Second of a three-part series
Hundreds of millions of dollars are being spent by Western countries to help Russia convert to capitalism, but little of the money is going to Russians.
Under the broad rubric of technical assistance, huge sums of Western funding are being paid to foreign accountants, investment bankers, consultants, educators and wealthy foreign firms to conduct studies and provide advice and training to the Russian government and people.
But Russian officials and even some Western officials have begun to question the high cost of the advice and its relatively low impact.
In particular, Russian officials complain about the wisdom of spending so much for advice, particularly when the West has provided little direct investment.
The billions of dollars that have already been allocated by Western powers to international institutions for investment in Russia have been held up by disarray in the Russian government and the rigid lending policies of the Western agencies, which are required by their laws to be profit-making and assume little risk.
Last year, for example, the European Bank for Reconstruction and Development, which was set up to make loans and equity investments in former communist countries, spent $43. 2 million in Russia, mostly on technical assistance. But it began disbursing money for just one investment project, a $4. 2-million loan for a telecommunications project by Sovintel, a joint venture half owned by the American phone company GTE.
"The money went mostly to Western specialists and others who have been preparing the intellectual groundwork", said Lou Naumovski, the Moscow representative for the EBRD. "It's very difficult to convince a lot of people, especially Russians, that this money benefitted Russia".
Lack of coordination of the technical assistance by Russia and Western donors makes it difficult to count the total amount of technical assistance, but some estimate it is between $1 billion and $2 billion.
The disorganization in the Western aid effort has led to costly studies being repeated by different foreign experts and a lack of connection between their work and Russia's needs.
One Western official, who asked not to be named, said that three different foreign agencies had conducted overlapping studies of seed potatoes in Russia. Just one of those studies, the official said, "cost several hundred thousand" dollars.
The U. S. Agency for International Development, or USAID, was about three-quarters of the way through an effort to foster small business development when it found the World Bank was beginning a similar project, said a USAID official who asked not to be named.
"It's a little untidy", the official said of the coordination. "We should be interacting more than we are".
A recent World Bank study found that, "in fact, there was not a great linkage between priorities of reform and the technical assistance that was provided", said Hasso Molineus, manager of operations for the World Bank's Moscow office.
But, Molineus added that the Russian government could be faulted as much as the West "for not articulating what its priorities are".
Sergei Chestnoi, a Russian Foreign Ministry official who deals with the international agencies, pointed to dozens of glossy studies conducted by leading world agencies such as the World Bank, the International Monetary Fund and the International Finance Corporation that line his shelves, some costing hundreds of thousands of dollars.
"Without financial assistance, it is very difficult for us to implement all of the very good recommendations of those studies", he said.
Even some Western officials agree that money for investment has been a critical shortcoming of the Western effort in Russia.
"We have no funds for the follow-up investment", said Hansjorg Kretschmer, deputy head of the European Community's Moscow delegation. "So that's a problem I cannot hide.
"It's not an ideal situation and we are aware of that", he added.
Some Western aid officials maintain that they are providing vital knowledge at the request of the Russian government. They say that the unique nature of Russia's needs demand heavy expenditures for technical assistance, because unlike Third World nations, Russia is a developed nation moving from one economic system to another.
Technical assistance "is a lot of what the Russians want us to do", said the USAID official.
The European Community is leading the technical assistance effort, having committed $1. 55 billion since 1991, including $575 million this year alone. The sweeping program covers 11 different sectors, from nuclear safety to transportation, with 300 ongoing projects.
They include a $4. 8-million grant to the European Savings Bank and West Deutsche Landesbank of Germany to restructure the Sberegatelny Bank, the Russian savings bank; a $12-million grant to the French concern Eurodouane to modernize customs administration; and an $8. 4-million grant for reorganizing the St. Petersburg port.
But little of the aid given by the West so far would help pay for new technology for the bank or new equipment to modernize the port.
Russian officials, and even some from the West, see the programs often as too expensive and question why Russians are often not included in the teams of experts.
"I'm not sure we have to pay all the foreign consultants here", said Sergei Vybornov, director of the department of International Finance and Investment in the Russian government. "Not everybody in Russia is crazy".
Foreign accountants, for example, can receive up to $300 a day from the U. S. government's technical assistance program, the equivalent of the average Russian's annual salary.
"I have nothing to say against experts working here", Chestnoi said. "But I know the public opinion that they are international tourists and that the effect of such aid is very low".
For different reasons, three well-funded world agencies designed to offer those funds and stimulate private sector ventures - the EBRD, the World Bank, and the International Finance Corporation, an arm of the World Bank Group - have so far not filled their roles.
The EBRD, founded in 1991, has $12 billion, donated by 53 countries, the EC and European Investment Bank, to lend exclusively in central and Eastern Europe and the former Soviet Union.
It has recently been the subject of stinging criticism for spending $300 million outfitting its London offices and paying overhead, including private jets and an $80, 000 office Christmas party. It had disbursed just $156 million in loans by December 1992, the Financial Times reported this week.
Some investment projects and loans in Russia are being held up partly by issues of Russian government guarantees and legal reviews. But some of the problem lies within the specific agencies, such as the EBRD, the World Bank and the IFC, and how they do business.
All three organizations are profit-making institutions and must evaluate risks by normal Western banking standards. The unstable political situation in Russia, its murky foreign investment laws and hazy legal code make it difficult to justify investment risks here.
The EBRD and IFC, in hopes of generating further investments, generally only fund from 25 to 35 percent of a project, seeking equity investment from the borrower and the remainder in the form of loans or cash from an alternative source, such as a private bank.
But the formulas have been hard to implement in Russia. Investors have not stepped forward with the cash and alternative sources of money to work with the funds have been difficult to find.
The International Finance Corporation has not even reached the stage of considering loans to Russia, even though it has been a leader in providing technical assistance for privatization.
But Roger Gale, IFC's director in Russia, said the organization has been studying the investment climate here and so far determined that because of the uncertain political and legal situation, the country is not yet a good bet, even for his organization.
"We have done the due diligence in Russia and our view is that the infrastructure is not in place", he said.
The EBRD has begun to change its strategy. Among the loans approved by the board are what Naumovski called five "emergency loans" to the oil and gas sector which are guaranteed by future oil revenues but in which EBRD is taking 100 percent of the risk.
"If we don't start lending money into critical sectors of the economy, the economy will be in real trouble", Naumovski said.
Added the USAID official, "At some point, you have to get your hands dirty".
Hundreds of millions of dollars are being spent by Western countries to help Russia convert to capitalism, but little of the money is going to Russians.
Under the broad rubric of technical assistance, huge sums of Western funding are being paid to foreign accountants, investment bankers, consultants, educators and wealthy foreign firms to conduct studies and provide advice and training to the Russian government and people.
But Russian officials and even some Western officials have begun to question the high cost of the advice and its relatively low impact.
In particular, Russian officials complain about the wisdom of spending so much for advice, particularly when the West has provided little direct investment.
The billions of dollars that have already been allocated by Western powers to international institutions for investment in Russia have been held up by disarray in the Russian government and the rigid lending policies of the Western agencies, which are required by their laws to be profit-making and assume little risk.
Last year, for example, the European Bank for Reconstruction and Development, which was set up to make loans and equity investments in former communist countries, spent $43. 2 million in Russia, mostly on technical assistance. But it began disbursing money for just one investment project, a $4. 2-million loan for a telecommunications project by Sovintel, a joint venture half owned by the American phone company GTE.
"The money went mostly to Western specialists and others who have been preparing the intellectual groundwork", said Lou Naumovski, the Moscow representative for the EBRD. "It's very difficult to convince a lot of people, especially Russians, that this money benefitted Russia".
Lack of coordination of the technical assistance by Russia and Western donors makes it difficult to count the total amount of technical assistance, but some estimate it is between $1 billion and $2 billion.
The disorganization in the Western aid effort has led to costly studies being repeated by different foreign experts and a lack of connection between their work and Russia's needs.
One Western official, who asked not to be named, said that three different foreign agencies had conducted overlapping studies of seed potatoes in Russia. Just one of those studies, the official said, "cost several hundred thousand" dollars.
The U. S. Agency for International Development, or USAID, was about three-quarters of the way through an effort to foster small business development when it found the World Bank was beginning a similar project, said a USAID official who asked not to be named.
"It's a little untidy", the official said of the coordination. "We should be interacting more than we are".
A recent World Bank study found that, "in fact, there was not a great linkage between priorities of reform and the technical assistance that was provided", said Hasso Molineus, manager of operations for the World Bank's Moscow office.
But, Molineus added that the Russian government could be faulted as much as the West "for not articulating what its priorities are".
Sergei Chestnoi, a Russian Foreign Ministry official who deals with the international agencies, pointed to dozens of glossy studies conducted by leading world agencies such as the World Bank, the International Monetary Fund and the International Finance Corporation that line his shelves, some costing hundreds of thousands of dollars.
"Without financial assistance, it is very difficult for us to implement all of the very good recommendations of those studies", he said.
Even some Western officials agree that money for investment has been a critical shortcoming of the Western effort in Russia.
"We have no funds for the follow-up investment", said Hansjorg Kretschmer, deputy head of the European Community's Moscow delegation. "So that's a problem I cannot hide.
"It's not an ideal situation and we are aware of that", he added.
Some Western aid officials maintain that they are providing vital knowledge at the request of the Russian government. They say that the unique nature of Russia's needs demand heavy expenditures for technical assistance, because unlike Third World nations, Russia is a developed nation moving from one economic system to another.
Technical assistance "is a lot of what the Russians want us to do", said the USAID official.
The European Community is leading the technical assistance effort, having committed $1. 55 billion since 1991, including $575 million this year alone. The sweeping program covers 11 different sectors, from nuclear safety to transportation, with 300 ongoing projects.
They include a $4. 8-million grant to the European Savings Bank and West Deutsche Landesbank of Germany to restructure the Sberegatelny Bank, the Russian savings bank; a $12-million grant to the French concern Eurodouane to modernize customs administration; and an $8. 4-million grant for reorganizing the St. Petersburg port.
But little of the aid given by the West so far would help pay for new technology for the bank or new equipment to modernize the port.
Russian officials, and even some from the West, see the programs often as too expensive and question why Russians are often not included in the teams of experts.
"I'm not sure we have to pay all the foreign consultants here", said Sergei Vybornov, director of the department of International Finance and Investment in the Russian government. "Not everybody in Russia is crazy".
Foreign accountants, for example, can receive up to $300 a day from the U. S. government's technical assistance program, the equivalent of the average Russian's annual salary.
"I have nothing to say against experts working here", Chestnoi said. "But I know the public opinion that they are international tourists and that the effect of such aid is very low".
For different reasons, three well-funded world agencies designed to offer those funds and stimulate private sector ventures - the EBRD, the World Bank, and the International Finance Corporation, an arm of the World Bank Group - have so far not filled their roles.
The EBRD, founded in 1991, has $12 billion, donated by 53 countries, the EC and European Investment Bank, to lend exclusively in central and Eastern Europe and the former Soviet Union.
It has recently been the subject of stinging criticism for spending $300 million outfitting its London offices and paying overhead, including private jets and an $80, 000 office Christmas party. It had disbursed just $156 million in loans by December 1992, the Financial Times reported this week.
Some investment projects and loans in Russia are being held up partly by issues of Russian government guarantees and legal reviews. But some of the problem lies within the specific agencies, such as the EBRD, the World Bank and the IFC, and how they do business.
All three organizations are profit-making institutions and must evaluate risks by normal Western banking standards. The unstable political situation in Russia, its murky foreign investment laws and hazy legal code make it difficult to justify investment risks here.
The EBRD and IFC, in hopes of generating further investments, generally only fund from 25 to 35 percent of a project, seeking equity investment from the borrower and the remainder in the form of loans or cash from an alternative source, such as a private bank.
But the formulas have been hard to implement in Russia. Investors have not stepped forward with the cash and alternative sources of money to work with the funds have been difficult to find.
The International Finance Corporation has not even reached the stage of considering loans to Russia, even though it has been a leader in providing technical assistance for privatization.
But Roger Gale, IFC's director in Russia, said the organization has been studying the investment climate here and so far determined that because of the uncertain political and legal situation, the country is not yet a good bet, even for his organization.
"We have done the due diligence in Russia and our view is that the infrastructure is not in place", he said.
The EBRD has begun to change its strategy. Among the loans approved by the board are what Naumovski called five "emergency loans" to the oil and gas sector which are guaranteed by future oil revenues but in which EBRD is taking 100 percent of the risk.
"If we don't start lending money into critical sectors of the economy, the economy will be in real trouble", Naumovski said.
Added the USAID official, "At some point, you have to get your hands dirty".
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