Bill Totten's Weblog

Sunday, August 12, 2007

Still Privatizing After All These Years

The World Bank's Russia office turns fifteen

by Alexander Zaitchik

the eXile (July 13 2007)


Russia-watchers know the horrific stat about Russian men's grotesquely low life expectancy, which in the 1990s reached levels normally associated with Tse Tse fly-infested backwaters in Africa. But over the past few years, things have started to turn around. Russia's male life expectancy has risen from a Congo-like low of 56 to nearly sixty, which, coincidentally, is the retirement age for Russian men. Finally, they're about to live long enough to start collecting their pensions.

Or not.

A few weeks ago, a familiar voice suggested that in order to shore up Russia's federal pension fund, the retirement age for men be raised to 65. After all, there's no better way to cut pension expenditures than to make sure recipients die before you have to pay them.

Who could propose something this cruel and keep a straight face? The World Bank. Yes, they're still around town. And though you don't hear much about them anymore, they're still promoting the same "tough-medicine" policies with the same double-speak explanations. Since this June the World Bank celebrated fifteen years of a job well done in Russia, we thought now would be a good time to take a fresh look at what they're up to.

There's no better place to start than their "pension reform" plan. The reason it's so shocking is obvious: Raising the retirement age to 65 would consign millions of Russian men, who were just on the verge of reaching pension age, to working themselves literally to death, never reaching the pension check finish-line. But that's not what interests the World Bank. For them, what makes raising the retirement age sexy is that the plan would immediately and drastically reduce the rolls - or, "increase social welfare efficiency" in Bank-speak. Like Stalin said: no people, no pension; no pension, no problem.

Why is the World Bank weighing in on Russian pension reform in 2007? And who's listening to them? A lot has changed since 1992, when the Bank set up camp in Russia for its biggest endeavor since the reconstruction of Europe afterWorld War Two. The notorious years of the IMF / World Bank good cop / bad cop routine - when the two institutions propped up the ruble and the Yeltsin government, encouraged the rapid-fire sell-off of Russian industry, and co-scripted economic and social catastrophe from offices in Cambridge and Washington - today seem distant and sepia-toned.

Since the rise in commodities prices began fueling Russia's resurgence over the past seven years, the Bretton Woods twins have gotten most of their money back on the mega-loans of the 1990s. The IMF even got its money back ahead of schedule, not that long after the 1998 default left most people assuming Russia would never pay back a dime.

Among the big questions at the Russian Treasury these days is not how to squeeze more money from Western institutions and governments, but whether to raise or lower the proportion of euros in its bulging foreign reserve currency basket, the world's third largest.

"Russia doesn't need the World Bank's money anymore", says Tatiana Piunovskaya, an analyst at the World Bank's Moscow office.

Russia hasn't for years. The last of the famous structural adjustment loans was inked in 1999. Early in this decade, the World Bank upgraded Russia from a "low-income" to a "middle-income" designated country. The latest sign of Russia's arrival as an economic power is its newfound interest in multilateral foreign aid institutions. The World Bank is now counseling the Kremlin in the art of debt-forgiveness; not how its debt can be forgiven, but how it can forgive debts owed to it by less fortunate countries. Russia has discovered the state-level equivalent of new-rich philanthropy.

The World Bank's two main divisions (the International Bank for Reconstruction and Development, and the International Finance Corporation) didn't disappear from the scene as the IMF did, slinking off to find new opportunities in Africa and Asia. The Bank, now located in a gleaming Moscow office complex on a leafy Novy Arbat side street, is still busy in Putin's revitalized Russia, and remains an influential presence in policy debates on everything from pension reform to Russia's place in the global carbon market. The World Bank's influence is maintained and exercised through its working-level relationships with high officials, its press conferences, and its influential reports, which make regular splashes in the media.

Then there are the loans. The Bank's Russia office currently oversees more than twenty active IBRD projects totaling some $2 billion. A couple of these are massive federal-level projects initiated years ago - such as a $230 million loan to overhaul the Russian Treasury - but most of the projects represent the Bank's "new look" in Russia. Meanwhile, the IFC, the Bank's private sector "investor", has more money in Russia than in any country except Brazil.

The new generation IBRD projects are smaller than the loans of old. They tend to target regional and city governments, which in recent years have been allowed increasing authority over their budgets. Instead of massive loans to restructure entire national industries, today's IBRD projects consist largely of technical assistance and economic advice, bundled into a small loan, often heavily co-financed by Moscow. In the future, there may not be loans involved at all. The Bank is increasingly looking toward straight business relationships with local governments, charging consulting fees for their services.

What kind of services do they offer? According to the Bank's recently departed Country Director, Kristalina Georgieva, Russia may not need the Bank's money anymore, but it still desires the Bank's "discipline, international expertise, and unbiased, honest advice on critical economic policy issues". (The new Country Director, Klaus Rohland, is fresh to the job and not yet speaking to the press.)

Doling out discipline and expertise to municipal governments doesn't garner the same attention as the gigantic loans of the 1990s that targeted entire national industries, but the World Bank's new projects nonetheless add up to a sizable and recognizable footprint on Russian life.

The substance of the Bank's new Russia strategy of targeting cities and regions ("sub-sovereign assistance") can be observed in Kazan, the capital of the Republic of Tatarstan and Russia's seventh largest city.

In early 2005, oil-rich Kazan received a $125 million World Bank loan, modeled partly on the Bank's ongoing Saint Petersburg Economic Development Project. As in Saint Petersburg, the Bank's goals in Kazan are to "undertake a broad range of reforms, making the city more efficient in delivering social services ... and more attractive in terms of its investment climate", according to Georgieva, who was the Bank's Russia director when the project was approved. The Kazan project, she hopes, "[can] be replicated in other parts of Russia".

The plan for Kazan is essentially the World Bank's plan for the world, writ small: privatize utilities, monetize and sharpen the distribution social benefits, cut government subsidies, and improve investment climate through transparency and incentives. In other words, the same neo-liberal formula that worked wonders in the 1990s. The end result, says the Bank, will be reduced poverty and stable long-term growth. At least that's what the Bank says on the website. In internal documents the Bank is more frank, and admits that the road to this brighter tomorrow is bumpy and uncertain, filled with short-term pain for the local passengers. In the Bank's classified Kazan Program Document, acquired by the eXile, the Bank's economists state that the Kazan project is fraught with the risk of "backlash to the reform program by the city's inhabitants".

It isn't hard to see why. Although it is the capital of an industrialized region swimming in oil, Kazan is still poor. According to the Bank's Project report, written in late 2004, nearly a quarter of the city's 1.1 million residents lived "below the subsistence level" in 2002. Another nineteen percent had monthly incomes at or slightly above subsistence level, defined by the Bank as 1,200 rubles a month, or about forty dollars (as of 2002). Another 53 percent of the population had monthly incomes below the "minimum consumer budget" (3,500 Rubles, then just over 100 dollars). This leaves about five percent of Kazan's residents with incomes above what the Bank calls a "rational budget" of 11,800 rubles a month, or $400.

No doubt these figures have changed since the Kazan project was initiated, but the fact is that at the time the Bank drafted its strategy, the latest available data showed that 95 percent of Kazan fell short of a "rational budget" - in plain English, they were butt poor. Surely, then, among the most pressing tasks for the local government is to cut benefits for parasitical welfare queens, privatize communal services, and raise the cost of utilities. Luckily the World Bank has just the expertise and the discipline to make this happen.

The Bank's Kazan Project Plan is a remarkable document. It spends several pages devoted to a critique of the "regressive" Russian social benefits system, in which entire groups, such as war vets, invalids, and pensioners, are allotted benefits like public transport tickets, free medicines, and occasional spa treatments. The Bank wants to eliminate these - or "monetize" and "target" them, in Bank jargon. This is because some of those invalids and pensioners are freeloaders. When benefits go to someone who is not in the poorest fraction of the population, the Bank considers this "leakage", and leakage is a scourge to be fought with the utmost vigilance. Monitoring is now accomplished by the Bank "innovation" of sending city agents to make sure Kazan's welfare participants are not lapping up leakage.

Cutting welfare rolls doesn't necessarily mean the saved funds will be shifted over to increase the budget for other social services. "We leave it up to the government to decide what to do with the savings", says John Litwack, lead economist at the Bank's Moscow office. Maybe the money can help pay for all of the door-knockers.

Another pillar in the Bank's reform plan for Kazan is the privatization of communal services like housing maintenance, and utilities like heat and water. While there is no doubt that the provision of these services is often a combination of subpar and wasteful throughout Russia, the Bank's remedies appear driven more by neoliberal dogmatism than a desire to improve the lives of Kazan's residents. Even though heating costs in the city are naturally low because it is produced largely as run-off from electricity production, the Bank has recommended that tariffs on heat be raised. In March this led to the latest of a series of protests in Kazan, after winter prices for heating doubled. Housing maintenance costs are likewise expected to rise with the introduction of private contractors to replace municipal companies.

No reforms are as controversial as the liberalization of the housing sector. Housing routinely ranks at the top of the list of concerns for Russians, but the market-based solutions currently in the pipe (the government and the World Bank share the same basic vision here) are generating the closest thing to a single-issue social resistance movement. Since the early 1990s, around 65 percent of Russia's apartments have been privatized. But management and maintenance duties have remained in state hands, while building ownership often remains legally murky. This is set to change. Around the same time as the Kazan project was approved, the Russian government passed a new Housing Code that, using advice from the neoliberal Institute of Urban Economics along with the World Bank, focuses on price deregulation and privatization.

According to critics of the new Code, the reforms will create problems as bad or worse than the ones it was intended to solve.

"The early stages of privatization have resulted in monopolies and exorbitant, and in some cases illegal, rate hikes in building management and communal services", says Carine Clement, the French director of the Moscow-based Institute of Collective Action. "We can expect more of the same in the next years when all residences must be managed by condominium, or by private companies as called for in the new Housing Code".

Property management and development in Russia is a multi-billion dollar business, and as Russian and foreign capital floods the regions and once-forgotten provinces, so goes the World Bank, representing major Western treasuries and the Western investment banks who buy the Bank's bonds. Although the World Bank's charter restricts it from "competing" with private lenders, the bank earns a return on its loans and is itself a kind of private bank, working in tandem with its investment bank stakeholders. For example, Bank projects that loosen up restrictions on real estate in Russia's provinces are met in the private financial sector with moves like Morgan Stanley's acquisition of a stake in RosEuroDevelopment, a real estate giant with big plans to develop Russia's ten largest cities over the coming years.

The World Bank may no longer have the influence over Russian economic policy it once did, but there's more than meets the eye. Aside from the re-nationalizations in the energy sector, Russia's political elite has largely embraced neoliberal fiscal and monetary policy. Which would explain why the Bank gives Russia a general thumbs-up. A recent World Bank Country Assistance Strategy Progress Report notes general satisfaction with Putin's reform agenda and commitment to macroeconomic fundamentals, especially his willingness to tackle "politically sensitive" reforms while keeping inflation in check. (The Bank's major expression of concern relates to veiled references to cases of "state intervention in economic life".) Putin has even floated the idea of private retirement accounts, a World Bank-endorsed idea roundly defeated in the United States when proposed last year by his friend George W Bush.

One of the Bank's main public beefs with the Russian government concerns the Stabilization Fund. At the moment the Stabilization Fund - the swelling collection of oil revenue windfalls - is a national savings account held in rubles at the Central Bank; investments of its funds have so far been limited to liquid foreign government bonds. The World Bank is recommending the Kremlin diversify the Fund by playing the global commodity and currency markets. Meanwhile, the Bank is urging the Kremlin against using the Fund to raise and pay for pensions (which didn't stop Putin from floated the idea in his April address to the National Assembly). The Bank maintains that only by first investing in equities can the Fund grow large enough to perhaps fund pensions at some point in the future. In other words, it's Bush's Social Security plan applied to the Stabilization Fund, and everyone knows who the real winners would be.

It's true that senior Russian officials have on occasion joined the chorus of those assailing the power of Western-dominated global financial institutions. In April, deputy finance minister Sergei Storchak told the IMF to mind its own business after the Fund criticized how the government spent oil revenues. Putin himself recently called for a "new architecture of international economic relations based on trust and mutually beneficial integration", which is basically nonsense-talk for a world in which the US Treasury and Western banks have less pull and the Ruble gets some respect.

But unlike the anti-neoliberal words and actions coming out of Latin America, Russian criticisms are based almost entirely on nationalism, not economic populism. When Hugo Chavez bear-hugged Putin during his recent trip to Moscow, they embraced not over policies like smashing free trade agreements or redistributing wealth to the poor, but rather over arms deals and a shared apprehension of US foreign policy. Chavez has said he will soon cease all cooperation with the IMF and World Bank; in Russia, the Bank remains something of a welcome partner in government.

"The projects in the 1990s run by the IMF and World Bank were a sort of intellectual training", says Boris Kagarlitsky, director of the Institute for Globalization Studies in Moscow and the author of Russia Under Yeltsin and Putin (Pluto Press, 2002). "Now the same kinds of decisions are being made voluntarily in the context of revitalization. The mindset is Thatcheresque, with little investment in the public sector. The psyche of the culture of the [Russian] elite was in many ways shaped during the Chubias and Sachs years. The IMF is gone, but next it'll be the WTO. When the country joins the WTO, you may start to see Russians in top jobs in top positions in international financial institutions."

The Bank's John Litwack essentially agrees. "We used to walk into the room and impose policies on Russian officials. Those days are gone. Now the ministries are really interested in what we have to say, even if borrowing from us is politically unpopular. We have good working-level relationships with [high-level people]."

Fifteen years after the Bank first arrived to save Russia from its socialist past, it has a lot to celebrate. It may not wield the same hard power inside the Kremlin it once did, but this doesn't matter when guys like German Gref and Alexei Kudrin and Viktor Khristenko are doing the work for them, leaving the Bank to take its Gospel on the road to places like Kazan. As always, the Bank's policies promise benefits that are just around the bend for the majority of the population, but immediate for investors seeking new opportunities in World Bank-advised economies.

That's why the Bank is still welcome in the Kremlin today. "The Russian elite is now part of the Western elite", says Kagarlitsky. "It is one neoliberal culture".

http://www.exile.ru/2007-July-13/still_privatizing_after_all_these_years.html


Bill Totten http://www.ashisuto.co.jp/english/index.html

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