RJ: Can injections of money actually save Russia or are institutions like the World Bank simply preventing a total collapse in the country.

MC: We don't see our job as propping up parts of the Russian economy. I like to see my job as trying to support government efforts to create a new start for the Russian economy. To promote growth. Our fundamental goal is poverty reduction, and in Russia it is clear there has been a substantial increase in poverty in recent years. That is mainly, but not entirely, connected to decline in incomes. So, improving growth is really a critical ingredient in battling poverty, as is strengthening social programs.

On the money side, you shouldn't see the role of the World Bank as primarily providing finance. Obviously we do provide finance, and that's important, but what we hope we also provide is a partnership and dialogue with the government, to which we bring experience of economic policy issues from many other countries in the world. Russia's economic progress won't depend on how big the next World Bank loan is, but on government policies and actions to create a better environment for the private sector to invest, to promote effective use of public resources.

RJ: Which are the most successful of current World Bank projects?

MC: We have a large portfolio. Altogether, we've provided 43 loans to Russia, some 30-odd of those are still active. Those are both investment loans - loans that finance a particular investment project, disbursed for expenditures - and so-called adjustment loans, which support programs and policies of particular sectors.

This has been a very difficult environment. The rate of success of projects has not been as high as either we or the government would like to see. But nevertheless, there have been some important contributions.

I think one very good example is the loan in May to help clean up the oil spill in Komi. The loan was made extremely quickly in an emergency situation and made it possible to bring international technology to help clean up what was a very serious environmental problem, one that could potentially affect other countries, too. The clean up was one of those projects that was a good partnership: We financed successful Russian efforts.

Another small example where we provided support was a project to computerize and reorganize the pension payments system in some regions - greatly accelerating the payment of pensions in those areas.

Another program I would highlight, although it is not yet complete, is the structural reform program for the coal industry, which is giving some interesting results.

For example, government subsidies to the coal industry, which were an extraordinarily high 1.4 percent of GDP in 1992, have come down to less than 0.2 percent, a very dramatic shift. And the composition of those subsidies has changed - from entirely supporting inefficient production, to a situation where most subsidies went to support specific actions to foster the restructuring of the sector.

Another very important change is that there is no longer a single coal committee that runs all aspects of the sector. Subsidies, production, social protection, safety and so forth have now been divided, with different parts of the government taking separate responsibility, thus reducing conflicts of interest.

Also, productivity in Russia's coal industry has now begun to rise. In fact, it rose by 30 percent over a three-year period from 1995. So there seems to be some kind of turnaround.

Finally, there have been some advances in privatization. I think these are important achievements. Although, it is also clear that there are still many issues to address.

RJ: On coal: There were reports in June that [First Deputy Prime Minister Nikolai] Aksyonenko went to Kuzbass, to the Kemerevo region, ostensibly to find $100 million of World Bank money that had "disappeared" - as well as government money that was supposed to have gone to restructuring programs. Was that mischief by the press or have there been real problems there?

MC: I think there has been an astonishing amount of inaccurate reporting on this subject.

First of all, the World Bank funding was in the form of adjustment loans; it was not disbursed specifically to finance the coal sector. It went into the budget, just like tax revenue or borrowing from capital markets. So it's like saying Eurobonds financed health centers.

Second, there were, I think three years ago, some concerns that emerged both from us and from the government about the proper control over the funds the government was providing the sector. This was partly for historical reasons: Under the old system through Rosugol, there were no control mechanisms at all.

It was clear that as the government began moving - as a result of dialog with us - to shift subsidies from supporting production toward supporting restructuring that there were not adequate mechanisms for making sure funds going specifically to restructuring were properly controlled. I remember Mr. Chubais ordered an audit to be carried out, and this audit found that some -three percent, I think - of the total subsidies, were not lost but were being misdirected. In fact, they were being used to meet wage arrears to doctors and teachers. Hardly an undeserving cause.

So, from our point of view, there was a distinction between the restructuring subsidies, which we strongly supported and continue to support, and the production subsidies. The production subsidies, to meet the losses of whole enterprises, which went through Rosugol. As I said, there was no transparency, and we do not know what happened over the years with those government funds. Of course, these subsidy expenditures should stop altogether, and, indeed, the government plans to stop subsidies at the end of next year.

So while there were some problems, I think they are exaggerated. The key point is that steps were taken which we pressed for. This helped strengthen control mechanisms. We also helped the government develop a system of payment through federal treasury offices in the regions, so that particular amounts of funding could be tracked better to the final destination. The proper control of government resources in general, not only in coal but everywhere, is a very important issue to address.

RJ: On the issue of tracking money - I know you're referring to government money as well - what are the checks and balances for a loan for a particular area? Even if it is going into consolidated revenue - there have been serious questions about diverting government revenue.

MC: In the case of investment loans, as I said, we finance particular projects and particular investments. Bridge rehabilitation, for example, which involves the rehabilitation of a number of bridges around the country, including a couple in Moscow. That work is done through letting out a contract for the work, and that really is at the center of a control system.

First of all, we require that the tendering process be open and competitive. Simply because that is in the best interests of the government - to get the lowest possible prices. Then we disburse - we first have to approve, of course - our funds against the payments under the contract. In other words, if we approve a contract for rehabilitation of a bridge, which involves particular payments, we will disburse against those payments when requested to do so, upon verification that it is for the price contracted. And, finally, we have an auditing requirement ... a review of expenditures related to a type of project each year. The combination of those checks provides some fairly strong assurances that money is being used properly, something we take very seriously.

For adjustment loans, the story is a bit different. We don't track the money beyond it going to the government. We have tracked, of course, whether it has reached the government. We've recently further reviewed and absolutely cross-checked that track to make sure that the money has reached budget accounts. And indeed, so far it has done so. I would not go as far as saying there is absolute assurance that no money has been misused, but we believe at the moment there is no evidence of such misuse.

RJ: Have any of those audits ever turned up discrepancies in the last seven or eight years? And if so, what action is taken in response?

MC: Those audits, I mean there are a large number of them, are like any audits: They often contain comments and interpretations, and obviously there is followup.

Also, in connection with investment loans, there is a further control mechanism that we are very keen to see in place, which is to work with the government before we begin the project, before the loan is disbursed, to establish a financial management system. This will be another way of ensuring there is real probity in how resources are managed.

RJ: Coming back to the coal industry, in something like Kuzbass, what is the ultimate goal? Is it to create a productive coal sector, or is Kuzbass a black hole and the aim is just to let the population down slowly? Who sets the goals: the region, federal government or the World Bank?

MC: First, it's important to know that Russia has good coal resources and therefore long-term potential for a coal industry. But, the Russian coal industry has faced some very serious problems. First were the many years of socialist management, where costs were not clear. There was a great deal of inefficiency and some mines were operating at extremely high costs, which were essentially borne by the rest of society. That was a drag on the whole Russian economy.

Secondly, of course, the Russian coal industry has been hard hit by the economic crisis in Russia over the last 10 years. Particularly because industrial output has dropped, reducing demand for coal.

Thirdly, Russia, like other countries with large gas resources, faces a tough transition because gas is a very attractive fuel that coal must compete against.

So the issue, as we see it, is to help the Russian coal industry to adapt to that particular set of circumstances and to help create a viable, prosperous industry, but one responsive to change. There is no future in continued provision of large subsidies. The government must spend money in other areas like infrastructure, schools and health, rather than just subsidizing inefficient industry.

(Next week, Michael Carter talks about loans and the Chechen war, political pressure and the World Bank and criticisms of Western financial institutions' policies in Russia.)