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Russia: World Bank Does Not Control Military Spending

Washington, 10 November 1998 (RFE/RL) -- Russia's ability to find the money to finish a new military radar base in Belarus even as it was having trouble feeding all of its troops in the midst of financial crisis brought renewed criticism of the lending policies of the international financial institutions recently.

But a senior World Bank official says that even under its structural loans, it does not control a country's military budget.

Johannes Linn, Vice President for Europe and Central Asia, told RFE/RL's economic correspondent in an interview Monday that when the bank makes project loans, it imposes strict accounting and procurement rules that make sure the money is going to the right place. "Our project or investment loans, are very clearly targeted to specific projects, whether building a road, a school or a hospital," says Linn.

"We audit, we check and if the money has been used wrongly, the government is required to pay it back," he says.

To date, there have been no incidents in Russia, although bank did determine last year that the first part of a huge coal industry rehabilitation loan had been misdirected.

However, he said, the other type of World Bank loan, for structural adjustment, is a very different product. It is general money, not targeted for any particular uses within the budget.

This money, says Linn, is lent in exchange for policy changes that the bank believes will be beneficial to the country at large.

Such policy changes can be in support of the private sector, to free-up natural monopolies, to improve tax collections or to reform the banking sector.

In the coal rehabilitation loan, Linn points out, the money was in exchange for agreement to overhaul the government subsidies paid to the coal industry and that, he says, had a "greater impact" than if the bank loan had simply gone straight into the coal industry.

Still, acknowledges Linn, this does leave open the fact that the bank doesn't control "every penny, every dollar the Russian government spends." After all, money is fungible (any one dollar can replace any other dollar), he says, so the World Bank loans simply act as a substitute for other borrowing the government might need to make. But in this case, in addition to interest, the bank collects promises of important policy changes.

Under a new agreement with Moscow, Linn says the bank hopes to have a little more influence in discouraging some of these expenditures:

Linn says the bank doesn't control the military budget, but it has recently agreed to review with the government its public expenditure program, to identify high-priority expenses and low-priority expenses in the budget. Moscow clearly has to cut public expenditures significantly if it wants to adhere to a non-inflationary program, says Linn, and this ability by the bank to review the budget allocations more generally is a "good thing."

Three current World Bank structural adjustment loans to Russia call for additional drawings in the next few months. Drawings are tied directly to achievement of specific economic or financial goals, and officials have said the next drawings are sometime yet away.