Note: This document may not always reflect the actual appropriations determined by Congress. Final budget allocations for USAID's programs are not determined until after passage of an appropriations bill and preparation of the Operating Year Budget (OYB).
RUSSIA
FY 1998 Assistance to the NIS Request . . . . . . . . . . . . . . . . . $241,500,000 Introduction
Russia's continued evolution toward development of a democratic and market-based system remains in the U.S. national interest. In supporting and hastening that evolution, the U.S. seeks to build and consolidate new relationships with Russia, first as a constructive partner on a wide array of global issues --ranging from the maintenance of regional and world peace to the reduction of environmental threats-- and second, as an active partner in trade and investment. The Government of Russia has maintained a course that has permitted these relationships to take root while U.S. assistance has contributed significantly to the broad agenda of change and innovation, working with public and private Russian partners in virtually every sector.In FY 1998, the United States will begin to shift the focus of its support for Russia's transformation from more broad-based economic, political, and social restructuring activities toward interventions that more directly target the trade and investment needed for Russia's economic growth. With the economy substantially in private hands and many new economic and political institutions in place, the Administration's new Partnership for Freedom (PFF) initiative will emphasize boosting trade between Russia and the U.S., facilitating rapid increases in foreign investment, fostering cooperative activities to strengthen civil society and democratic rule, and promoting durable ties between U.S. and Russian partners.
The Development Challenge
While Russia can look with satisfaction at progress already achieved, the road ahead continues to pose formidable challenges. Although the privatization process progressed much more rapidly than was anticipated in early 1992, actual restructuring of many of these privatized enterprises has lagged. The continued threat of growing unemployment has contributed to widespread skepticism about the benefits of privatization, particularly among the economically displaced. Physical infrastructure is deteriorating, and uncertainty persists over rural land and property ownership. Progress has been slow in the absence of resources for new infrastructure investment to increase agricultural sector productivity and because of a lack of agreement on whether and how to privatize farmland. While foreign investors are exploring the Russian market, actual investment levels remain relatively low as potential investors display caution in the face of uncertainties about Russia's political stability, its relatively poor credit rating, and the perverse economic incentives created by certain taxes, regulations and policies governing economic activity and foreign participation.Corruption and organized crime continue to be of major concern, reflecting a lack of functioning systems to maintain the rule of law under open and democratic principles. In addition, although a vigorous independent media has sprung up across Russia, providing significantly greater citizen access to objective information and alternative points of view, threats to the continued independence of broadcast and print media include lack of investment and financing, an ambiguous legal environment, and continued government control of key inputs such as printing presses. Democratic goals have also been furthered by the impressive growth of Russia's civil society, but the non-governmental sector is still in the formative stages and has not been a major factor in policy debates. Among the challenges facing non-governmental organizations (NGOs) are: a high percentage of the most active groups remain concentrated in the large cities; NGOs need to expand their base of support through better outreach and organization; and the NGO sector as a whole has a long way to go before becoming financially sustainable.
The strong showing of the Communists in the December 1995 Duma elections, which raised the possibility of backsliding in political and economic reform, has been tempered by the re-election ofPresident Yeltsin and the electorate's apparent endorsement of continued progress along the reform path. Leading reformers received prominent positions in the executive branch in mid-1996, and there is evidence of a resurgence of reform efforts. However, mixed results in recent regional and local elections bear testimony to the reality that the economic reform measures remain fragile.
Key economic indicators for the Russian economy during 1996 are mixed. Data for the first three quarters of the year suggest some continued decline in GDP, although these figures probably understate actual performance, particularly in the dynamic informal sector. Investment in the economy reportedly dropped 17%, hurt by concerns over the elections and President Yeltsin's health, and official statistics show that unemployment continues to rise. Russia's fiscal problems have not eased, with budget revenues falling so sharply in the first half of the year that IMF disbursements were temporarily suspended (though subsequently resumed). A positive note among the key indicators is a sharp reduction in the inflation rate, from about 130% in 1995 to a respectable 20% in 1996. This snapshot suggests the need for improvements in budget planning and implementation, as well as for measures designed to attract both domestic and foreign funds for investment in Russia's economy. It also suggests that U.S. Government withdrawal from support for Russia's reform efforts would be premature at best and detrimental to long-term U.S. interests.
At year's end, both the Russian Government and a number of large enterprises and production entities succeeded in selling, respectively, bonds and shares abroad, an indication of a substantial amount of foreign interest in the economy. However, investment levels are nowhere near those required to revitalize and expand Russia's productive capacity, and are unlikely to increase without fundamental changes in the legal and regulatory environment.
As of January 1, 1996, the total outstanding external debt of the Government of the Russian Federation amounted to $120.4 billion. In 1995, $6.4 billion in debt service was paid, $2.4 billion more than the previous year. Of the outstanding amount, some $17.4 billion is in the form of loans contracted or guaranteed by the Russian Government and has always been honored in full. The remainder represents the debt of the former Soviet Union. In the absence of sufficient foreign currency reserves to service these obligations --of which more than 25% fell due in 1992-- the government was forced to seek a restructuring of this inherited debt burden. Four rescheduling agreements were negotiated with the Paris Club followed by an unprecedented comprehensive and definitive rescheduling accord reached in April, 1996. Rescheduled principal will be repaid by means of gradually increasing installments commencing in 2002.
Other Donors
A key objective of U.S. assistance to Russia, following from the fact that the United States was the external supporter able to mobilize most rapidly following the dissolution of the Soviet Union, is to serve as a catalyst for other assistance providers, not only other bilateral donors but perhaps more importantly, the international financial institutions (IFIs). For example, because of the technical assistance provided by USAID to Russia's fledgling capital markets institutions, two World Bank loans totaling $120 million were provided to the Federal Commission for the Securities Market (CSM) in 1996, contributing to the development and sustainability of that key institution.To put U.S. assistance into perspective, about $31.1 billion of total assistance (exclusive of debt restructuring) has been disbursed to Russia from all sources through mid-1996. Of this amount, about $2.7 billion has been in technical assistance, some 44% of which has been provided by the U.S. through USAID. USAID has, therefore, played a premier role in working with Russian counterparts to devise solutions to the challenges of economic, political and social transition.
FY 1998 Program
U.S. assistance to Russia has rapidly declined following the FY 1994 peak of $1.6 billion, but the USAID program has remained broadly focussed on economic and political restructuring intended to support Russia's move toward a sustainable free-market democracy. This assistance has helped bring about encouraging institutional and attitudinal changes. Despite the fact that significant economic reforms are already in place, there is scant domestic or foreign investment in Russia and, consequently, less economic growth than is desirable. While prospects for political stability appeared to brighten with the process and outcome of the mid-1996 Russian presidential election, democratic-era political institutions remain fragile.In response to those conditions, the Administration intends to launch a major multi-year initiative to support economic growth and political development in Russia, beginning in FY 1998. The Partnership for Freedom would shift USAID's focus more toward economic growth goals --such as trade and investment-- and toward collaborative undertakings --such as partnerships and exchanges-- to strengthen democratic institutions and practices. USAID proposes to take advantage of a resurgence in reform spirit in Russia, particularly on matters affecting the economy, as articulated in meetings between Russian and U.S. leaders, to push for increasing investment and growth. Many U.S. Government agencies will be engaged in this priority program. In Russia, about 48% of the request level, will be managed by USAID, while the remainder will be managed by other U.S. Government agencies.
Strategic Goal: Economic Growth, Focusing on Trade and Investment
An expansion of external trade and increased ability to attract both domestic and foreign investment are key elements in turning around the current negative growth in output and employment in the Russian economy. While Russia's potential as an object of U.S. investor interest has improved markedly, it remains limited due to several factors that raise investor risk: unclear political conditions; absence of an enforced, transparent legal and regulatory framework, including crippling tax laws; an unfavorable macroeconomic situation (inflation, monetary instability, etc.); a perception of runaway crime and corruption in the Russian business sector; a variety of infrastructural inadequacies (telecommunications, transport); and, perhaps most importantly, a dearth of potentially profitable enterprises in which there is a possibility to invest. These same factors also inhibit domestic investment.Despite the magnitude of the task ahead, far-reaching changes in the Russian economy are well underway -- and U.S. assistance has been associated with many of these changes. In each of the areas of reform noted below, for example, USAID support has played a critical role.
* Majority ownership in about 150,000 enterprises was transferred in 1994 from the Government of Russia to private owners.
* Titles to nearly a thousand parcels of land had been transferred to privatized industrial enterprises throughout Russia by October 1996. This marks the beginning of a market for commercial real estate.
* On March 1, 1996, the new Russian Civil Code (establishing, among other things, the legal right to buy and sell private property, borrow money, sign contracts, and for non-governmental organizations to operate) became effective.
* The underpinnings of a reliable and efficient banking system are in place, with 50 foreign and over 2,000 local banks, and increasingly effective banking supervision.
* Russia's stock market is now handling as much as $50 million in daily trades, up from zero in June, 1995. Requisite government and private sector implementation and regulatory institutions for this pivotal component of the financial system are in place and functioning.
* A nascent residential mortgage market has been formed on the heels of privatization of over half of Russia's housing stock with the help of U.S. assistance. Some 25 banks are now making housing mortgage loans on market terms.
* More than 200 institutions and organizations which support entrepreneurship and innovation, such as business incubators and business support centers, are flourishing.During FY 1998, USAID will, in concert with the U.S. Treasury, play a strong supporting role in fiscal reform in Russia. Most observers agree that without drastic improvements in transparency, fairness, and efficiency of Russia's tax code, growth-stimulating investment --either domestic or external-- will continue to be constrained. Interventions in this area are necessary elements of the new PFF initiative, focusing on the enabling environment for trade and investment. In conjunction with other U.S. agencies (e.g. Overseas Private Investment Cooperation and the Export-Import Bank), USAID will implement a new trade and investment program to promote economic partnerships between the United States and Russia.
Support for business development will encompass legal and regulatory reform, client assistance for business activities through supporting organizations, and continued equity and debt financing actions of The U.S.-Russia Investment Fund (TUSRIF). Lack of transparency and enforceability in the range of laws and regulations governing economic activity and land and property ownership is frequently cited by would-be investors as a binding constraint. USAID will be combining its efforts in this area with its support for general legal and judicial reforms. These interventions also are designed to assist Russia in reducing the debilitating effects of crime and corruption on the business and investment climate. Privatized firms are still highly inefficient and often not competitive either on local or world markets. New entrepreneurs require informational and training support. USAID will consolidate its client-focused business efforts, particularly targeting U.S. business, volunteer assistance to business support organizations and financing instruments to selected regions. While TUSRIF will continue to receive broad oversight from USAID, the Fund will operate as an independent entity in developing a portfolio of investments in Russia.
USAID's work in the financial sector during FY 1998 will begin to phase down while other assistance providers --whose support for capital markets work USAID has "leveraged" (e.g. the World Bank)-- will become firmly engaged. USAID's plans are to focus on support to the Central Bank of Russia and the legislature, in support of banking supervision activities and legislation related to the banking sector. While USAID's funding for energy sector restructuring in Russia will also decline, beginning in FY 1997, some additional support may be provided in support of the PFF regional investment initiative, since electric power generation and distribution investments are likely to be attractive once competitive wholesale markets for power are established.
Strategic Objective: Sound fiscal policies and fiscal management practices
Strategic Objective: Accelerated development and growth of private enterprises
Strategic Objective: A more competitive and market-responsive financial sector Strategic Goal: Democratic Transition
USAID is helping Russian counterparts to establish and build the range of public and private institutions necessary to ensure a pluralistic, democratic society. Already established are a number of basic democratic institutions, including an election system, independent media, and literally thousands of grassroots non-governmental organizations (NGOs) which provide direct opportunities for citizen participation in solving a number of problems confronting Russia. In addition, USAID is working with both public and private organizations tasked with strengthening the rule of law. Complementary efforts have focussed on bolstering the capacity of democratically-elected municipal government to respond to the challenges accompanying a de facto devolution of power and responsibilities to the local and regional level and to the demands of an increasingly empowered citizenry. Media development activities have concentrated nearly exclusively on the regions, and are helping to create a network of respected independent television stations capable of providing credible sources of objective information.Political party-building activities are shifting their focus away from elections and campaigns toward grassroots organization-building and the nexus between local elected officials, community groups, and local political party structures. A program to strengthen the NGO sector is being recalibrated to increase support to Russian training and technical assistance providers and to expand the existing regional focus on Siberia, Southern Russia, and Central Russia into two new regions. In all programs, Russian trainers are being used for the majority of activities, thereby building indigenous, long-term training capacity.
Under this strategic goal, a number of important successes are attributable to USAID programs, as noted below.
* Leaders of political parties representing a wide spectrum of political views have been trained in techniques for building grassroots support, mobilizing voters and developing platforms. The 1996 Presidential elections demonstrated the use and effectiveness of such technical advice.
* Active regional NGO Resource Centers have been established in 15 cities throughout Russia, providing a focal point for information on networking, Internet access, civic advocacy, training materials and programs, and fund-raising.
* Independent broadcast and print media are delivering news throughout Russia, including objective reporting on Chechnya.
* The development of free labor unions and civic organizations has built the organizational capacity for citizens to participate in and influence public policy debates at both the local and national level.
* Judicial reform has resulted from workshops, training and exchanges, including a pilot program to reintroduce jury trials for serious criminal offenses in selected regions.
* Improvement in election administration has been dramatic; the two national elections in the past year (parliamentary and presidential) were deemed free and fair by nearly all domestic and international election observers.During FY 1998, political process and independent media activities will continue. A new "community development initiative" will bring together NGO, local government, and private sector elements in communities in order to restructure relationships and increase participation among the three. USAID's previous support for effective, democratic local governance will not extend into FY 1998 as a separate objective, but will be subsumed under this new initiative on community development to achieve greater synergy among NGOs, municipal governments and the private sector. Rule of law activities will be combined with USAID's ongoing interventions in the legal and regulatory sphere in support of economic development to assure tighter focus and coordination of efforts. Within this, a key activity will be developing an independent judiciary. As part of the Partnership for Freedom, emphasis will be given to cooperative activities --such as partnerships and exchanges-- which promote democracy and civil society.
Strategic Objective: Increased, better informed citizens' participation in political and economic decision-making
Strategic Objective: Legal systems that better support democratic processes and market reforms
Strategic Goal: Social Stabilization
The entire economic and political reform effort could be jeopardized if, for example, citizens cannot access basic health and education services. Likewise, failure of Russia to address its serious problems of environmental pollution and unsustainable management of natural resources will both undermine long-term economic growth and produce substantial negative global environmental impacts. Therefore, USAID plans to continue support for health care financing reform. Other activities will focus on grassroots efforts in environmental reform.Some examples of successes associated with USAID programs to date are noted below.
* Health reform has produced new policies, laws, regulations, practices, and models that are helping Russia improve the quality, organization, and financing of its health care system.
* U.S.-Russian hospital partnerships have taught Russian health professionals state-of-the-art practices in several specializations and contributed to improved hospital management.
* New low-cost techniques and approaches are reducing air and water pollution and improving sustainable forestry management in target areas.
* Modern economic tools are being incorporated in to environmental policy-making, e.g., introduction of user fees and regional forestry codes.
* Environmental NGOs are pursuing public education and clean-up projects, legal and legislative efforts, and information gathering and monitoring.
FY 1998 funding will continue to support partnerships between U.S. and Russian hospitals, including some continued work in family planning, and roll-out of lessons learned in environmental management. In response to the Gore-Chernomyrdin Commission's priority focus on the chlorofluorocarbon (CFC) production sector phase-out, USAID will support over three years the "Special Initiative for Supplementary Funding to Complete Ozone Depleting Substances (ODS) Phase-Out in the Russian Federation."
Strategic Objective: Improved effectiveness of selected social benefits and services
Strategic Objective: Increased capacity to deal with environmental pollution as a threat to public health Cross-Cutting and Special Initiatives
Planned activities under Cross-Cutting and Special Initiatives include funding for targeted training and exchanges between American and Russian organizations, program design and evaluation, and the broad program of the Eurasia Foundation. In addition, funding will be provided for the Peace Corps --which specializes in English language education and in small enterprise development-- and the science centers program. Activities undertaken in support of the Gore-Chernomyrdin Commission (GCC) initiatives will also be funded. These address mutual concerns in the areas of health, energy, environment, agriculture, and capital markets/business. Most are undertaken on a multi-agency basis, with the relevant U.S. Government department or agency assuming lead responsibility for implementation.
RUSSIA
FY 1998 PROGRAM SUMMARY*
Strategic Objectives
Economic Restructuring and Growth Democratic Transition
Social Stabilization Cross-cutting and Special Initiatives Total Privatization -- -- -- -- -- Tax Reform 7,000,000 -- -- -- 7,000,000 Private Enterprise 112,500,000 -- -- -- 112,500,000 Financial Sector 3,300,000 -- -- -- 3,300,000 Energy -- -- -- -- -- Citizens' Participation -- 58,300,000 -- -- 58,300,000 Legal Systems -- 11,500,000 -- -- 11,500,000 Local Government -- -- -- -- -- Crises -- -- -- -- -- Social Benefits -- -- 3,500,000 -- 3,500,000 Environmental Health -- -- 9,000,000 -- 9,000,000 Cross-cutting / Special Initiatives -- -- -- 36,400,000 36,400,000 TOTAL COUNTRY 122,800,000 69,800,000 12,500,000 36,400,000 241,500,000 *FREEDOM Support Act (FSA) funds
USAID Mission Director: Janet Ballantyne
ACTIVITY DATA SHEET
PROGRAM: RUSSIA
TITLE: Fiscal Reform, 110-S001.2
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $ 7,000,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1992; ESTIMATED COMPLETION DATE: FY 2001
Purpose: To support the development of an efficient fiscal system in Russia which is adapted to the needs and functions of a market economy as well as to government's need to raise revenues sufficient for public expenditures.
Background: The privatization of the Russian economy and the substantial decentralization of government tax and spending responsibilities since 1991 require substantial changes in the design and implementation of the country's tax system. Potential investors report that the burden (to honest taxpayers) and unpredictability of the tax system is a major reason they remain reluctant to invest in Russia. At the same time, persistent declines in revenue collection (exacerbated during the 1996 presidential election campaign) are weakening the program of macro-economic stabilization that Russia has been undertaking within the framework of IMF stand-by arrangements since April 1995.
USAID Role and Achievements to Date : Since 1994 USAID has provided a range of technical experts and training opportunities to the Ministry of Finance, the State Tax Service (STS), the Russian Parliament (both the Duma and the Federation Council), and regional oblasts to support primarily initiatives in tax reform. The advisory services have included experts in drafting of tax legislation, administration of tax systems, projecting and monitoring of tax revenues (e.g. for negotiation and compliance with the economic stabilization program), and analysis of yield and impact of alternative tax rules. USAID has also supported municipal government efforts to introduce local property tax as a major revenue source, and to improve budget and revenue management at the local level.
The Ministry of Finance, assisted by U.S. legal and economic advisors, prepared a comprehensive draft Tax Code during 1994-96, but adoption has been stalled due to strong opposition in the Duma and from some GOR factions to many proposed changes. In the face of such opposition, the government since May 1996 has set more modest legislative goals for 1996-97, focusing its efforts on tax administration procedures, the VAT, and profits and excise taxes.
USAID has been assisting with the design of efficient, market-based local property taxes in two cities which, with the support of the MOF and Duma, are expected to be pilots for nationwide introduction of the property tax as a primary source of local revenue. With confidence in this revenue source, municipalities will become increasingly willing to privatize municipal property rather than hold onto commercial land and buildings in order to retain the flow of "leasing fees" that are now a major source of local revenue.
During 1996-97, a new major emphasis of the technical assistance program has been to help improve tax administration. U.S.-funded advisors are assisting the STS with an intensified program in areas of improved tax collections, monitoring arrears, audit selection and programs, and public education. In 1994-95, U.S. GOVERNMENT assistance had been limited mainly to classroom training of STS officials.
Description: USAID and its partner U.S. institution (Department of Treasury) consider tax reform to be a very high priority. During 1998, the U.S. assistance program will continue the recently expanded effort to help improve tax administration, while legal and economic advisors will continue to assist the MOF and Duma with problem-diagnosis, program design, and legislative action on the GOR tax reform program. That program will include a review and proposals for reform of individual income and payroll taxes and tax regimes for selected sectors as well as continued advice regarding changes to the VAT,and to profits and excise taxes not completed in 1997. USAID will also support continued implementation of the new property tax system in pilot cities.
Host Country and Other Donors: USAID works with the Ministry of Finance, the State Tax Service, and Parliament and coordinates closely with other U.S. agencies (principally Treasury) and other supporters of Russia's reforms, particularly the International Monetary Fund and the World Bank, both of which are also providing technical assistance and training in fiscal issues and tax administration.
Beneficiaries: Business investors, recipients of state payments (pensioners, public employees, suppliers), and the general atmosphere of "financial discipline and fulfillment of payment obligations" will benefit from reform and improved administration of Russia's tax system. The current system imposes high tax burdens on honest taxpayers but suffers from poor tax compliance, excessive exemptions and arrears of major enterprises, and inefficient administration. Dwindling real revenue collection threatens the viability of Russia's macroeconomic stabilization program (which was successful in 1995-96), erodes the capacity of the government to deliver basic public services, and, through "sequestration of expenditures," results in state delinquencies to pensioners, state employees, and government suppliers that sets a bad example of payments arrears that permeates much of the economy.
Principal Contractors, Grantees, or Agencies: Fiscal reform activities are implemented under the overall direction of USAID. The Harvard Institute for International Development (HIID) is currently serving as the overall technical coordinator for the U.S. Government's tax reform activities in Russia. The Department of Treasury participates actively in the program through inter-agency transfers. HIID, KPMG's Barents Group, the Center for Financial Engineering and Development, the Soros Foundation, and Georgia State University are all deployed in different aspects of the program.
Major Results Indicators Baseline TargetFixed capital formation increases 17.7% of GDP (1995) 22% (2000)
Tax revenue: actual as a percent of planned 79% (1995) 95-105% (2000)
Tax code adopted 0 (1995) Adopted (1999)
ACTIVITY DATA SHEET
PROGRAM: RUSSIA
TITLE: Private Enterprise, 110-S001.3
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $ 112,500,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1992; ESTIMATED COMPLETION DATE: FY 2001
Purpose: To accelerate development and growth of private enterprise in Russia, thereby realizing the transformation of Russia from a centrally-planned economy to one based upon individual initiative and the operation of market forces.
Background: In 1993, Russia undertook a process of mass privatization which made it possible for nearly 150,000 enterprises of all sizes to become private companies. This transfer of state assets to private hands was, however, only the first step in the transformation of Russia into a market economy in which private ownership and management are dominant. Since 1993, many private as well as public initiatives have been launched to help the privatized enterprises become viable and competitive in both domestic and international markets and to foster the growth of new businesses, particularly small businesses. A critical mass of successful private enterprises is gradually developing. Managers who run struggling enterprises are learning what it takes to turn these companies around, while those at firms that did find success from the outset are realizing what must be done to stay competitive and to grow. Macroeconomic stability and political leadership have proven to be important even for small firms with domestic markets. Policies, legislation, and regulations conducive to broad-based competition and private sector growth are being developed, but are not yet adequate to provide entrepreneurs and managers with the incentives and structures they need to operate more profitably. A network of business support institutions providing advisory and training services as well as more specialized assistance has sprung up in nearly every region of the country, but still needs strengthening technically and financially before it can be considered a solid, sustainable resource.
USAID Role and Achievements to Date: USAID has made direct contributions to developing the policy, legislative and regulatory frameworks appropriate for private sector growth through the provision of expert technical advisors, training and study tour opportunities, and by financing experimental models which have demonstrated what can work in Russia. Successful models of private ownership and management in firms both large and small have been developed in collaboration with private Russian partners and the relevant lessons have been shared with policymakers at all levels of government. USAID has also contributed significantly to the growth of an increasingly viable network of business support institutions rendering services to entrepreneurs and businesses. The Morozov Project training network now offers business courses in 36 regions across Russia. The eight regional Business Support Centers offer advisory services, training, and trouble-shooting help to thousands of small business owners every year. The Business Collaboration Center was developed as a coordinating hub and information resource for both direct and peripheral members of the business support network. Further, USAID has supported the establishment and the functioning of factor markets critical to all entrepreneurs and managers: land and real estate markets and financial markets. Finally, in 1995 two existing enterprise fund activities were folded into The U.S.-Russia Investment Fund (TUSRIF), which has a total commitment of capital from USAID of $440 million and which has commenced equity and lending activities.
Description: Foci for USAID support for accelerating private enterprise growth in FY 1998 will be: strengthen and expand the network of Russian business support organizations (i.e. providing quality services and achieving financial viability); further develop the policy, legislative, and regulatory environment within which private enterprises operate (which is also linked to fiscal policy reform, our Strategic Objective 1.2); replicate or "roll-out" successful models of private ownership and modern, market-oriented management; and improve operation of the nascent factor markets (land, real estate, and capital) which are important to private enterprises. In addition, USAID is seeking ways to expandthe flow of equity and loan resources available through institutions such as TUSRIF.
During FY 1997, USAID consolidated a number of separate, though similar, business support activities into a single umbrella activity. By FY 1998, the U.S. GOVERNMENT, under the auspices of the Gore-Chernomyrdin Commission, intends to be engaged in a regional investment effort, concentrating technical assistance and financing resources in several selected areas of Russia. USAID's support for this regional initiative will involve existing activities under this Strategic Objective, such as those described above. Russia will also be a major participant in a new Trade and Investment Facility designed to promote the international links necessary for sustained growth.
Host Country and Other Donors: USAID works with private Russian institutions, the managers and owners of private enterprises and associations of private businesses, and with various Ministries and agencies of the government at both national and local levels. USAID collaborates with other donors seeking to support private sector growth, especially the British Know-How Fund, the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation, and the World Bank. EU-TACIS provides complementary support as do both private and public representatives of European governments.
Beneficiaries: Accelerated development and growth of private enterprises in Russia will benefit all stakeholders. GDP and productivity have been declining for years. Official unemployment is growing as large firms, especially those which have been part of Russia's impressive military industry, begin to downsize. More successful businesses will provide new jobs and new incomes, leading to further growth and stability of the Russian economy.
Principal Contractors, Grantees, or Agencies: USAID works with literally dozens of U.S. nongovernmental organizations as well as for-profit contractors in implementing a broad program of support to private sector growth.
Major Results Indicators: Baseline Target Private sector production as % of GDP 20 (1995) 45% (1999)% of Household income from private sector sources 27.8% (1995) 50% (1999)
Number of USAID-assisted firms receiving outside financing 0 (1992) 2000 (1998)
ACTIVITY DATA SHEET
PROGRAM: RUSSIA
TITLE: Financial Reform, 110-S001.4
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $ 3,300,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1992; ESTIMATED COMPLETION DATE: FY 2001
Purpose: A more competitive and market-responsive financial sector is a fundamental for accelerated private sector growth.
Background: The financial sector in Russia expanded rapidly in the early 1990s, as private commercial banks proliferated across the country and as privatization of state enterprises led to an explosion of new shareholdings. The basic regulatory and market infrastructure necessary for a capital market has been in place since 1994. Central bank regulations and measures to reduce risks and raise capital requirements of private banks are among the positive developments, although public confidence in the sector is periodically rocked by bank failures--including those of several larger banks in 1996. In the capital markets, the main problem areas have been restrictions on shareholder rights by entrenched enterprise managers and risks of fraud and deception against shareholders and investors. Continued regulatory and institutional development are key to realizing the objective of a market-responsive financial sector which actively mobilizes capital for investment, protects investors, and provides the range of financial services needed to support entrepreneurial growth.
USAID Role and Achievements to Date: As the principal donor to the development of financial markets in Russia, USAID has provided technical assistance in the development of legal frameworks and regulatory mechanisms for both the capital markets and the banking sectors. Advisory services to the Central Bank of Russia (CBR) have led to the establishment in 1993 of a capable bank inspection department. Training since 1994 in both the CBR and dozens of commercial banks has increased the capacity of middle- and upper-level managers to manage risks more prudently and boosted their lending skills. In 1993-94, USAID-funded advisors also provided support to the Central Bank to develop a Treasury bill market, thereby enabling the government to finance its budget deficits without recourse to inflationary credit expansion policies by the Central Bank. This resulted in a drop in inflation from 20% per month in 1994 to 20% per year in 1996. USAID advisors have been the central players in the establishment of the Federal Commission for the Securities Market, and in developing the institutional infrastructure for trading of shares in a secondary market. The Russian Trading System, which assures transparent operation of the secondary market, was initially funded by USAID, but has developed into a self-sustaining mechanism for over-the-counter trading. USAID's assistance has been crucial in the development of an increasingly well-regulated capital market and to increased confidence among foreign investors in Russia.
Description: By the end of FY 1997, USAID will have obligated all its funds dedicated to the capital markets sector. Support to enhance banking supervision --on-site inspection, improved accounting and regulatory standards, and rehabilitation/liquidation of failing banks-- will continue during FY 1998 with the goal of strengthening this currently weak but critical, component of the financial sector. Assistance to speed Russia's adoption of international accounting standards is planned for 1997 and may continue into 1998.
Host Country and Other Donors: USAID plays a critical role in the financial sector. Activities are used as practical laboratories for future funding by the World Bank, the EU, and other donors. The World Bank will be providing a two-tranche loan totaling $120 million to the capital markets sector because USAID technical assistance has provided the Russian Commission on the Securities Market with sufficient knowledge to manage the loan and implement policy. USAID works closely with the GOR on developing a regulatory and legal environment conducive to a robust financial sector.
Beneficiaries: Russian business, which creates jobs, Russian citizens, who will be able to count on understandable bank regulations, personal investment vehicles, and Russian banks are the principal beneficiaries of these activities.
Principal Contractors, Grantees, or Agencies: USAID implementers include: KPMG, Booz Allen, Intrados, HIID, IBTCI, PW, Burson Marstellar and Financial Services Volunteer Corps (FSVC), the latter primarily responsible for the continuing banking supervision work.
Major Results Indicators: Baseline TargetTotal assets of banking system as % of economic output 40.7% (1993) 75% (2000)
Bank licenses revoked by the CBR 85 (1994) 1200 (1999)
Regional bank training centers established/licensed 0 (1994) 2 (1998)
ACTIVITY DATA SHEET
PROGRAM: RUSSIA
TITLE: Citizens' Participation, 110-S002.1
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $ 58,300,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1992; ESTIMATED COMPLETION DATE: FY 2001
Purpose: Increased, better informed citizens' participation in political and economic decision-making.
Background: Free and fair elections, vibrant independent media, open and responsive political parties, a robust civil society, and confidence-building transparent political processes are essential steps on the path to free-market democracy. Few of these preconditions for democratic rule were in place until recently. Improvements in both areas were and are still needed to help guarantee that the reform process will continue. At the same time, the ability of citizens to understand public policy issues and to use this knowledge to influence economic and political decisions is essential in a well-functioning democracy. Independent media have grown exponentially in Russia since 1992 and have had a major, demonstrable impact on the quality, quantity, and availability of information about current events and issues. Russians now have the capacity to organize voluntarily around issues of common interest and do so frequently via nongovernmental organizations (NGOs). Social problems, environmental concerns, and a host of other interests have stimulated the growth of thousands of NGOs. Just as the independent media are attempting to survive and prosper in an increasingly competitive commercial market, NGOs are developing their own strategies for achieving sustainability by employing techniques of private fundraising as well as relying on foreign donors for start-up financing.
USAID Role and Achievements to Date: USAID works through grants and other financing mechanisms to provide technical assistance at the national, and increasingly the regional and local levels, to assure transparency, accuracy and integrity of Russia's election management system. USAID has provided training for political parties and has been instrumental in developing outreach and communication strategies for parties and Duma factions. The most recent Parliamentary and Presidential elections were judged to be free and fair by both domestic and international observers. Internews, an American NGO dedicated to strengthening independent media around the world, has, with USAID funding, played a key role in Russia through training and facilitating networking among both broadcast and print media. A clear demonstration of success was the direct access and objective reporting provided the Russian people on the events in Chechnya. USAID-funded NGO assistance provides training directly to citizens on how to communicate their concerns and demands to public officials. USAID has established NGO support centers in 15 cities around the country with the aim of ensuring long-term access to information and training in support of ongoing civic advocacy efforts.
Description: USAID-funded technical assistance will continue to target citizens, communities, NGOs, public officials, and various political party officials in order to expand public outreach efforts and to increase participation. Major grant programs will be administered directly by USAID (often through umbrella grants to U.S. NGOs) and by the Eurasia Foundation. Media partnerships between American and Russian entities were started in 1995 and will continue to be nurtured through the 1998 - 2000 period. A new "community development initiative" will bring together NGO, local government, and private sector elements in selected communities, to foster inter-sectoral partnerships and maximize program impact. As part of the Partnership For Freedom, funds will be provided to make change permanent by endowing key U.S. and Russian institutions.
Host Country and Other Donors: Russia has dozens of political parties. USAID has emphasized responding to requests for technical advice and training services from those parties generally viewed as "reform-oriented." Work with citizens' groups has generally been carried out through NGOs and in concert with local institutions, including municipal governments. Other donors have been active in electoral process issues; USAID has coordinated regularly with them in all election run-up periods andwill continue to do so. USAID also works cooperatively with other bilateral donors providing assistance to the media and, increasingly, to Russian civil society.
Beneficiaries: The entire citizenry stands to gain as a direct result of USAID programs under this strategic objective. The political process activities are of greatest importance to voters and public officials at the national and regional level. Both independent media and NGOs can reach a large portion of the Russian population. Independent media provides more objective news coverage essential for informed debate while NGOs offer an avenue for citizen participation in the policy making process.
Principal Contractors, Grantees, or Agencies: USAID is working with the following: International Republican Institute (IRI), Free Trade Union Institute (FTUI), International Foundation for Electoral Systems (IFES), National Democratic Institute (NDI), ISAR, Save the Children Federation, United Way, Helping Hand, Internews, Russian/American Press and Information Center (RAPIC), the U.S. Information Agency (USIA), and the Moscow School of Political Studies.
Major Results Indicators: Baseline TargetAccess to independent TV 12% of viewers (1995) 21% (1998)
Percent increase in voters receiving campaign information through party campaign tactics None 15% (1997)
Number of media partnerships that are self-sustaining 0 (1995) 3 (1999) Share of domestic funding in monitored NGOs 15% (1995) 40% (1997)
ACTIVITY DATA SHEET
PROGRAM: RUSSIA
TITLE: Legal Systems, 110-S0 2.2
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $ 11,500,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1992; ESTIMATED COMPLETION DATE: FY 2001
Purpose: Legal systems that better support democratic processes and market reforms
Background: As Russia lacks both an adequate base of commercial law and an equitable means of dispensing justice through an independent judiciary, it does not possess the necessary prerequisites to encourage investment and prevent recourse to non-judicial means of dispute resolution among its citizens.
USAID Role and Achievements to Date: USAID's Rule of Law program focuses on three principal aspects of legal reform in Russia: judicial reform (including enforcement of judgements and alternative dispute resolution), legal education and training, and commercial law drafting. Work in the area of commercial law drafting has been particularly successful, with numerous new laws and decrees being adopted in the past year. To complement these achievements in the legislative area, USAID has worked with the Rule of Law Consortium to ensure that all Russian Commercial Court judges are familiar with new legislation, including the Civil Code. USAID support assured that all 1600 commercial court judges in the country received Part 1 and 2 of the new civil code and other laws and that over 40% of these judges received training on substantive, Russian commercial law topics. USAID has started to work on improving enforcement of judgements and creating alternative dispute resolution mechanisms. USAID has provided funding for bringing together U.S. and Russian legal associations, resulting in improved continuing legal education programs and increased flow of information between the two countries. USAID is also funding the U.S. Department of Justice, which is helping Russia reform its criminal justice system, and has funded conferences on crime and corruption. Another important USAID supported effort is the work with many local NGOs to improve advocacy and outreach., helping Russians become more aware of their rights in such areas as housing, property, civil rights, and environmental protection. The Free Trade Union Institute works with local legal groups to provide citizens with the resources and encouragement to seek enforcement of their labor rights and to organize into effective, independent labor unions. A grant to the American Bar Association has provided technical expertise in the reinstatement of trial by jury after a 70 year hiatus.
Description: USAID will continue its dual focus on creating the requisite legal and regulatory environment to promote trade and investment while combating crime and corruption. Activities will include continuing support for commercial law drafting, judicial training and reform, alternative dispute resolution, enforcement of judgements, legal education, and legal rights advocacy by NGOs. Organizations such as the Institute for a Law-Based Economy (ILBE) will be used to work on progressive commercial laws and regulations. Support for the judiciary will also play an important role, especially as regards the creation of the new, independent Judicial Department. Training of lawyers will focus on new commercial laws and the development of advocacy skills with which to protect the rights of their clients.
Host Country and Other Donors: The World Bank, the EU, and several bilateral donors are involved in Rule of Law activities for Russia. USAID also works closely with the Russian government, local governments, legal associations, and NGOs such as the Institute for a Law Based Society and the Sakharov Center.
Beneficiaries: Investors, both foreign and indigenous; Russian citizens desiring an open, transparent civil and commercial legal system; as well as the legal profession, all stand to benefit from activities that increase transparency and the soundness of new laws, and that ensure their even-handed application and enforcement.
Principle Contractors, Grantees, or Agencies: In addition to DOJ technical assistance, USAID works with ABA/CEELI, ARD/Checchi, HIID, and the Institute for a Law Based Economy.
Major Results Indicators: Baseline TargetPercentage of people willing to use courts or alternative mechanisms in order to resolve disputes. 10% 25% (1999)
Number of people visiting Sakharov Institute and learning about their rights 1000 (1995) 5000 (1997)
ACTIVITY DATA SHEET
PROGRAM: RUSSIA
TITLE: Social Benefits, 110-S003.2
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $ 3,500,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1992; ESTIMATED COMPLETION DATE: FY 2001
Purpose: Improved effectiveness of selected social benefits and services.
Background: The Russian health care system is falling apart. In 1995, health care related expenditures were estimated to be less than 1.5% of GDP, very low by Western standards Budgetary pressures prevent the government from providing adequate health services to the population. Inefficient management systems and lack of alternative financing mechanisms virtually guaranteed that health service delivery would be unsustainable and of low quality. Improved efficiency in management and resource allocation, together with sound policies and regulations, are all needed to make service delivery sustainable and of adequate quality.
USAID Role and Achievements to Date : USAID has provided technical assistance and advice in several sectors, successfully demonstrating the benefits of a restructured, more market-oriented health system. This has been accomplished through support for the development of working models which integrate financial incentives for high quality with cost-effective service delivery. USAID has provided ground-breaking assistance in setting up total quality management (TQM) for physicians, piloted health maintenance organizations and other financing models, and proven approaches for improving systems for pharmaceutical management. USAID's women's reproductive health activities have supported the development of fourteen model family planning clinical sites in six oblasts and the training of over 2,000 service providers in modern contraceptive technology. USAID funding has also led to the improvement of disease control strategies and the development of information and education campaigns to promote immunization. USAID is also providing a system to upgrade service delivery for residents of recently privatized state farms and has completed a nation-wide policy for means testing for housing subsidies for low-income populations.
Description: New funding will be used to support (a) medical partnerships between U.S. and Russian health systems and (b) women's reproductive health activities. The partnership program will help upgrade Russian health care facilities and systems in such important areas as health care financing and management, infection control, emergency medical services, nursing skills, and pharmaceutical management. Funding for women's reproductive health will support dissemination of new family planning and clinical practices developed and tested under prior year funding. Prior year funding will continue to be used for health sector restructuring activities. These activities will focus on national and oblast-wide initiatives to reorganize the governance mechanisms of regional health authorities and regional financing authorities. They will also include support to legislative bodies to draft and implement laws and regulations that promote market-oriented reforms.
Host Country and Other Donors: Activities are closely coordinated with the World Bank, EU-TACIS, the British Know-How Fund and other donors. USAID normally pilot test activities which are later embraced and built on by other donors. The Ministries of Health, Agriculture, and Housing consider USAID activities to be very important and work closely with USAID in formulating policy.
Beneficiaries: Efforts to assure the sustainability of basic social services and benefits target users of the health care system, low-income populations, and members of recently privatized state farms. Achievement of this SO will result in more efficient and sustainable delivery of quality basic services.
Principal Contractors, Grantees, or Agencies: American International Health Alliance, Kaiser Permanente, Boston University, Lutheran Hospital, LaCrosse, American Medical Association, U.S.Department of Health and Human Services, AVSC, and others to be determined.
Major Results Indicators: Baseline TargetHospital days per thousand 1,260 (1994) 675 (2000)
Hospital mortality rates in pilot oblasts 30.0 (1994) 13 (2000)
Range of abortions/1000 in target areas 65-102 (1993) 58-92 (1998)
Use of modern cost accounting and financial planning systems in pilot oblasts 0 facilities (1994) 34 facilities (1998)
ACTIVITY DATA SHEET
PROGRAM: RUSSIA
TITLE: Environmental Health, 110-S003.3
STATUS: Continuing
PROPOSED OBLIGATION AND FUNDING SOURCE: FY 1998: $ 9,000,000 FREEDOM Support Act
INITIAL OBLIGATION: FY 1992; ESTIMATED COMPLETION DATE: FY 2001
Purpose: Increased capacity to deal with environmental pollution as a threat to public health.
Background: The acuteness of environmental problems in Russia, deepened by the difficult socio-economic conditions, has led to a substantial deterioration in the health of its population and undermines its drive towards economic reform. Environmental degradation and reckless depletion of resources have led to significant losses in economic productivity.
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USAID Role and Achievements to Date: USAID has developed an active environmental program to foster economic and social development in an environmentally sound manner and to prevent and reduce environmental threats to human health. Significant progress has been achieved to date. USAID technical assistance has introduced new low-cost techniques and approaches which are reducing air and water pollution while also reducing energy demands and costs. Environmental policy and economic advice has led to the incorporation of economic tools in environmental policy making, such as introduction of user fees and regional forestry codes. Grants to environmental NGOs have led to public education and clean-up projects, legal and legislative efforts, and information gathering and monitoring. USAID's environmental health activities have resulted in the completion of seven environmental health risk assessments in selected cities; the development of a policy "Lead White Paper," which will form the basis for an intergovernmental action plan to address the problem of lead contamination; and the completion of a pilot blood lead level screening of children, which led to the development of recommendations on lead screening methodology and intervention strategies.
Description: USAID has recently initiated the second phase of the Russian/American Environmental Cooperation Program, which is designed to ensure program sustainability by providing resources to Russian partners to replicate and disseminate lessons learned. This comprehensive new project will be the principal focus of USAID's future environmental assistance efforts in Russia through the year 2000. USAID will also continue to be an active member of the Gore-Chernomyrdin Commission. To support the Commission's priority focus on the chlorofluorocarbon (CFC) production sector phase-out, USAID will contribute $6 million, over three years, providing grant resources to the World Bank-managed "Special Initiative for Supplementary Funding to Complete Ozone Depleting Substances (ODS) Phase-Out in the Russian Federation." USAID resources will be used to carry out sub-projects consisting of a number of actions, including the provision of appropriate technical assistance aimed at phasing out the production of ODS in Russia. The Department of Energy will continue its nuclear safety activities at selected power plants.
Host Country and Other Donors: USAID closely coordinates with host country government, non-government, and private sector counterparts at the national, regional, and local levels. USAID programs work with other donors and international financial institutions, particularly the World Bank and EBRD, to coordinate activities and to leverage additional resources. To date, USAID environmental assistance projects in Russia have leveraged at least $370 million in environmental investments, with the potential for a total of $400-500 million before the assistance program comes to an end.
Beneficiaries: The entire population of Russia will benefit if USAID-supported and other donor programs in this area have their intended impact. Large segments of the Russian citizenry are exposed to air and water pollution, and also live near unsafe nuclear plants. High pollution levels help to explain the marked decline in public health, which in turn has reduced people's ability to contribute to the country's economic and political renovation.
Principal Contractors, Grantees, or Agencies: USAID is working with the following: U.S. Environmental Protection Agency, U.S. Forest Service, U.S. Department of Interior, CH2 M Hill, Harvard Institute for International Development, ISAR, Institute for Sustainable Communities, Ecologically Sustainable Development, World Wildlife Fund/U.S., Center for International Environmental Law, and the Department of Energy.
Major Results Indicators: Baseline TargetAmount of environmental protection TBD TBD
fund in targeted region
Number of people using new 0 (1993) 2600 (1997) environmental information networks and data
Number of self-sustaining 5 (1993) 25 (1997) environmental NGOs
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