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Russia: Government Promises Reforms To Win World Bank Loan

Washington, 7 August 1998 (RFE/RL) -- The Russian government has laid out an ambitious program of structural reforms to win its latest World Bank loan. It promises, among other things, to open up monopolies like Gazprom and the railways to competition, sets specific goals for privatization, and proposes to ensure land ownership rights.

The reform program is contained in a 23-page "Letter of Development Policy," signed by Prime Minister Sergei Kiriyenko and Central Bank Chairman Sergei Dubinin, and released by the World Bank last night as part of its approval of a new $1.5 billion structural adjustment loan for Russia.

The Bank's Vice President for Europe and Central Asia, Johannes Linn, told a press conference in Washington that the loan -- the bank's largest so far to Russia -- is part of the international community's $22.5 billion financial rescue package assembled by the IMF. It is an "essential part" of the recovery of the economy and recovery of confidence in Russia, he says.

The first drawing of $300 million was made available immediately after Linn and Russian Ambassador to Washington, Yuli Vorontsov, signed the loan agreement. The rest of the money will be made available in drawings over the next 18 months.

The senior bank economist for the region and "team leader" on this loan, Harry Broadman, says there is no specific date set for future tranches. They will be disbursed, he says, as Moscow fulfills the promised reforms.

He says there are "threshold" measures which will signal achievements. For instance, one of the conditions for release of the next drawing is that the competitive restructuring of Gazprom for greater transparency must be achieved. Another trigger is the beginning of quarterly offerings of at least seven major state firms for privatization sales, while yet another is passage of laws on business licensing.

It is expected, says Broadman, that these conditions should be achieved and trigger release of the next tranche in December or January.

But the bank's Russian country director, Michael Carter, says the bank is not demanding the break-up of firms like Gazprom. Rather he says, it is pushing to have natural monopoly firms organized in a way that facilitates proper state regulation of its activities and particularly of its monopoly functions.

Carter says that Gazprom's pipeline assets should be available to other producers of gas in Russia, so Gazprom should establish a separate enterprise to run the pipelines so that those activities can be properly regulated by the Federal Energy Commission.

In the Russia letter, the government aims to have that reorganization completed by January 1, 1999.

Another aspect of dealing with natural monopolies, he says, is setting up level playing fields between Gazprom and other gas producers. For example, he says, the Russian oil industry burns off a huge amount of natural gas -- equal to half the total production in all of France -- and this enormous waste has been allowed because the oil companies can't compete with Gazprom to sell that gas.

In addition to promises on making Gazprom, RAO UES Rossii, Transneft and the State Railways more transparent, financially transparent and open to competition, the program agrees to ensure by September 30 a presidential decree to affirm the rights of citizens to engage in transactions in land, including "purchase, sale, rental, and mortgage."

There are four areas of agreed reforms in the World Bank program -- reform of infrastructure monopolies, private sector development, fiscal management, and financial sector reform.

Under fiscal management, Moscow promises to cut arrears for payments to infrastructure monopolies for deliveries after September 30 to no more than 45 days, to cut wage arrears to 30 days or less, and to bring transfers to municipal governments to under 30 days.

As part of this and other tax administration changes, the government agrees to have some "key deficiencies" in the current tax code passed by the Duma by January 1. It also promised to present by December 1 a program for government restructuring, including a reorganization of the relationship between the federal government and the regions, especially in the manner of collecting taxes.

A new formula for allocating resources transferred to regions through the federation is in the 1999 budget law and further revisions are to be adopted by next June.

World Bank officials praised the Russian government for agreeing to make the letter open to the public through the Russian treasury's Internet web site and through the bank.

Bank Vice President Linn says that between now and the end of 1999, the bank will have available loans totaling $6 billion -- including this one -- for structural adjustment in Russia if it's needed and the government continues to successfully implement the reform program.

This will be in addition to what are called "investment loans," to underwrite specific projects. A $400 million loan is currently being prepared to finance road construction, for example, and disbursement of those kinds of credits could reach $700 million by the end of 1998, says Linn.