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PROJECT INFORMATION DOCUMENT (PID)
CONCEPT STAGE
Report No.: AB6376
Project Name
Region
Sector
Project ID
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Implementing Agency
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Date PID Prepared
Estimated Date of
Appraisal Authorization
Estimated Date of Board
Approval
Fiscal and Financial Development
EUROPE AND CENTRAL ASIA
Central government administration (50%);General finance sector
(50%)
P122998
RUSSIAN FEDERATION
The Ministry of Finance and the Federal Tax Service
[ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined)
February 17, 2011
September 28, 2011
December 8, 2011
1. Key development issues and rationale for Bank involvement
The Russia’s economy grew briskly at an annual growth rate of about 6.9 percent and most
citizens enjoyed improvements in income and living standards during 1999-2008. On the
heels of sound fiscal management, strong macroeconomic fundamentals, and favorable external
environment, unemployment reached a low of 5.4 percent and the national headcount poverty
rate was nearly cut in half from 2002 to 2007, bringing better lives to 12.5 million people. The
Russian Federation advanced to become a top-ten world economy in dollar GDP, current
account, and federal budget surpluses. International reserves peaked at USD 584 billion in
August 2008, the third highest in the world.
Despite this background of strong macroeconomic performance, the Russian economy
remained vulnerable. Russia maintained a narrow industrial base, and budget revenues
depended on the price of oil, gas, and other minerals, which continue to constitute about one
third of total budget revenues and about two thirds of Russia’s exports. Of the stock market
capitalization, two thirds was concentrated in oil and gas or related stocks, amplifying the
transmission of external oil shocks to the domestic economy. As wage growth began to outpace
productivity gains and the real effective exchange rate rose, Russian firms operating in nonenergy sectors had to cope with rising pressures from foreign competition.
The impact of the global crisis on the real economy was swift and deep: the decline in
global demand, collapse of oil prices, reversal of capital flows, and tightening of credit
triggered a sharp slowdown of the Russian economy in the fourth quarter of 2008, followed
by a severe contraction in 2009 across all sectors. With the sudden reversal in capital inflows
and difficulties in access to financing, Russian banks found themselves in a vulnerable position
to weather the financial turmoil. The social impact of the crisis was also significant: rising
unemployment, falling incomes, and higher poverty rates. Simulations of the impact of crisis
indicate that the number of poor people reached almost 25 million, up more than seven million
from the pre-crisis normal growth scenario.
Russia is currently overcoming the effects of the crisis precipitated by the global financial
and economic downturn. Revenue shortfalls across all government levels, inefficient budget
spending and weak investment in public infrastructure modernization, rigid financial
management models in public institutions—all these factors are hampering the government's
efforts to pursue an effective fiscal and economic policy. These problems are especially acute at
the regional and local levels, where they are exacerbated by a weak revenue base, under-funded
mandates and insufficient skills in public finance management. Problems of a declining natural
resource base, demographic changes and systemic weaknesses in the financial systems could also
threaten fiscal stability. These challenges are not new, but they have been exposed and
aggravated the financial crisis, making its consequences more severe than anticipated.
Over the past several years, the Government laid the foundation for a modern public
financial management system, including implementing a single treasury account, and
regulation of the overall budget process. It created the Oil Stabilization Fund following best
international practice (2003), reformed the regional fiscal relations and established fiscal rules
for the sub-national government (2004), formulated the Concept of Administrative Reform,
introduced performance management and improved service delivery (2005) and national priority
projects, started to prepare and execute three-year federal budgets (from 2007). These reforms
constitute a major shift from a traditional, centralized, and control-oriented budget management
framework toward a modern, performance-based budget system, with a strong medium-term
focus.
Systemic reform of tax administration, undertaken in the last 15 years, resulted in
significant progress in transforming the administrative mindset and institutional culture of
the tax administration from command-and control-approach to a modern service oriented
culture. Tax services have been rationalized with a focus on voluntary compliance and effective
management of large taxpayers. Enforcement mechanisms were strengthened through enhanced
capacity to carry our tax audits and administrative efficiency improved through automation of
business processes.
More recently, the Government has undertaken a broad set of reforms to raise the
efficiency and effectiveness of resource use in the public sector and create more room for
private sector growth. These measures span more traditional, long-standing reforms of public
financial management and decentralization. But they also include areas with potentially farreaching impact on public sector performance as a whole: overhauling the organization of the
public sector, improving energy efficiency and mitigating climate change, and enhancing
infrastructure efficiency, especially in the railway and ICT sectors.
Russia thus appears poised for another wave of important reforms that could significantly
modernize and strengthen public sector performance. The Government is also making all
necessary efforts, including creation of a proper legal and normative environment and
appropriate changes in budget classification, in order to make a transition towards program
budgeting at the federal level from the year 2012. During recent years Russia also became an
important member in G8 and G20 forums, thus it started to actively participate in Russia as a
donor programs and it is trying to develop its role as a key world financial center with the ruble
as a strong currency, with the idea to make it in the future as a fully convertible, widely used in
international transactions, and a reserve currency.
The Country Partnership Strategy focuses on assistance to implementation of the
Government’s four main goals: diversify the economy for sustainable development and
growth, improve public sector management and performance, improve delivery of communal
and social services, and enhance Russia’s global role. The focus of this operation, supporting
improvements in public financial management and advancing the role of Russia as a donor- is to
improve the efficiency and effectiveness of public sector performance and enhance Russia’s
global role, are fully in line with the second and fourth goals.
Experience in carrying out public finance reforms in the Russian Federation, namely tax
modernization, an intergovernmental fiscal reform, a single treasury account for budget
execution and moving to three-year budget planning, suggest that to achieve a durable
change for the better public finance and financial sector reforms should be designed and
implemented following a coordinated and programmatic approach. The Government has
already laid out the strategic directions for change in policy documents on tax policy, budget
effectiveness, inter-budgetary relations, development co-operation and the financial sector.
Access to international experience combined with investment in modern business processes and
upgraded skills will play a key role in ensuring the successful implementation of these policies.
2. Proposed objective(s)
The project development objective is to strengthen economic management and oversight of
financial risks through policy advice and capacity building in the Ministry of Finance, the
Federal Tax Service and sub-national governments. Within this broader overall objective the
strategic objectives of the project are to:
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Enhance the economic efficiency of the tax system reduce the costs of compliance for
tax payers;
Improve the effectiveness of public spending at regional and local levels;
Strengthen Russia’s role as a provider of official development assistance;
Improve the effectiveness of Russian cooperation with international financial
institutions and economic organizations;
Develop the role of the ruble as an international currency; and
Improve management of fiscal risks within the financial system.
3. Preliminary description
It is envisaged that the project would consist of four components, the implementation of which
would be managed by the Ministry of Finance and the Federal Tax Service.
Component 1: Inter-government fiscal relations
The level of economic and social development of the regions varies widely, and the revenue base
of sub-national governments is similarly diverse. A small number of regions have strong
revenues from natural resources but, for the most part, sub-national governments remain highly
dependent on federal transfers to fund public services and investment. Efforts by central
government to improve the performance of lagging regions through central support have
achieved mixed results, reflecting in part the diversity of challenges facing different regions.
Government is committed to
 Improve the quality of budget management at regional and municipal level,
 Improve the efficiency and effectiveness of budget transfer mechanisms,
 Clarify expenditure obligations of state bodies and local self-governments and strengthen
the internal revenue base of sub-national governments.
In parallel the government’s budget efficiency program (The Program of Enhancing the
Effectiveness of Budget Spending in the Period until 2012) requires significant reforms at subnational level; including the introduction of program budgeting and the establishment of semiautonomous agencies responsible for service delivery. The Ministry has also taken on a new
commitment to improve the quality of regional development programs and of federally funded
investment projects at sub-national level.
The project will support the delivery of these policy objectives and programs with a package of
technical assistance including analytical and advisory work, drafting necessary legal and
normative acts, and investments in capacity building and training for both Ministry staff and staff
in regional and municipal governments. Special attention will be given to the needs of lagging
regions.
Component 2: Tax policy and administration
The Government has already carried out a broad range of tax reforms and modernization of tax
administration which have transformed the tax system. Having carried out the obvious major
tasks, the Government is now left with a range of more complex tax issues, where they would
like to benefit from international best practice, covering both policy and related administration
aspects. The objectives are to improve the fiscal balance over the medium term, create
incentives for restructuring of the economy, increase fairness and improve the efficiency,
effectiveness and user friendliness of tax administration.
The strategic directions for change have set out in the “Main Directions of Tax Policy of the
Russian Federation for 2011 and the Planning period of 2012 and 2013”. The project will help
to implement the changes envisaged as well as making provision for support to other likely tax
policy reforms. The project will provide advice and capacity building support both to the
Ministry of Finance on the development of tax policy and to the Federal Tax Service for
implementation of tax changes in the following areas:
Taxation of Hydrocarbons:
Provide access to international experience and good practices in the design of tax systems for
hydrocarbons, help to model and evaluate proposed tax changes, provide advice on the transition
process to test and then roll out changes and help the FTS to develop the regulations, business
processes, organization, information management and skills required to administer the new tax
regime.
Property tax modernization:
Support impact assessment of the new property tax, including impact on vulnerable social
groups, businesses and across regions, development of methodology and software to undertake
mass appraisal of property values and public relations and communications support for the
introduction of the new tax.
Taxation of not for profit entities:
Provide advice and support for the implementation of the new tax regime including review of
international experience in taxation of non-profit organization, and the development of
regulatory and administrative procedures, systems and training for implementation a new tax
regime.
Transfer Pricing:
Provide access to international experience in transfer pricing; support the development of new
legislation and regulations; develop methods and systems for establishing market prices and train
Federal Tax Service employees to carry out more effective tax audit of transfer prices.
Other tax and revenue policy issues:
During the course of the project it is likely that other tax policy and administration issues will
arise. The project will include provision for flexible advice in other areas of tax and revenue.
Areas that have already been identified include tax expenditures, excise on tobacco and alcohol
products, contributions to social extra-budgetary funds, primarily to the Pension Fund, and tariff
issues related to the customs union with Kazakhstan and Belarus.
Tax administration:
Support modernization of business processes, introduction of call centers and more electronic
filing of tax returns, upgrading of data processing and electronic archiving of records, as well as
better performance measurement and monitoring.
Component 3: Strengthening Russia’s effectiveness as a provider of official development
assistance
The Russian government has set a policy goal to increase Russia’s financial contributions to
development assistance and to ensure their effectiveness (Russia’s Participation in International
Development Assistance, 2007). Russia has become an increasingly significant contributor to
international development institutions and provider of direct aid to neighboring countries and
seeks to fulfill international obligations under G8 and G20 agreements. At the same time the
Russian government is looking to broaden its participation in IFIs and its contribution to
international economic institutions including UN organizations, OECD etc. The project would
support the following:
o Developing performance appraisal approaches to evaluate Russia’s contributions to IFIs
and inform policy making
o Developing a national system to collect and analyze data to meet OECD DAC reporting
requirements
o Developing new instruments including bilateral development banks that could develop
into new IFIs.
o Developing the policy, legal and institutional bases for management, monitoring and
evaluation of ODA programs, currently delivered by various ministries and agencies
o Policy development in relation to G8, G20 and APEC agendas focusing on some concrete
areas of development such as financial sector, health and energy.
Component 4: Developing the ruble as an international currency and strengthening
financial oversight.
A group of activities under the project are focused on the Ministry of Finance’s role and
responsibility for monitoring systemic financial risks, while at the same time strengthening the
financial sector through policies to expand electronic payments and encouraging greater
participation in international financial markets, including through promotion of the ruble as an
international currency. The main components that will be supported by the projects are:
o Development of a system for monitoring the status of systemically important financial
institutes in the banking and insurance markets of the Russian Federation in order to
create a crisis early warning system and prevent cross-sectoral contagion of systemic
risks;
o Advice on accreditation and regulation of national credit ratings agencies.
o Creation of an automated system for monitoring and management of federal debt and
financial assets including contingent liabilities.
o Advice on the development and regulation of the proposed new national electronic
payment/settlement system.
o Advice on expanding the use of the ruble as an international means of payment and the
creation of a market in ruble dominated financial instruments, including legislation for
clearing and settlement of ruble transactions and development of an advisory body on the
development of the international role of the ruble.
4. Safeguard policies that might apply
Safeguard Policies Triggered by the Project
Environmental Assessment (OP/BP 4.01)
Natural habitats (OP/BP 4.04)
Pest Management (OP 4.09)
Physical Cultural Resources (OP/BP 4.11)
Involuntary Resettlement (OP/BP 4.12)
Indigenous Peoples (OP/BP 4.10)
Forests (OP/BP 4.36)
Safety of Dams (OP/BP 4.37)
Projects in Disputed Areas (OP/BP 7.60)
Projects on International Waterways (OP/BP 7.50)
Yes
No
X
X
X
X
X
X
X
X
X
X
X
5. Tentative financing
Source:
Borrower
International Bank for Reconstruction and Development
Total
6. Contact point
Contact: John Ivor Beazley
Title: Lead Public Sector Specialist
Tel: (202) 458-7947
Fax:
Email: [email protected]
TBD
($m.)
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