The World Bank endorsed the Progress Report on the World Bank Group’s Country Assistance Strategy (CAS) for the Russian Federation covering the period 2003-2006. The Progress Report presents an impressive record of achievements in all three CAS areas–improving the business environment and enhancing competition, strengthening public sector management, and mitigating social and environmental risks.

During the CAS period the Russian economy enjoyed rapid economic growth, macroeconomic stability and strong fiscal and current account surpluses. Since 1999 the GDP has increased by 40 per cent, and living standards have improved, and poverty declined by half — from its peak of over 30 percent in 1999 to under 20 percent in 2004. Progress was driven by a combination of internal and external factors — responsible macroeconomic policy and pursuit of key structural reforms, and sustained high prices for commodity exports. Despite these positive trends, some discretionary interventions by the authorities, including the targeting of individual businesses, have increased uncertainty in the investment climate at a time when investor confidence could be booming has contributed to concerns among Russian policy-makers about the sustainability of the country’s strong performance. In addition, complications in the monetization of in-kind benefits raised questions about the speed of implementation of important social reforms.

As envisaged in the CAS, the World Bank Group has supported the implementation of reforms and policies aimed at investment climate improvements, macroeconomic stability, sustained growth and gains in social welfare. The application of the whole range of Bank’s instruments – lending, private sector investments, guarantees, analytical services, technical assistance and knowledge sharing – were properly tailored to fit Russia’s changing needs to make best use of the comparative advantages of IBRD, IFC and MIGA.

„In terms of growth and poverty reduction Russia’s performance exceeded our initial expectation in the CAS. However, given the formidable restructuring needed for achieving sustainable and diversified growth, there is no room for complacency on the part of the government even during times of high oil revenues,“ says Kristalina Georgieva, Country Director for Russia. „At the same time, there are still major structural tasks — ranging from housing and communal services reform, related to an unfinished economic transition, to the promotion of public-private partnerships, needed for Russia’s competitiveness, to regional development, and the challenge of growing gap between prosperous and lagging regions.“ In the context, she commented that, while Russia’s large fiscal surpluses and substantial reserves accumulated in the Central Bank and the Stabilization Fund preclude any noticeable need for sovereign borrowing, the partnership with the World Bank Group was strong. In addition to work in support of key federal reforms, areas for future emphasis include regional development, public-private partnerships (PPP), and assistance to Russia on issues of global and regional importance.

So far, the World Bank’s Board of Directors has approved seven new projects totaling $900 million, and eight new operations, including two guarantees, are expected to be processed by the end of the CAS period. The projects address important policy and institutional development objectives in many areas ranging from treasury, tax administration and customs, to cadastre and registration, hydrometeriological services, and the courts, to health, education, social protection and regional development. In response to Russia’s strong fiscal position and the importance of private sector-led growth, there has been an appropriate shift in investment from IBRD to IFC and MIGA. At present, Russia is the second largest country exposure in IFC’s global portfolio after Brazil. Similarly, MIGA has expanded its activities and Russia is currently its fourth largest exposure on a net basis.

The Progress Report extends the CAS timeframe by one fiscal year to allow completion of the activities initiated under the current CAS and the piloting of new partnership relations and provides the foundation for a transition to a Country Partnership Strategy. The new Country Partnership Strategy will be prepared in the spring of 2006.