessary to ensure Russia's continued progress on economic and 

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2.2

Fiscal year

Other 0.02 0.03 0.03 0.02 0.09 0.14 0.17 0.25

Agriculture 0.13 1.03 0.03 0.03 0.02 0.01 0.00 1.16

CTR Nunn-Lugar DOD 0.00 0.02 0.04 0.12 0.17 0.09 0.13 0.21

Freedom Support Act 0.08 0.30 0.97 0.35 0.22 0.12 0.15 0.07

1992 1993 1994 1995 1996 1997 1998 1999

In billions of dollars
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Support Act Program in Russia

Page 166 GAO-01-8 Foreign Assistance to Russia

political reforms. The Freedom Support Act authorized bilateral economic 

assistance activities in at least 13 sectors, including humanitarian needs, 

educational television, administration of justice, and civilian nuclear 

reactor safety. Congress stated that technical and managerial assistance 

should be provided on a long term, on-site basis, supplying practical 

management and other problem-solving advice, and encouraged assistance 

to be provided through nongovernmental organizations, enterprise funds to 

invest in the Russian economy, and cooperative development and research 

projects. 

The Freedom Support Act also established in law the Coordinator of 

Assistance to the former Soviet Union. The Coordinator was a State 

Department official, answering ultimately to the Secretary of State. The 

State Department's involvement in all assistance to the former Soviet 

Union demonstrates the political sensitivity of the program. The 

Coordinator was to (1) design an overall assistance and economic strategy 

for the former Soviet Union; (2) ensure program and policy coordination 

among U.S. agencies and foreign governments and international 

organizations; (3) ensure proper management, implementation, and 

oversight by U.S. agencies; and (4) publish an annual report on U.S. 

assistance for the former Soviet Union. The effect of this broad assistance 

program was to allow the President and his Assistance Coordinator wide 

latitude to design the U.S. assistance strategy. USAID became the primary 

implementor of Freedom Support Act assistance.

Objectives and Initial 

Assumptions

Since 1992, the United States has pursued three objectives for assistance to 

Russia through the Freedom Support Act:

• The first objective was to foster the emergence of a competitive, 

efficient, market-oriented economy in which the majority of economic 

resources were privately owned and managed, so that economic 

decisions were based primarily on individual choice. 

• The second objective was to foster transparent, open, and accountable 

governance; the empowerment of citizens, working through their civic 

and economic organizations; and democratic political processes that 

ensure broad-based participation in political and economic life and 

respect for human rights and fundamental freedoms. 

• A third objective was to foster redefined public and private sector roles 

in the management of humanitarian, health, and related social services 

fundamental to a successful transition to stable democracy and a 

market-based economy.2
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The relative priority3 of the objectives has varied over the years. In the 

earliest years from 19914

 through 1992, the third objective, providing 

“humanitarian assistance,” was the priority. As the technical assistance 

program developed from 1993 through 1995, the market reform objective 

assumed the priority. With the development of the Coordinator's new 

“Partnership for Freedom” approach (for more information, see later 

paragraphs), the democratic reform objective has been emphasized since 

1996. During fiscal year 1995, as a response to U.S. budget cuts, the 

humanitarian assistance objective was dropped outright, only to be 

reinstated as budgets increased in the late 1990s.

The U.S. program was built on a number of initial assumptions about how 

Russia might make the transition to a market economy and the role foreign 

assistance could play in that transition. Some assumptions identified by 

State and USAID included the following:

• Russia was wealthy in natural resources but misdeveloped. Russia had a 

generally healthy, educated, and productive populace, a significant 

industrial base, and a potentially strong agricultural base. Russia was 

misdeveloped, especially in respect to many institutions essential for a 

market economy and democratic politics. The challenge was not to 

develop basic human and physical infrastructure but to assist Russia in 

redirecting resources to support open and participatory political and 

economic systems. 

• Assistance had to happen quickly. If assistance were not provided 

quickly, the Russian state might revert to Communism. This assumption 

drove the United States to expend assistance funds as quickly as 

possible, sometimes with minimal concern about the effectiveness of 

the activity.

2

 A fourth objective, related to Cooperative Threat Reduction funding rather than Freedom 

Support Act funding, was to accelerate demilitarization and promote responsible security 

policies. This objective became a regular part of the Coordinator's reports in April 1996, 

reporting on fiscal year 1995. The report consistently presents data about the Cooperative 

Threat Reduction program.

3

 These objectives were routinely listed in early Coordinator's reports without ordinal 

numbers beside them.

4

 Before the collapse of the Soviet Union, the United States had provided humanitarian 

assistance in the form of pharmaceuticals and medical supplies worth $39.1 million under 

the President's Medical Initiative. This assistance precedes the Freedom Support Act and 

the Coordinator's reports, which first express the objectives.
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• Russians had to want change. Just as no outside agency, institution, or 

country could substitute for or replace Russian reformers themselves, 

so no one country or agency by itself could shoulder the task of 

encouraging Russian reform at the margin. Only Russians would be able 

to create the political will to do what they must.

• Protracted support was not needed. Russia was a well-endowed country, 

fully capable of remaking itself into a full, democratic, prosperous 

partner in the international community, with the help of strategically 

targeted support during the critical period of economic and political 

transition. U.S. programs would be of limited duration. 

• Aid should follow reform. Former Soviet Union states and regions 

within countries would receive aid based on their progress toward 

democratic and economic reform. 

• Projects should be generally regional and managed from Washington. 

Organizing projects across the former Soviet Union would allow the 

United States to respond quickly to the changing circumstances in the 

former Soviet Union states and keep design and contracting actions to a 

manageable number. Achieving U.S. assistance objectives and 

developing assistance priorities was to be most effectively 

accomplished through a Washington-based Coordinator responsible for 

overseeing policy development and implementation of the assistance 

effort. The whole assistance program was to be managed from 

Washington, with a small number of USAID officials in the former Soviet 

Union. 

The Freedom Support 

Act's Instruments

U.S. Freedom Support Act assistance program has used the following 

instruments from the beginning of the program to the present. 

• Technical assistance has been provided by U.S. contractors and 

agencies, primarily USAID, to Russia to convey know-how. 

• Exchanges run by the U.S. Information Agency, USAID, and other 

agencies bring Russians to the United States for training and exposure 

to the U.S. style of democracy and capitalism and the institutions that 

underlie them, thus supporting the transition to free market economies 

and democratic society. The exchanges, which could help create peopleto-people linkages, run the gamut from secondary school students to 

Russian parliamentarians. Many U.S. citizens are also sent to Russia.

• Commodity import programs, such as the Russia Energy and 

Environmental Commodity Import Program, have introduced U.S.-

designed equipment to Russia. The purpose of this particular program 
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was to improve the efficiency of energy use and improve environmental 

quality, primarily in the energy sector. 

• Enterprise funds, primarily The U.S. Russia Investment Fund or TUSRIF, 

also have been used to make equity investments in and provide loans 

and technical assistance to Russian businesses. Most of these 

investments have been in small- and medium-sized businesses.

• Trade and investment programs have been established through the 

Overseas Private Investment Corporation, the Department of 

Commerce, the Trade Development Agency, and the U.S. Export-Import 

Bank. The Freedom Support Act authorized supplementing these 

agencies' regular appropriations to pay for programs of technical 

assistance, feasibility studies, and orientation visits. The act also paid 

for programs fostering long-term commercial ties between Russia and 

the United States to help American companies defray the costs of 

hosting Russian managers and scientists for hands-on training. These 

programs are viewed as assistance. On the other hand, to the extent that 

these agencies' programs have funded export credits or insurance, they 

are not usually considered assistance. 

• Programs providing small grants have been used to promote democracy 

and market reform. The Eurasia Foundation is a prime example of a 

provider of small grants. The Eurasia Foundation is a privately managed 

grantmaking organization, originally funded by USAID and dedicated to 

funding programs that build democratic and free market institutions in 

Russia. 

Funding History for 

Russia

From fiscal year 1992 through 2000, the United States budgeted $2.68 

billion for Freedom Support Act programs in Russia.5 From fiscal year 1992 

through 1999, the United States expended $2.26 billion in programs 

authorized by the Freedom Support Act in Russia, which comprise about 36 

percent of the U.S. assistance expenditures. USAID was responsible for 

spending almost 75 percent of the funds for programs authorized under the 

Freedom Support Act. Figure 24 shows how funds for programs authorized 

under the Freedom Support Act were budgeted among the primary U.S. 

objectives.

5

 The Coordinator allocates the appropriation for assistance to the former Soviet Union 

among the countries, creating country budgets.
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Figure 24: Funds Budgeted for Freedom Support Act Assistance to Russia, Fiscal Years 1992-2000 (in $millions)

Source: U.S. Department of State and GAO analysis.

Strategy

Humanitarian Assistance 

Priority: 1991-1992 

Prior to the passage of the Freedom Support Act, there were several 

projects in process that paralleled the objectives in the Freedom Support 

Act. During the early years of U.S. assistance to Russia, there was no 

written U.S. strategy nor specific authorizing legislation to guide the 

program.6

 In fact, according to officials, the State Department prohibited 

USAID from developing country strategies or country budgets because it 

0

100

200

300

400

500

600

Address Urgent Human Needs Related to

Transition

$44.86 $45.41 $123.32 $62.58 $27.84 $15.76 $18.10 $28.80 $23.32

Nonproliferation/ Security Related Items $16.14 $10.25 $92.28 $11.50 $12.00 $9.50 $9.05 $15.45 $58.35

Promote Democracy and Rule of Law $8.05 $52.86 $213.33 $74.00 $42.40 $46.56 $57.48 $72.44 $64.06

Promote Market Reform $17.58 $205.09 $572.30 $210.83 $136.66 $72.23 $125.69 $46.83 $32.53

1992 1993 1994 1995 1996 1997 1998 1999 2000

In millions of dollars
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wanted to develop a general approach for assistance to the entire region of 

the former Soviet Union. Therefore, to determine the strategy for 1991 and 

1992, we relied on the Coordinator's early annual reports and our previous 

work (see Related GAO Products section). The United States' general 

approach assumed that the needs of the former Soviet Union states were 

similar and that the same project could be implemented across several 

countries.

Although some of the assistance that went to Russia in the early 1990s 

financed projects to support economic and democratic reforms, the main 

focus was on humanitarian assistance (see fig. 24 for specific sums). The 

Departments of State and Defense collaborated on a large-scale airlift of 

medical, food, and other supplies7

 to needy populations throughout Russia, 

called Operation PROVIDE HOPE. The economic and democratic 

assistance from this period was generally spread across several sectors8

 in 

a deliberate effort to try different approaches and find out which ones were 

most successful.9

The emphasis across the entire program was on speedy delivery and 

limiting the cost visible in the U.S. budget. The State Department 

emphasized quick-impact projects in an effort to show that the United 

States was engaged in and making an effort to help with the reform 

process. At the same time, domestic budgetary and economic problems in 

the United States created pressure to find ways to deliver assistance 

without having to seek additional appropriations. Thus, Operation 

PROVIDE HOPE shipped surplus commodities from the Defense 

Department as well as commodities from private donors. The initial 

6

 The Freedom Support Act was signed into law in October 1992.

7

 These supplies were a combination of Department of Defense surplus items and donations 

from private organizations. From fiscal year 1992 through 1999, the estimated value of the 

items was $602 million. The Freedom Support Act paid for the transportation costs, which 

were $59 million.

8

 In a December 1992 report, Former Soviet Union: Assistance by the United States and 

Other Donors (GAO/NSIAD-93-101), we reported that the experience gained in Central and 

Eastern Europe would help shape the aid program in the former Soviet Union, according to 

U.S. officials. U.S. officials cited lessons they learned and intended to apply, including that 

aid should be concentrated in a few priority areas to prevent a proliferation of projects.

9

 USAID's grant assistance to help with the implementation of mass privatization is an 

exception. In that instance, the United States devoted relatively significant resources in a 

deliberate effort to influence a major aspect of the reform process. 
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economic and democratic assistance programs were financed from the 

transfer of U.S. economic support funds initially designated for Pakistan 

and the Philippines. 

The nature and approach for the assistance were greatly influenced by 

initial assumptions and the domestic political environment in Washington. 

For example, part of the rationale for running the program from 

Washington and not developing country strategies stemmed from efforts to 

limit the numbers of State Department new embassies and USAID new 

missions in the former Soviet Union and the accompanying costs. This 

pressure, in turn, arose from the administration's desire to reduce the 

deficit and combat the recession underway in the United States during the 

early 1990s. In the earliest years of the program, this may have made sense 

because assistance officials generally knew little about how the Soviet 

economy and the economies of the former Soviet Union states worked. 

However, according to U.S. officials, the policy of not having countryspecific budgets actually undermined Washington management and control 

of the assistance program. Project managers, implementing work in one 

sector across several countries could leave a given country out of the 

project by committing all funds to projects in other countries. This limited 

the ability of officials at the Coordinator's office to control the program.

Market Reform Priority: 

1993-95 

The approach to providing assistance to Russia and the other former Soviet 

Union states evolved with the change of administrations in early 1993. 

Although humanitarian assistance continued, the primary emphasis was 

now on working with the Russian Federation government to develop and 

implement national reforms. Using the authority provided by the Freedom 

Support Act, the new U.S. administration sought to increase dramatically 

the size of the U.S. program in an effort to increase its impact on the reform 

process in Russia. The hope was that U.S. help in key areas would jumpstart the reform process and assist in bringing about the numerous 

structural changes needed in Russia for a democratic, market-based 

economy. For example, large contracts were created to assist Russians 

with privatization, and capital markets development. By September 1993, 

8 U.S. firms were working in these areas under contracts worth up to $60 

million.

The United States developed the overall approach for these programs in 

preparing for two major international summits in mid-1993. At the April 

Vancouver summit meeting with Russian President Yeltsin, President 

Clinton announced a $1.6-billion bilateral package of humanitarian and 
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technical assistance for Russia. Components of the package had been 

announced before and required no new appropriations. These programs 

were designed to be implemented very quickly to ensure that the U.S. 

bilateral program was having tangible effects for the Russian population to 

see. 

At the annual summit of the world's seven largest industrial economies (the 

G-7) in Tokyo in July 1993, the leaders of the G-7 countries approved a plan 

to extend an additional $3 billion in financial assistance to Russia. The U.S. 

portion totaled $1.5 billion for Russia in addition to the amounts pledged 

previously at Vancouver and consisted of private sector development 

funds, including grants; trade and investment money, including commodity 

import programs; democracy initiatives; funds to support troop withdrawal 

from the Baltics; an energy and environment program; and humanitarian 

assistance.

In September 1993, Congress appropriated the money necessary to 

implement these programs, approving over $2.5 billion in the fiscal year 

1993 supplemental fiscal year 1994 appropriation for assistance to Russia 

and the remaining former Soviet Union states.

We have reported about the complex iterative interagency process involved 

in developing these packages.10 Several groups, whose membership 

included many different U.S. agencies convened by the National Security 

Council, met to develop programs for Russia and the remaining former 

Soviet Union states. These programs focused on specific sectors such as 

Agricultural Technical Assistance, Anti-crime, Democracy, Energy, 

Environment, Enterprise Fund, Financial Sector, Food Aid, Law 

Enforcement, Rule of Law, Trade and Investment, and Russian Officer 

Housing and Retraining. Several officials described the challenges of 

making a coherent program with so many agencies. Although the general 

thrust of the program had shifted to emphasize economic reform, it 

maintained the broad and disparate nature of the early 1990s. By 1994, a 

wide variety of U.S. departments and agencies were implementing 

programs in Russia, including the Departments of Commerce and Energy, 

as well as the U.S. Information Agency and the Environmental Protection 

Agency. In December 1995, we reported that 23 departments and 

independent agencies were implementing over 200 programs in the former 

10See Former Soviet Union: U.S. Bilateral Program Lacks Effective Coordination

(GAO/NSIAD-95-10, February 7, 1995).
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Soviet Union —including 180 in Russia. The sheer magnitude of the U.S. 

bilateral program made coordination difficult and complicated efforts to 

focus U.S. efforts in a few key areas.

In 1993 and 1994, the U.S. program still stressed the need for quick 

implementation due to pressure from Congress and the White House. 

However, the rationale for speed changed. In the early 1990s, U.S. officials 

believed that rapid humanitarian assistance could stave off social unrest 

and show the Russia public the benefits of the new economic system. In the 

mid-1990s, the desire for rapid assistance in market reforms was driven by 

the belief that rapid reform would improve reform results and decrease 

hardship for the population in the long run.

By mid-1993 the United States moved away from having a single program 

for all the former Soviet Union. In late-1993, the Coordinator began writing 

the country strategies that were published in 1994, with the first country 

strategy being completed for Russia. Country budgets for assistance were 

also developed, and program design and management moved more to the 

local USAID mission and U.S. embassy. The Coordinator told us that, 

because of the Russia program's sensitivity, it would always receive more 

scrutiny than other country programs.

As State and the other agencies implemented the emphasis on market 

reform throughout 1994 and 1995, congressional support began to wane. 

After budgeting $1.0 billion for Russia for programs authorized under the 

Freedom Support Act in 1994, Congress cut funding to $359 million for 1995 

and $219 million for 1996. These dramatic funding reductions were driven 

by two main factors. First, the large appropriation for Russia in 1993 was 

presented by the administration to be an exceptional, onetime event to 

support what was likely to be a relatively short transition period. Indeed, 

the 1995 U.S. strategy for Russia supported this idea by stating that there 

would be no need for new funding for assistance to Russia after 1998. 

Second, Congress began to raise bipartisan concerns about the 

effectiveness of assistance to Russia and started earmarking significant 

portions of the Freedom Support Act program's appropriations for other 

former Soviet Union states, most notably Ukraine. Officials told us that the 

decrease in funding to Russia stemmed from a desire to do more in other 

parts of the former Soviet Union and not necessarily to do less for Russia. 

Democratic Reform Priority: 

1996 to Present

The significant decreases in U.S. funding, heightened concerns about the 

program's effectiveness, and a growing sense of unease about the state of 
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transition in Russia combined to bring about the next shift in U.S. strategy. 

Faced with these challenges, in early 1996 the Coordinator began to 

reevaluate the U.S. program for Russia. He found many problems affecting 

project effectiveness, which were published in the annual report. 

• Since a large amount of funding was appropriated early in the process, 

the rate at which a project was able to expend its funds became an 

important criterion in the initial rush to move money out the door, in 

some cases sacrificing cost-effectiveness. Under political pressure to 

expend as much money as possible, the Coordinator's office and the 

implementing agencies could not take time to figure out what projects 

worked. Contracts were let with objectives so large and vague that the 

money would always be spent.

• During the first several years of providing assistance to Russia, the 

desire to start up programs as quickly as possible, in combination with 

the need to ensure strict control over program implementation, resulted 

in a heavy reliance on large contracts for program implementation. For 

example, as we reported, under USAID's cooperative agreement with 

the Harvard Institute for International Development, the Institute 

oversaw the work of contractors involved with Russian privatization 

with minimal oversight from USAID. 11 According to the Coordinator, 

the United States had to move away from primary reliance on the largecontract mechanism.

• The difficult and rapidly changing environment in Russia, as well as the 

need for outside expertise, led to the predominant use of U.S., rather 

than Russian contractors in the early years of the program. The 

Coordinator concluded that the United States also had to make greater 

use of alternatives to U.S. contractors, such as local Russian 

nongovernmental organizations and experts.

11 In Foreign Assistance: Harvard Institute for International Development's Work in 

Russia and Ukraine (GAO/NSIAD-97-27), we reported:

The Harvard Institute for International Development conducted this project with minimal 

oversight from USAID. USAID did not always enforce the reporting requirements contained 

in the cooperative agreement, did not set measurable goals, and was not aware of decisions 

HIID was making that could have resulted in added cost to the government or significantly 

affected U.S. strategy. In addition to assistance provided to Russia directly by HIID, HIID 

also helped USAID to manage and oversee contractors and consulting firms. The U.S. 

contractors were paid by USAID, not HIID. The total value of USAID'S obligations for 1992-

96 for the Russian privatization program as of May 10, 1996, amounted to about $325 million, 

including approximately $40 million for HIlD.
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As a result of the Coordinator's review, State, USAID, and other agencies 

began to close down projects considered to be less effective or less 

important to the overall effort, including efforts in (1) agriculture, (2) 

energy reform, and (3) housing. Several USAID and State officials told us 

that the dramatic cuts in funding for Russia forced them to prioritize 

stringently their assistance efforts and limit strictly the scope of assistance.

As Figure 24 shows, the United States began shifting funds away from the 

market reform objective and toward promoting democracy in fiscal year 

1996. Since 1995, budgets for promoting market reform have generally 

dropped from a high of $572.3 million in fiscal year 1994 to $46.83 million in 

fiscal year 1999. For promoting democracy, the trendline since 1996 rose 

steadily, with the exception of a $12 million decrease in 2000. The funding 

for Promoting Democracy surpassed the funding for Promoting Market 

Reform in 1999 by $24 million. 

The Coordinator's review also led to a significant shift in U.S. strategy. In 

mid-1996, the Coordinator formulated a new U.S. approach, called the 

“Partnership for Freedom.” Assistance to the Russian federal government 

would diminish as projects at the national level ended, and new funding 

would focus mainly on grassroots efforts at the regional, local, or individual 

level. Implementation of the new approach began in fiscal year 1997 and 

has continued to the present. The restructuring focused U.S. assistance 

efforts on promoting (1) investment-led economic growth; (2) people-topeople linkages, bringing citizens of Russia and the U.S. together;12 and 

(3) the development of civil society. In Russia, according to the 

Coordinator, technical assistance provided by the United States and other 

donors had played an important role in helping to begin building the basic 

institutional building blocks for developing a market economy and a 

democratic government. Nonetheless, implementation of many 

institutional reforms was blocked in the Russian federal government. 

Under the new approach, the United States would remain involved to 

support the development of small- and medium-sized enterprises and civil 

society. The United States also place a greater emphasis on partnerships 

between U.S. and Russian universities, hospitals, nongovernmental 

organizations, cities, and business and professional associations as well as 

exchanges between U.S. and Russian students, professionals, and 

12 In fiscal year 1997, people-to-people linkages included low-cost, high-impact activities 

such as community-based exchanges and training, and U.S.-NIS institutional partnerships 

which were designed to be increasingly self-sufficient and ultimately self-sustaining.
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entrepreneurs. The purpose of this grassroots effort was to demonstrate to 

Russians the value of reform and the values of a democratic society. 

Connecting Russians with the world beyond their borders is supposed to 

encourage pressure for reform from below.

In addition, the recipients of U.S. assistance shifted from organizations 

working largely at the federal level to organizations in regions that 

demonstrated more reform-minded policies. Under this aspect of the 

program, known as the Regional Initiative, the United States targeted its 

assistance towards three Russian regions— Novgorod, Samara, and the 

Russian Far East13— whose local governments were deemed to be among 

the most reform minded and hospitable to investment. Moving to the 

regions was part of the approach to increase the bottom-up pressure from 

Russian citizens for reform in Russia. Supporting the development of 

nongovernmental organizations, financing public access Internet locations, 

and helping independent media were intended to bolster the development 

of a pluralistic democracy. Similarly, the United States hoped that providing 

advice to businesses, training in international accounting standards, and 

microlending opportunities would bolster the development of a vibrant 

small- and medium-sized enterprise sector that, in the long term, would 

grow large enough to counteract the influence of large enterprises 

controlled by the “oligarchs.”

These shifts involved rejecting a number of old assumptions. First, the 

Coordinator recognized that the transition process in Russia would extend 

over generations and that U.S. assistance in these efforts would last beyond 

fiscal year 1998, which was the initial end date in the original 1994 Russia 

strategy. As a result of the changed assumption, many U.S. programs, such 

as Junior Achievement programs or exchanges for young Russian leaders, 

became rooted in “investing in the future.” Second, the U.S. embassy and 

USAID mission in Russia played an increasing role as more U.S. assistance 

was targeted for specific regions within Russia. Finally, U.S. assumptions 

about what its assistance could accomplish were scaled back. The earlier 

emphasis on impacting national-level reforms shifted to hope that creating 

“success stories” at the local or regional level would spread, over time, 

throughout Russia.

The election of President Vladimir Putin in 2000 and the renewed 

possibility of reform driven at the federation level presented the United 

13 The Tomsk region joined the Regional Initiative in 2000.
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States with a quandary. So much of the U.S. assistance funding was 

committed to the Partnership for Freedom and the Regional Initiative that 

little was available to move back to the federation level to encourage 

reforms there. The Coordinator told us that the United States will continue 

to emphasize work at the grassroots level away from Moscow. Such 

assistance corresponds with the U.S. long-term perspective in Russia and 

with U.S. political realities. According to the Coordinator, if the Russian 

government makes specific requests for assistance, the U.S. government 

will consider responding positively if (1) a significant opportunity exists to 

advance reform; (2) the U.S. government has a comparative advantage in 

providing assistance in the requested sector; and (3) the Russian 

government is judged not to have sufficient resources to purchase 

assistance from private sources or the assistance requested is not available 

from private sources. If a large number of requests is received, the 

Coordinator may have to consider reallocating current budgets, or, in an 

extraordinary case, asking Congress for additional funds. U.S. officials 

expect to maintain some bilateral engagement in support of economic and 

democratic reforms in Russia over the long haul, believing that needed 

changes in Russia will require generations.

Lessons Learned U.S. agencies implementing assistance in Russia learned many lessons 

about assisting the transition to a market democracy. In general, the 

magnitude of change in Russia posed challenges greater than expected. 

The very difficult operating environment limited the progress of the 

program. The following are key lessons learned based on our review of U.S. 

documents and discussions with State Department and USAID officials.

• The Russian economy did not perform as predicted. According to U.S. 

officials, incomplete implementation of the reforms contributed to the 

failure to perform as predicted. Stabilization, liberalization, and 

privatization were supposed to transform centralized economic systems 

into competitive market economies. Economic reform was supposed to 

lead to growth, which would generate the money to pay for social 

programs. However, the hardships resulting from incomplete transition, 

economic stagnation, and collapsing social services, created greater 

resistance to reform.

• A lack of political will and consensus slowed the implementation of the 

transition. The governing elite in Russia, supporting the transition, was 

supposed to provide leadership for reform, and a growing middle class 

was to provide grassroots support for economic reforms, making them 

sustainable. However, the Russian transition has not spawned a growing 
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middle class. Russian Federation officials were not committed to 

specific transition policies, despite professed official statements to the 

contrary. Because the United States believed that the “ideas” of reform 

were so powerful, the United States underestimated the political 

dynamics in Russian society, particularly the struggle between 

reformers and entrenched power center, including the oligarchs. 

• Lack of consensus in Russia about what kind of society was ultimately 

desired resulted in fundamental disagreements about the institutional 

arrangements needed for transition. Where entrenched interests 

dominate the Russian national level, leadership for reform may need to 

come from the grassroots level (for example, business associations, 

nongovernmental organizations, community organizations, and local 

government). Because the next generation will provide tomorrow's 

leaders, it is in this generation that the United States must seek a reform 

orientation to deepen and consolidate the transition. Building the 

political will for reform after so many problems is a more difficult task 

now than it was in 1992 and must be viewed as a longer-term process.

• Russian commitment to assistance projects is vital. Russia must be 

ready for and open to the type of change that the assistance activities 

are designed to promote, and there must be willing private and public 

sector officials who can be full partners in reform. By requiring Russian 

partners to share program costs, the United States can accomplish two 

objectives: (1) reduce the costs of U.S. programs and (2) ensure that the 

recipient actually wants the program. Involving Russian staff in projects 

as much as possible is also important, because it teaches them new 

skills.

• The United States underestimated the difficulty in reorienting existing 

Russian institutions toward the principles and practices of market 

democracies. New economic reform policies−even once passed into 

law−were difficult to carry out due to insufficiently developed 

institutions in either the bureaucracy or the newly created private 

sector. Formal and informal public and private sector institutions 

fundamental to the operations of a market economy and democracy 

were and still are lacking or severely underdeveloped in Russia. By 

itself, training in how western systems work has limited effect when the 

trainees must return to the Russian environment. Likewise, new 

institutions filled with people who have not adopted new approaches 

will not be institutions of change.

• Corruption is a pervasive major constraint to reform. Corruption is 

pervasive in Russia and is a major constraint to the development and 

growth of the private sector. Powerful private interests use their 
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connections to the state to block reforms. Economic restructuring will 

not be successful without addressing corruption. 

• Relations between the United States and the Russian Federation will 

fluctuate based on international politics or the pace of reform in Russia. 

However, there are useful, long-term programs mutually beneficial to 

the United States and the people of Russia that remain relatively 

immune to fluctuations in the pace of governmental reforms. These 

include (1) training and exchange programs that increase exposure to 

and knowledge of democracy and market economies among those 

involved; (2) direct assistance to independent media or democratic 

political institutions; (3) help for the emerging private sector; and 

(4) people-to-people, and institution-to-institution programs.

• Sustained contact with assistance recipients enhances projects: A 

regular complaint from Russian and other former Soviet Union officials 

was that technical aid consisted of too many assessments and too few 

actions. Effective aid projects, such as housing reform by the Urban 

Institute, relied on sustained contacts between American experts and 

Russian counterparts, not whirlwind site visits by consultants. 
Page 181 GAO-01-8 Foreign Assistance to Russia

Appendix V

Additional Information on the European 

Union's TACIS Programs in Russia ApendxiV

Background In December 1990, the European Council decided to offer technical 

assistance to the Soviet Union in an effort to bolster the reform agenda and 

help foster the development of a market economy and a democratic 

society.1

 The European Union (EU) was concerned that the growing 

economic and political instability in the Soviet Union could affect the EU's 

member countries. EU members believed that aiding the transition could 

stave off large refugee flows, help ensure that nuclear reactors operated 

safely, and maintain economically important trade ties.

However, the EU was aware of the potentially large sums of money that 

could be spent on transition efforts. The German government was just 

beginning to expend billions of dollars trying to integrate eastern Germany 

with the rest of the newly unified country. EU leaders were deterred by the 

potential price tag for providing direct investment in infrastructure for 

Russia and decided that EU assistance efforts would focus on the provision 

of technical assistance. This choice played into the assumption at the time 

that Russia, although misdeveloped by years of communism, also enjoyed 

the benefits of a large industrial base, an educated population, and 

abundant natural resources. The EU believed that a large program with 

several hundred targeted, short-term projects would help train Russians in 

how to revitalize their economy, integrate Russia into the global market, 

and contribute to overall political stabilization in the region.

In July 1991, the EU adopted a regulation establishing the legal authority 

for the European Commission2

 to implement a technical assistance 

program, later named the Technical Assistance for the Commonwealth of 

Independent States. Since that time, the Commission has been responsible 

for implementing the program. The EU has reauthorized TACIS three times 

since its creation, through regulations issued by the Council of the EU in 

1993, 1996, and 1999.3

 These regulations, combined with periodic policy 

1

 The European Council is composed of representatives from the 15 member states of the 

European Union. Its decisions reflect the consensus political will of the EU member states 

and provide overall political guidance to the activities of the EU.

2

 The European Commission is responsible for, among other things, the implementation of 

political decisions made by the institutions of the EU.

3

 The Council of the European Union adopts resolutions, which are legally binding on the 

institutions that comprise the EU, such as the European Commission, and the EU member 

states. In this instance, the regulation creating TACIS is roughly equivalent to congressional 

authorizing legislation.
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resolutions issued by the EU Council, provide the Commission with overall 

political guidance for the program. In addition, implementation decisions 

such as issuing tenders (bids) for contractors and developing the objectives 

and scope of work for specific projects are overseen by representatives 

from the 15 member states of the EU, with input from the Russian 

government.

Overall Objective and 

Initial Assumptions

Since its inception, the overall objective of the TACIS program in Russia 

has been to assist and accelerate market economic reforms in Russia. 

Other objectives pertaining to democracy and rule of law were added in 

1993 and 1999. The program has been guided by a common series of 

assumptions about how TACIS projects would help bring reform to Russia.

From the outset, the EU recognized that its ability to influence change in 

Russia through TACIS was limited. The European Council resolution that 

created TACIS in 1991 explicitly noted that the resources available for the 

program were minuscule relative to the size of Russia and the problems it 

would face during the transition. Successful individual projects could have 

little impact in such a large country. As a consequence, TACIS strategies 

and plans stressed the importance of focusing efforts in a few key sectors 

and tried to cluster projects in reform-minded localities and regions to help 

achieve broader impact.

EU leaders also believed the transition in Russia would take some time and 

be very expensive. A TACIS document from 1992 speaks openly of the 

challenges the program faced in starting operations in Russia. These 

included the rapidly changing political situation and the magnitude of the 

problems to be addressed, as well as TACIS' own institutional constraints, 

especially a critical shortage of staff.

Implicit in TACIS' design is the EU's belief that technical assistance is a 

relatively inexpensive and cost-efficient way to promote reform. Rather 

than providing large sums of money to enhance restructuring of enterprises 

or to finance the social safety net while reforms were being implemented, 

the EU focused on encouraging the transfer of know-how about market 

systems to Russia. Related to this assumption was the belief that TACIS' 

technical assistance would help bring about market reforms. These 

reforms would attract the foreign direct investment Russia needed to help 

share the high costs of modernizing and restructuring the Russian 

economy.
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The TACIS program has also stressed the importance of close cooperation 

with Russian counterparts on strategies, project design, and evaluation. By 

working alongside its Russian counterparts, the EU hoped to ensure that 

the resulting TACIS projects would be closely tied to Russian priorities and 

would reflect the realities on the ground in Russia. This would enhance the 

program's impact.

TACIS also recognized that Russian buy-in to an individual project might 

not be enough to ensure success. Broad progress in making appropriate 

reforms and providing stability in the macroeconomy creates a stable 

foundation for technical assistance efforts that are important for overall 

program success. This assumption recognized that projects were not being 

conducted in a vacuum. The EU assumed that the support of government 

officials, an enabling environment of sound economic policies, and 

progress toward an open and democratic society were necessary for 

individual TACIS projects and the program as a whole to achieve its goals.

TACIS' Instruments Since its inception in 1991, the TACIS program has relied almost 

exclusively on six different forms of technical assistance to meet its 

objectives.4

• Policy advisers to government agencies: This has been the primary 

instrument for the program since its inception. TACIS hires European 

contractors to work with Russian government officials—sometimes at 

the federal level, but more frequently at the regional or local level. 

Policy advisers are supposed to work closely with their counterparts 

and assist them in pursuing their reform agenda. For example, TACIS is 

providing policy advisers to assist the Russian government in drafting 

and implementing tax laws.

• Training and advice to the private sector: Although used less 

frequently in recent years, many of TACIS' early projects involved 

training people in various aspects of the operation of the market 

economy. For example, the largest single project for 1991 provided 

management education and training for Russian business people in 

cooperation with the Academy of National Economy. Recently, TACIS 

has relied less on this instrument due to (1) growing knowledge among 

Russians about the market and (2) the realization that mass training 

4

 Since 1996, the TACIS regulation has allowed limited use of funds for investment projects. 

So far, the TACIS program has rarely used this instrument in Russia.
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programs may not be effective if there are no opportunities to use the 

training outside the classroom. For example, an internal evaluation of 

TACIS programs in Russia found that training Russians in bank 

standards based on western practice was not necessarily relevant to the 

way banks actually operated in Russia.

• Internships: TACIS finances internships that allow Russians to work at 

EU companies. For example, the managers' training program gives 

Russian managers from the manufacturing sector a 2- to 3- month 

internship working at a European firm.

• Funding studies, including pre-investment plans, market research, 

and feasibility studies: TACIS has provided funding for a wide variety 

of studies and plans, especially in the early years of the program. The 

rationale for this instrument is that the Russians may need basic 

information about the particular problem or issue they hope to address. 

Studies also sometimes helped form the foundation for much larger 

financing from the World Bank or the European Bank for 

Reconstruction and Development. For example, TACIS recently 

completed a 2-year study of the feasibility of a gas distribution network 

extension for the Russian Ministry of Energy. This effort is being used as 

preparatory work to support a World Bank loan.

• Developing and reforming legal and regulatory frameworks, 

institutions, and organizations: The EU has also provided technical 

assistance to help the Russians establish key institutions and processes 

vital for a market economy. Much of this work involves drafting 

legislation, training government workers in necessary skills, and 

offering advice on changing operations. For example, since 1997, TACIS 

has been supporting efforts to improve the federal-level management of 

the public health care system in Russia by working with the Ministry of 

Health to improve its ability to develop and monitor activities to address 

health concerns.

Linking EU and Russian institutions: In recent years, the EU has placed 

more emphasis on developing permanent links between EU and Russian 

institutions, a process the EU calls “twinning.” Rather than hiring 

consultants who may not be around in 12 months' time, the EU will use a 

European institution, such as a hospital, to implement a program in a 

Russian hospital. Twinning helps ensure that the Russian counterparts will 

have a consistent EU partner for follow-up after the conclusion of the 

program. Ideally, the EU institution would begin to operate its programs in 

Russia without further EU funding. For example, TACIS' Tempus program 

promotes links between Russian and EU academic institutions in the areas 

of economics, business administration, and law.
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Funding History for 

Russia

Since 1991, TACIS has committed $2.7 billion for programs in Russia and 

disbursed $1.6 billion (see fig. 25). For most of this period, commitments 

ranged from $250 million to $300 million annually, although commitments 

for 1999 and 2000 dropped considerably.5

Figure 25: TACIS Commitments and Disbursements for Russia, 1991-2000

Note: Data for 2000 is through August 31.

Source: European Commission.

5

 Part of the reason for this drop is the introduction of an incentive scheme within the 

program. About 10 percent of total program funding for 2000 has been taken from country 

budgets and set aside to finance the best project proposals from all TACIS countries. 

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Committed Disbursed
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TACIS assistance has been spread across seven major sectors since 1991 

(see fig. 26). Energy and enterprise support account for about half of total 

disbursements to date.6

 Human resources development and agriculture 

spending are also important sectors. In fact, TACIS has devoted a larger 

share of its funding—about 9 percent— for agriculture than any of the 

other donors in our study. Although the 2000 program for Russia 

emphasizes human rights and civic society, funding for democratic reform 

has been only a minor portion of the program to date.

Figure 26: TACIS Commitments by Sector, 1991-1999

Source: European Commission.

Strategy Drawing generalizations about strategy with such a broad and diverse 

program is difficult. Since 1991, TACIS has implemented more than 500 

projects in Russia and as of August 2000 had about 100 projects underway. 

6

 Energy programs include nuclear reactor safety efforts, as well as technical assistance to 

rationalize Russia's delivery of all forms of energy within the economy.

Energy

28%

Enterprise Support

21% Human Resources Development

20%

Agriculture

11%

Transportation

8%

Environment

3%

Telecom

2% Other

7%
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Although the TACIS strategy for Russia has evolved over time away from 

having a quick impact toward placing more emphasis on laying the 

foundations for reform and paying greater attention to democratic reform, 

some central tenets have remained consistent. TACIS remains largely a 

technical assistance program that has delivered help to essentially the 

same sectors since 1991. The EU presents its strategy for TACIS assistance 

to Russia in a series of publicly available documents, including multiyear 

indicative plans and annual action plans.

Early Efforts in 1991-94 

Focused on Quick Impact

TACIS projects during the early years of the transition focused on having a 

quick impact, with special attention devoted to training Russians in market 

economics. Democracy building was not initially a significant part of the 

program. Although democracy was included as an overarching objective in 

1993, the projects TACIS implemented during this period were almost 

exclusively related to various aspects of economic reform including human 

resource development, enterprise support, energy, transportation, financial 

services, and food distribution.

The specific projects implemented to pursue these goals emphasized 

quickly identifying problems and putting consultants in the field to meet 

specific Russian needs. Many of the early projects were small, with a focus 

on diagnosing a problem, and often involved study tours, conferences, or 

writing reports. There was also an emphasis on training as many people as 

possible in a variety of areas including banking, finance, and economics. 

Most of this training was conducted in Russia because TACIS also 

attempted to support or create permanent institutions to carry out the 

training after TACIS funding stopped.

From the beginning of the program, TACIS frequently implemented 

projects at the regional and local levels. In fact, it prepared action plans 

specifically for ten regions of Russia from 1992-1995, in addition to plans 

for Russia as a whole. The rationale for focusing on the regions, later 

echoed by other donors such as the United States and the European Bank 

for Reconstruction and Development, included a desire to reward more 

reform-minded regional governments in an effort to show other regions 

that reforms were both preferable and possible.
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Greater Emphasis on 

Attaining Systemic Change, 

1995-98

During this period, support for economic reform and for democracy were 

the dual goals of the TACIS program in Russia. However, TACIS 

implementation continued to focus mainly on economic reform, with 

greater emphasis on attaining systemic change at the federal level.

The change in TACIS' approach was driven by the changing conditions in 

Russia. The EU realized the challenges of transition in Russia proved to be 

much harder than expected in terms of complexity and the length of time 

the process would take. From working in the regions, TACIS learned that 

the success of projects often depended on the overall reform environment. 

Without a strong base of reform and market-oriented institutions, it proved 

difficult to have lasting impacts. Thus, TACIS shifted its focus in an attempt 

to have greater influence on systemic reforms. TACIS implemented larger 

projects and worked more frequently with partners at the federal level, but 

projects with federal institutions generally had activities in pilot regions.

Although TACIS changed its relative focus from the regions to the federal 

level, it continued to operate in essentially the same sectors as it always 

had. For example, the only change in priority sectors between 1994 and 

1998 was the addition of environment to the list of sectors that were the 

focus of technical assistance.

The political context for the TACIS program changed after 1994, when the 

Partnership and Cooperation Agreement between the EU, EU member 

states, and the Russian government was signed.7

 This document was an 

effort to delineate and tighten the links between Russia and the EU. For 

TACIS, the Partnership and Cooperation Agreement provided clear 

political guidelines for the program, something that had been lacking in the 

past. By 1996, TACIS' plans included specific references to the agreement, 

although the selection of specific projects remained more closely linked to 

the annual action and multiyear indicative plans.

Some of TACIS' initial assumptions changed during this period. Like other 

donors, TACIS realized the challenges of promoting reform in Russia were 

more complicated than initially expected. As an interim EU Commission 

evaluation of the program reported in 1997, “With hindsight, it is clear that 

the complexity of societal change in the NIS [new independent states of the 

former Soviet Union] was grossly underestimated.” As a result, project 

7

 The Agreement entered into force in December 1997.
Appendix V

Additional Information on the European 

Union's TACIS Programs in Russia

Page 189 GAO-01-8 Foreign Assistance to Russia

selection began to include more grassroots efforts related to improving 

civil society and developing small- and medium-sized enterprises.

Post-crisis Reflection Leads 

to Modified Approach

The Russian financial crisis in late 1998 reinforced TACIS' earlier 

assumption that Russia's transition to a market economy would be a longterm process. TACIS officials told us that it was clear the transition had not 

gone as well as initially expected, in part because (1) the institutional 

underpinnings for a market economy and democratic society were lacking 

and (2) the necessary political consensus within Russia on how to proceed 

was not developed. The EU in general revisited its overall approach to 

helping Russia with the transition process. The increased focus on the 

institutions necessary for a market economy and democratic society led 

the EU to add a third objective to the program: support for the 

development of the rule of law. By 2000, the TACIS' annual program made 

democracy building the central focus for the first time. TACIS also placed 

greater emphasis on building institutions, working at the grassroots level, 

and developing more linkages—“twinning”—between Russian and EU 

institutions.

During this period, TACIS also changed the way in which it consulted with 

the Russians about plans and projects. Until the end of 1999, the Russian 

government had to initiate project proposals before TACIS could develop 

and implement them. In practice, relying exclusively on Russian project 

proposals limited TACIS' ability to play a role in several key areas of the 

transition, especially the democracy building and social service sector. 

Consequently, the 1999 regulation for TACIS moved to a so-called 

“dialogue-driven” approach in which project ideas can be initiated by the 

EU or the Russian government. Project approval remains a mutual EURussian decision.

TACIS' strategy in Russia was also placed more firmly within the 

framework of broader EU political goals in Russia. The Partnership and 

Cooperation Agreement was supplemented by the development of a 

common EU strategy for relations with Russia.8

 The main finding in the 

strategy was that a stable, democratic Russia closely tied to a united 

8

 Under the terms of the treaty obligations that form the legal basis for the EU, the 

Commission is allowed to act on behalf of the joint interests of the 15 member states on 

certain foreign policy matters. EU member states negotiated the common goals set out in 

the common strategy, which were later approved by the Council of the EU after consultation 

with the Russian government.
Appendix V

Additional Information on the European 

Union's TACIS Programs in Russia

Page 190 GAO-01-8 Foreign Assistance to Russia

Europe was essential for maintaining lasting peace in Europe. To achieve 

this goal, the EU would focus on achieving two aims: (1) a stable, open, and 

pluralistic democracy in Russia underpinned by a market economy; and (2) 

intensified cooperation with Russia on global security goals. Technical 

assistance to Russia was now more explicitly tied to supporting broader 

EU goals. In practice, this meant development of projects like improving 

transportation links, upgrading border controls, and addressing 

environmental concerns in northwest Russia. Projects like these supported 

the dual EU goals of backing the transition in Russia to a market economy 

and democratic society for its own sake and increasing Russia's integration 

within Europe as a whole.

New Assistance Slowed in 

2000

The year 2000 has been unusual for the TACIS program in Russia. First, the 

introduction of a new regulation for the entire program caused some shifts 

in priorities, tactics, and instruments. Second, Russia's ongoing war in 

Chechnya and the EU's concern about the human rights situation there led 

to a political decision by the EU Council in December 1999 to suspend most 

work on new TACIS assistance to Russia. Previously approved projects 

could continue to function, and work began on developing $32.3 million in 

new projects to bolster civil society and human rights.9

 However, work on 

new economic assistance projects for Russia was halted. The EU lifted this 

ban in July 2000 and currently plans to devote $53.3 million for economic 

assistance to support the implementation of Russia's economic reform 

package.

TACIS has the legal authorization to continue assistance to Russia through 

the end of 2006. Given the EU's political commitment to support reform in 

Russia and increase its integration with the rest of Europe, the nature of 

the help may change. EU officials told us that future programs may place 

increasing emphasis on supporting EU-Russia bilateral goals such as 

complying with Partnership and Cooperation Agreement requirements, 

approximating EU standards, and removing technical barriers to additional 

trade, in addition to promoting democratic development and the growth of 

civil society.

9

 The EU approved the plan for these projects in June 2000.
Appendix V

Additional Information on the European 

Union's TACIS Programs in Russia

Page 191 GAO-01-8 Foreign Assistance to Russia

Lessons Learned TACIS does not have a systematic process for collecting lessons learned 

about its projects. TACIS officials stressed that such a system would be 

difficult to implement, given the large number of projects it carries out 

across Russia and the rest of the former Soviet Union. However, TACIS 

officials and TACIS reports and evaluations provide some lessons learned 

from experience in Russia.

• Achieving an impact in Russia is difficult, given the challenges of the 

operating environment. Russia is a large country with complex 

problems that are not easily addressed by technical assistance, unless 

there is clear commitment to reform. Such commitment and consensus 

are hard to build during a period of economic decline and continued 

political crisis. Sustainability of results is also difficult and requires 

follow-through on recommendations. For example, contractors cannot 

expect to have much influence from writing a report, then leaving.

• Successful projects have support from Russian counterparts and 

generally require contractors to have a close, long-term presence.

• The lack of political will and the difficulty in obtaining political 

consensus have been significant impediments to reform in Russia.

• The transition to a market economy and democratic society will take a 

long time— much longer than initially envisioned. In part this is because 

a sustainable transition to a market economy and democratic society 

requires broad, grassroots support; effective and stable institutions; and 

adequate laws and enforcement.

• The quality of individual consultants is central to project effectiveness.

• Russians are now more familiar with “how it is done” in the West. They 

need help in developing solutions that work within the Russian context. 

Within this context, the previous emphasis on knowledge transfer may 

require modification. Instead, TACIS implementers and their Russian 

partners should expect to share knowledge and information to develop 

joint solutions more frequently. For example, according to one EU 

official, about half of TACIS' ongoing projects in Russia use local 

experts.

• There is a clear understanding that TACIS could further improve the 

delivery of its assistance, both in terms of timeliness and impact. Many 

reports noted the lengthy delays between project approval and project 

implementation and found that these delays were rooted in (1) the 

complex EU tendering process, (2) critical understaffing of the program, 

and (3) political complications stemming from the requirement to obtain 

approval from 15 member states and the Russian government. The new 
Appendix V

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Union's TACIS Programs in Russia

Page 192 GAO-01-8 Foreign Assistance to Russia

regulation approved in December 1999 was designed to address some of 

these problems.
Page 193 GAO-01-8 Foreign Assistance to Russia

Appendix VI

Time Line of Key Economic and Political 

Events in the Russian Federation, 1990-2000 ApendxiVI

Year Economic events Political and social events

1990 • G7 asks for joint study of the Soviet economy

• Soviet output declines

• System of state orders begins to break down in face of 

growing strikes, interethnic strife, and creation of local 

and republic trade barriers follows

• Competitive local and republic level democratic elections held; 

anti-Communist parties do well

• Soviet constitution amended to remove Communist supremacy in 

political matters; new parties emerge

• Presidential guideline issued giving republics considerable 

freedom over pace of reform

1991 • Gorbachev issues new economic anticrisis program

• Trade bloc with former East bloc dissolved; volume of 

trade quickly declines

• Yeltsin granted emergency powers to reform the 

Russian economy; calls for rapid, ambitious reform 

including privatization, ending most wage and price 

controls, and removing government controls on trade 

and foreign currency transactions

• Inflation surges, output falls, deficit quickly grows due to 

low taxes and continued high government transfers to 

households and enterprises

• Boris Yeltsin popularly elected Russian President

• Communist hard-liners' attempted coup fails, but episode 

undermines the political authority of the Soviet Union and 

Gorbachev

• Yeltsin issues decrees declaring Russia's economic sovereignty 

and takes control of Soviet government agencies

• Yeltsin appoints pro-reform government and appeals for donor 

assistance; Yegor Gaider named Deputy Prime Minister 

• Accord between Russia, Ukraine, and Belarus dissolves the Soviet 

Union; Gorbachev resigns and the Soviet Union is formally 

dissolved

1992 • Ruble allowed to float freely

• Most prices liberalized leading to increases five to 

sixteen fold in retail prices

• State trading monopoly abolished

• Mass privatization program adopted

• Exchange rate unified

• Voucher privatization begins

• Russian legislature tries to halt Yeltsin's reform efforts

• Western nations announce $24 billion aid package

• Acting Prime Minister Gaidar ousted and replaced by Viktor 

Chernomyrdin

• Gereschenko becomes head of the Central Bank of Russia, and 

proceeds to lend money directly to enterprises 

• Russia joins the IMF and World Bank

1993 • Treasury bills market started

• New ruble introduced

• Ruble zone collapses

• Legislature narrowly fails to impeach Yeltsin; passes resolution 

limiting powers of government to implement reforms

• President dissolves the Russian parliament and calls for elections

• Parliamentary forces attack a TV station and the mayor's office; 

government forces storm the parliament building

• Yeltsin introduces special presidential rule

• Federal elections for the new Duma result in victory for Communist 

and nationalist parties

• New constitution giving President greater power, approved in 

referendum

1994 • Voucher privatization completed

• Cash-based privatization begins

• Speculators attack the ruble, causing a 20 percent drop 

in value in one day⋅

• New federal Duma attempts to block the government's reform 

plans; Yeltsin responds by issuing decrees

• Reformers brought back into government

• Russian troops invade Chechnya

1995 • Currency bonds introduced

• Federal Assembly bans loans from Central Bank to the 

government without Assembly approval

• Loans for shares auction begins

• Communist Party dominates Duma elections

• Yeltsin's popularity rating falls below 10 percent

• Duma tries to impeach Yeltsin and fails

• Russian oligarchs agree to suspend their differences and unite to 

back Yeltsin's presidential campaign

1996 • Foreign trade liberalized

• Full current account convertibility introduced

• Federal Eurobond sale begins

• Yeltsin wins Presidential election, but is stricken with poor health 

for much of the year

• Russian troops withdraw from Chechnya
Appendix VI

Time Line of Key Economic and Political 

Events in the Russian Federation, 1990-2000

Page 194 GAO-01-8 Foreign Assistance to Russia

1997 • Regional Eurobond sale begins

• Paris Club admission

• London Club debt rescheduling

• Russia's first year of (barely) positive economic growth

• Financial crisis in Asia places pressure on the ruble

• Key reformers brought back into the government in March

• Scandal over book royalties proves politically damaging to some 

key reformers

• Duma tries to impeach Yeltsin and fails

1998 • Interest rates on Russian bonds, securities rises as 

government attempts to finance growing deficit and 

defend ruble

• $22.6 billion Western financial assistance package 

announced

• Financial crisis: Russia defaults on government bonds, 

places moratorium on external debt service, widened 

exchange rate bands—ruble plunges, stocks plunge, 

GDP falls, prices soar

• Reformers removed from key positions in government

• Yeltsin fires Chernomyrdin, and Sergei Kiriyenko is confirmed as 

Prime Minister

• Yeltsin dismisses entire cabinet, and Yuri Primakov becomes 

Prime Minister

1999 • New government fails to enact meaningful reform in 

response to crisis; but also does not turn back past 

reforms

• New tax code enacted

• Exchange rate reunified after a brief dual exchange rate 

regime 

• New $4.6-billion IMF program announced; only $600 

million disbursed to date

• Economic growth, led by increased domestic 

production, resumes sooner than expected

• Yeltsin dismisses cabinet again, including Primakov; Sergei 

Stepashin named new Prime Minister

• Duma tries to impeach Yeltsin and fails

• Vladimir Putin named prime minister after Stepashin is dismissed

• Russian troops enter Chechnya, launching second war there

• Duma elections result in pro-government majority for the first time

• Yeltsin resigns and names Putin acting President

2000 • Oil price increase, leads to large trade and balance of 

payments surpluses

• Economic growth accelerates

• Russian government releases outlines of economic 

reform package

• Duma approves changes to tax laws

• Putin is elected president

• New laws reduce political autonomy of the regions

• Government cracks down on opposition media

(Continued From Previous Page)

Year Economic events Political and social events
Page 195 GAO-01-8 Foreign Assistance to Russia

Appendix VII

Additional Information on Economic Trends ApendxiVI

In this appendix, we sketch the key economic trends that have prevailed 

during Russia's economic transition. We have limited the discussion to 

trends in Russian output, poverty, debt, trade, foreign investment, and 

capital flight. 

Since the early 1990s, Russia has been described as having an “economy in 

transition;” that is, it is in the process of transforming the institutions, 

incentive systems, and economic structures of central planning into those 

appropriate to a market system of decentralized decision-making. Russia's 

economic transition faces the challenge of transforming the rigid 

production and social structures handed down to Russia by the former 

Soviet Union. Although Russia still has a long way to go to create a market 

economy, it has seen some success in overcoming the vestiges of the Soviet 

command economy. However, the transition has been, at times, 

accompanied by a substantial degree of macroeconomic instability in the 

form of declining economic output, soaring inflation, large government 

deficits, unsustainable debt, capital flight, and deteriorating living 

standards.

Aspects of the Decline 

of Russian Output

The fall of the former Soviet Union led to the collapse of Russia's trade with 

traditional partners as well as reduced flows of goods and services among 

the former republics. The Russian output began to slip as supply and 

distribution problems idled enterprises and as the economy deteriorated 

into barter. Also, as the government removed production subsidies, much 

of the capital capacity went out of use. Reductions in military expenditures 

further accelerated the fall in production. 

Figure 27 shows the severe drop in gross domestic production experienced 

by Russia since 1990, together with the even sharper contraction in 

investment and industrial output. The decline in consumption was less 

drastic, reflecting a correction in Soviet-era policies that discouraged 

consumption. 
Appendix VII

Additional Information on Economic Trends

Page 196 GAO-01-8 Foreign Assistance to Russia

Figure 27: Index of Russian Production, Consumption, Industrial Output, and Investment, 1990-1999, 1990 = 100

Source: PlanEcon.

Measured economic output, however, may not accurately reflect Russian 

production, because many economic activities have been drawn away from 

the formal sector to the informal sector. Also, official statistics may have 

exaggerated the decline to some degree.1

 Furthermore, how the decline in 

output affected the welfare of Russian citizens is complex. The elimination 

of expensive military investments, downsizing of energy-intensive polluting 

industries, and closure of some industries that produced little actual value -

added had some beneficial effects. 

Russia achieved a positive nominal GDP growth in 1999, as industrial 

production grew by 8 percent. GDP grew by 3.2 percent in 1999, exceeding 

0

20

40

60

80

100

120

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Real Gross Domestic Product Personal consumption

Gross Investment in Fixed Capital Gross industrial output

1

 The extent of the decline in output in official statistics may be exaggerated, because 

expenditure data indicated a less severe downturn, and also because electricity 

consumption by industry had fallen far less than the reported decline in industrial 

production.
Appendix VII

Additional Information on Economic Trends

Page 197 GAO-01-8 Foreign Assistance to Russia

western forecasts. This recovery was primarily attributable to the import 

substitution effect after the ruble devaluation of August 1998, the increase 

in prices of Russia's oil exports, and some industrial restructuring. As of 

September 2000,the IMF forecast GDP growth of 7.0 percent in 2000 and 4.0 

percent in 2001.

Poverty and Living 

Standards

Russia has seen a surge in poverty and a deterioration of living standards 

for a large number of its citizens. Most social indicators show significant 

worsening since the collapse of the Soviet Union in 1991. According to the 

latest United Nations human development report, Russia in 1999 ranked 

71st among 173 countries. In 1991 based on data for 1985-90, the United 

Nations had ranked the Soviet Union as 31st out of 160 countries. One 

measure for the extent of poverty in Russia is the trend of real GDP per 

capita and real average wages, which shows that by 1999 the average 

Russian citizen lost nearly 40 percent of his or her 1990 income. During the 

first quarter of 2000, 59.9 million Russians, or 41.2 percent of the 

population, lived below the poverty line or subsistence level of 1,138 rubles 

($40.21) a month. The average life expectancy in Russia has reflected the 

trend in poverty and living conditions (see fig. 28).
Appendix VII

Additional Information on Economic Trends

Page 198 GAO-01-8 Foreign Assistance to Russia

Figure 28: Average Russian Life Expectancy at Birth, in Years

Source: IMF, Russian Federation: Recent Economic Developments.

Much of the increase in poverty can be linked to the collapse of output and 

income, coinciding with very high rates of inflation early in the transition 

process. As a result of the increase in income inequality, the share of the 

population below the subsistence level does not necessarily improve with 

output growth. Other causes of the increase in poverty include reductions 

in state subsidies, and nonpayment and erratic payment of wages and 

pensions.2

As can be seen from figure 29, after an initial surge during the early years of 

high inflation, the share of population below the subsistence level was 

relatively stable at around 20 percent from the end of 1995 to July 1998. In 

50

52

54

56

58

60

62

64

66

68

70

1991 1992 1993 1994 1995 1996 1997 1998

All Russians Males

2

 In 1997, overdue wages were estimated at 63 trillion rubles (equivalent to 5 weeks' wages 

in the whole economy). 
Appendix VII

Additional Information on Economic Trends

Page 199 GAO-01-8 Foreign Assistance to Russia

September 1998, the share of population below the subsistence level 

surged due to the financial crisis and subsequent reduction in real wages. 

The traditional social support system has been severely affected by the 

budget crises of local, regional, and central governments; with health 

services, housing, and recreational and cultural facilities becoming 

increasingly inaccessible to those who are poor.

Figure 29: Share of Russian Population Below Subsistence Level, December 1991−June 2000

Source: Russian Economic Trends database, 2000.

Foreign Trade The supply and distribution linkages within Russia and the former union 

fell apart when the former Soviet Union dissolved. In the absence of these 

linkages, the region lacked an effective payments system to facilitate trade. 

Russia, therefore, faced a collapsed demand for its traditional industrial 

0

10

20

30

40

50

60

Dec-91

Jun-92

Dec-92

Jun-93

Dec-93

Jun-94

Dec-94

Jun-95

Dec-95

Jun-96

Dec-96

Jun-97

Dec-97

Jun-98

Dec-98

Jun-99

Dec-99
Appendix VII

Additional Information on Economic Trends

Page 200 GAO-01-8 Foreign Assistance to Russia

exports and uncertain input supplies from domestic and former Soviet 

Union sources to produce its exports. 

Russia's exports have been concentrated in energy and raw materials, 

making export revenues highly sensitive to changes in commodity prices. 

Its imports were primarily consumer goods, foodstuffs, and machinery and 

equipment. 

Figure 30: Merchandise Trade of Russia, January 1992−December 1999 (Billions of U.S. dollars)

Source: Russian Economic Trends database, 2000.

Russia has generated a persistent trade surplus despite a very low level of 

trade for the size of the Russian economy. In mid 1993, both imports and 

exports began to increase, when higher oil and gas export prices prevailed 

and a depreciated ruble made exports more competitive. Imports of 

0

1

2

3

4

5

6

7

8

9

10

Jan-92

May-92

Sep-92

Jan-93

May-93

Sep-93

Jan-94

May-94

Sep-94

Jan-95

May-95

Sep-95

Jan-96

May-96

Sep-96

Jan-97

May-97

Sep-97

Jan-98

May-98

Sep-98

Jan-99

May-99

Sep-99

Exports Imports
Appendix VII

Additional Information on Economic Trends

Page 201 GAO-01-8 Foreign Assistance to Russia

western goods and services were boosted by eased foreign exchange 

constraints. In 1998, oil prices fell and the Russian financial crisis caused a 

devaluation of the ruble and imports dropped sharply. In 1999, a further 

drop in imports helped to raise the merchandise trade surplus to a record 

$35 billion (see fig. 30). 

Figure 31: Composition of Russian Exports, 1994-98

Note: “others” includes textiles, footwear, leather, and fur.

Sources: Goskomstat: Russian Economic Trends, 1999.

Mmineral products

45%

Chemical products

9%

Wood and paper products

5%

Machinery and equipment

10%

Metals and precious stones

25%

Food and agricultural materials

3%

Others

3%
Appendix VII

Additional Information on Economic Trends

Page 202 GAO-01-8 Foreign Assistance to Russia

Figure 32: Composition of Russian Imports, 1994-98

Note: “others” includes wood and paper products, leather, and fur.

Source: Goskomstat: Russian Economic Trends, 1999.

Debt of the 

Government of Russian 

Federation

The Russian government has substantial foreign debt, estimated at 

$146 billion (see fig. 33) at the end of 1999. Approximately $100 billion of 

Russia's foreign debt was inherited from the former Soviet Union. Russia 

assumed all the debt of the former Soviet Union in exchange for the Soviet 

Union's foreign assets. The Russian government also has domestic debt, 

which was approximately $33 billion as of the end of 1999.3

Foodstuffs and

agricultural raw materials

(excluding textile)

26%

Mineral products

6%

Machinery, equipment

and transport means

35%

Chemical products,

rubber

13%

Metals, precious stones

and their products

8%

Textiles, textile articles

and footwear

5%

Others

7%

3

 A portion of the domestic debt is valued in foreign currency, which makes servicing the 

debt particularly burdensome to the federal budget when the ruble exchange rate 

depreciates, as was the case in 1998.
Appendix VII

Additional Information on Economic Trends

Page 203 GAO-01-8 Foreign Assistance to Russia

Figure 33: Russia's Foreign Debt, 1990-99 (Billions of U.S. dollars)

Note: 

Soviet era debt = Debt inherited from the former Soviet Union 

Russian era debt = Debt of the Russian Federation contracted after January 1, 1992

Source: 1990-93 figures were calculated by GAO using World Bank, Global Development Finance, 

1994-99 figures are from IMF, Russian Federation: Recent Economic Developments. 

Russia's current payment obligations to creditors represent a significant 

expense in the federal budget. Debt service obligations in 1999 were 

$17.9 billion, or 29 percent of federal expenditures. In addition, servicing 

domestic debt amounted to another 11 percent of federal expenditures. 

Table 8 shows the amount of external debt service due and paid in 1999. 

Russia paid all the debt service due on debt obligations incurred by the 

Russian federation, the majority of which was payments to multilateral 

institutions. In contrast, in 1999 Russia paid about $600 million on the 

$8.9 billion debt service due on Soviet era debt owed primarily to Paris 

Club bilateral creditors. Furthermore, its payments on the debt of the 

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Russian era debt Soviet era debt
Appendix VII

Additional Information on Economic Trends

Page 204 GAO-01-8 Foreign Assistance to Russia

former Soviet Union have been rescheduled several times. The 

rescheduling of the debt has generally postponed payments of interest. In 

February 2000, Russia's commercial creditors agreed to write off $11.6 

billion in debt and to restructure the remaining debt over 30 years. Russia 

has argued that the high costs of market reforms call for lower debt 

repayments and has requested additional debt relief on its Soviet era debt 

from its official bilateral creditors.

Between 1994 and 1999, Russia paid interest and principal of about $12 

billion on loans it had received from international financial organizations. 

Russia expects to pay roughly $10 billion in foreign debt payments in 2000. 

Also, from 2001 on, it will have to retire the Eurobonds it placed in 1997 

and 1998. In addition, the grace period on debt repayment to the London 

and Paris clubs ends in 2002, boosting significantly annual foreign debt 

repayments. According to the World Bank, it is estimated that between 

2001 and 2008, a total of $117 billion in debt service will be due. 

Figure 34: Debt Components of the Russian Government, End 1999 (Billions of U.S. 

Dollars)

Source: Institute for Economies in Transition, 1999.

Domestic $33

18%

International Monetary

Fund $15

8%

World Bank $7

4%

Paris Club official

creditors $43

24%

Commercial creditors

$52

29%

Other official creditors

$30

17%
Appendix VII

Additional Information on Economic Trends

Page 205 GAO-01-8 Foreign Assistance to Russia

Table 8: Foreign Currency Debt Service of the Russian Federation in 1999

a

Debt service on debt of the former Soviet Union for which Russia has accepted responsibility.

b

Debt service on debt of the Russian Federation contracted after January 1, 1992.

** Data included in official bilateral creditors.

Source: International Monetary Fund

Foreign Investment The Russian federation presents a potentially lucrative opportunity for 

foreign investment due to its large domestic market, skilled and educated 

labor force, and valuable natural resources. Most foreign investment in 

Russia has been concentrated in the energy, food, and trade sectors with 

the United States and Germany as the leading foreign investors in Russia. 

Russia has, however, attracted little foreign investment compared to most 

other transition countries. Taxes, corruption, changing regulatory 

environments, bureaucratic processes, and underdeveloped property right 

and contract laws have been cited as deterrents to foreign investment to 

Russia. 

Billions of U.S. dollars

Soviet eraa Russian erab

Due Paid Due Paid

Principal 3.06 0.18 5.72 5.72

Interest 5.83 0.45 3.31 3.31

Total debt service 8.89 0.63 9.03 9.03

of which

 Multilateral 0.00 0.00 5.54 5.54

 Official bilateral 8.39 0.40 1.56 1.56

 Bonds 0.00 0.00 1.64 1.64

 Other commercial ** 0.23 0.29 0.29

 Interest on arrears 0.50 0.00 0.00 0.00
Appendix VII

Additional Information on Economic Trends

Page 206 GAO-01-8 Foreign Assistance to Russia

Figure 35: Gross Foreign Investment in Russia, 1993-99 (Billions of U.S. dollars)

Source: Business Information Service for the Newly Independent States (BISNIS), U.S. Department of 

Commerce, Washington, DC.

According to the United Nations Economic Commission for Europe, 

cumulative net foreign direct investment in Russia from 1988 to1999 had 

amounted to $19.9 billion. On per capita basis, this is approximately $135 

per capita (see fig. 36), far less than the Czech republic ($1612 per capita) 

and Poland ($527 per capita). Net foreign direct investment in Russia in 

1999 amounted to about $2 billion, out of a global total of $827 billion. 

Meanwhile, the average age of Russian manufacturing plant and equipment 

is on average three times older than that of countries in the Organization 

for Economic Cooperation and Development, implying that updating or 

replacing these items will take plenty of foreign investment.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

1993 1994 1995 1996 1997 1998 1999

Direct Investment Portfolio Investment
Appendix VII

Additional Information on Economic Trends

Page 207 GAO-01-8 Foreign Assistance to Russia

Figure 36: Per Capita Cumulative Foreign Direct Investment in Transition Economies (1988-99)

Source: U.N. Economic Commission for Europe: Transition Report, 2000.

Capital Flight Capital flight is broadly defined as all outflows of funds that occur in 

excess of those that would normally be expected as part of an international 

portfolio diversification strategy. Outflows of funds originating from truly 

criminal activities, outflows of legally earned funds that breach capital 

controls and taxes, and fully legal outflows that comply with existing 

regulations but are motivated by a desire on the part of the investor to flee 

the country owing to political uncertainty are regarded as capital flight. The 

economic consequences of capital flight are reduced investment in the 

economy, loss of productive capacity, lower government revenue for easing 

the less desirable aspects of economic adjustment, and loss of control of 

monetary policy. 

$0 $250 $500 $750 $1,000 $1,250 $1,500 $1,750 $2,000

Hungary

Czech Republic

Estonia

Latvia

Croatia

Slovenia

Poland

Lithuania

Azerbaijan

Kazakhstan

Slovakia

Bulgaria

Romania

Turkmenistan

Albania

Russian Federation

Armenia

Georgia

Macedonia

Republic of Moldova

Kyrgyzstan

Belarus

Ukraine

Bosnia and Herzegovina

Uzbekistan

Tajikistan
Appendix VII

Additional Information on Economic Trends

Page 208 GAO-01-8 Foreign Assistance to Russia

The transition process has caused Russia to confront a variety of problems 

that make it risky for its citizens to hold financial assets within Russia's 

borders. These problems include macroeconomic instability, unsettled 

political environments, corruption, poorly defined property rights, a fragile 

banking system, high and unevenly enforced taxes, and fraudulent 

managerial practices. As a result, capital flight has depleted financial 

resources needed for economic reform and revitalization. 

The main forms of capital flight from Russia include (1) understated export 

earnings, (2) smuggling or unreported exports of goods, (3) over-invoicing 

of imports, (4) advance payments for import contracts without subsequent 

deliveries, and (4) capital account transactions with nonresident (offshore) banks that are not regulated by Russian authorities. The channels of 

capital flight in Russia are mainly the foreign trade sector and the banking 

sector. In the export sector, revenues from the energy sector are the 

primary source of capital flight. Over-invoiced imports of foodstuffs are 

also alleged to be a channel for capital flight.

Estimates of capital flight are limited by the inability to distinguish between 

legal and illegal capital flows. The Central Bank of Russia estimated that 

capital flight during 1994-98 averaged $11 billion a year, or approximately 

$75 per capita (see fig. 38). Other estimates of capital flight from Russia 

range between $10 billion and $20 billion per year. According to the IMF, 

Russian authorities have sought to decrease capital flight through 

intensification of exchange controls, tightened tax administration and 

financial sector supervision.
Appendix VII

Additional Information on Economic Trends

Page 209 GAO-01-8 Foreign Assistance to Russia

Figure 37: Estimate of Capital Flight From Russia, 1994-98 (Billions of U.S. dollars) 

Source: Central Bank of Russia

0

2

4

6

8

10

12

14

16

1994 1995 1996 1997 1998

Non reciept of export earnings Unredeemed import advances

Nonequivalent barter 50-percent of errors and ommissions
Page 210 GAO-01-8 Foreign Assistance to Russia

Appendix VIII

Comments From the Department of State and 

USAID ApendxiVI
Appendix VIII

Comments From the Department of State and 

USAID

Page 211 GAO-01-8 Foreign Assistance to Russia
Appendix VIII

Comments From the Department of State and 

USAID

Page 212 GAO-01-8 Foreign Assistance to Russia
Page 213 GAO-01-8 Foreign Assistance in Russia

Appendix IX

Comments From the Treasury Department ApendxiIX
Appendix IX

Comments From the Treasury Department

Page 214 GAO-01-8 Foreign Assistance in Russia
Page 215 GAO-01-8 Foreign Assistance to Russia

Appendix X

Comments From the International Monetary 

Fund ApendxiX
Appendix X

Comments From the International Monetary 

Fund

Page 216 GAO-01-8 Foreign Assistance to Russia
Page 217 GAO-01-8 Foreign Assistance to Russia

Appendix XI

Comments From the World Bank ApendxiXI
Appendix XI

Comments From the World Bank

Page 218 GAO-01-8 Foreign Assistance to Russia

2 pages
Page 219 GAO-01-8 Foreign Assistance to Russia

Appendix XII

Comments From the European Bank for 

Reconstruction and Development ApendxiXI
Appendix XII

Comments From the European Bank for 

Reconstruction and Development

Page 220 GAO-01-8 Foreign Assistance to Russia
Page 221 GAO-01-8 Foreign Assistance to Russia

Appendix XIII

Comments From the European Commission ApendxXiI

GAO’s comment 

supplementing those in the 

report text appears at end of 

this appendix.

Now on p. 92.

See comment 1.
Appendix XIII

Comments From the European Commission

Page 222 GAO-01-8 Foreign Assistance to Russia

The following is GAO’s comment on the European Commission letter dated 

October 25, 2000.

GAO Comment 1. Our summary view of TACIS effectiveness in Russia is based on the 

findings in the EU’s own evaluations and the information collected from 

discussions with several EU, Russian, and private officials. EU evaluations 

of TACIS programs in Russia over the years have painted a generally mixed 

picture of the success of individual projects. However, Russian and private 

officials concerns about the design and implementation of the program 

over the period. We have attributed these views to the officials and not the 

GAO.
Page 223 GAO-01-8 Foreign Assistance to Russia

Appendix XIV

GAO Contacts and Staff Acknowledgments ApendxXiIV

GAO Contacts Celia J. Thomas, (202) 512-8987

Barbara I. Keller, (202) 512-9624

Acknowledgments In addition to those named above, Dave Maurer, Gezu Bekele, Eugene 

Beye, Nima Patel Edwards, Bruce Kutnick, Joy Labez, Jane Li, Rona 

Mendelsohn, and John Treanor made significant contributions to this 

report.
Page 224 GAO-01-8 Foreign Assistance to Russia

Related GAO Products

International Monetary Fund: Status of Efforts to Strengthen Safeguards 

Over Lending (NSIAD-00-211, Sept. 1, 2000).

World Bank: Management Controls Stronger, but Challenges in Fighting 

Corruption Remain (NSIAD-00-73, Apr. 6, 2000).

Foreign Assistance: Donation of U.S. Planting Seed to Russia in 1999 

Had Weaknesses (NSIAD-00-91, Mar. 9, 2000).

Foreign Assistance: Enterprise Funds’ Contributions to Private Sector 

Development Vary (NSIAD-99-221, Sept. 14, 1999).

International Monetary Fund: Approach Used to Establish and Monitor 

Conditions for Financial Assistance (GGD/NSIAD-99-168, June 22,1999).

Foreign Assistance: Treasury’s Technical Assistance Program (NSIAD-99-

65, Mar. 12, 1999).

Foreign Assistance: Harvard Institute for International Development’s 

Work in Russia and Ukraine (NSIAD-97-27, Nov. 27, 1996).

Promoting Democracy: Progress Report on U.S. Democratic Development 

Assistance to Russia (NSIAD-96-40, Feb. 29, 1996).

Former Soviet Union: Information on U.S. Bilateral Program Funding

(NSIAD-96-37, Dec. 15, 1995).

Former Soviet Union: An Update on Coordination of U.S. Assistance and 

Economic Cooperation Programs (NSIAD-96-16, Dec. 15, 1995).

Foreign Assistance: Assessment of Selected USAID Projects in Russia

(NSIAD-95-156, Aug. 3, 1995).

Former Soviet Union: U.S. Bilateral Program Lacks Effective 

Coordination (NSIAD-95-10, Feb. 7, 1995).

Former Soviet Union: Creditworthiness of Successor States and U.S. 

Export Credit Guarantees (GGD-95-60, Feb. 24, 1995).

Former Soviet Union: Assistance by the United States and Other Donors

(NSIAD-93-101, Dec. 30, 1992).

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