Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No.: P- 7202-RU

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ONA

PROPOSED SECOND COAL SECTOR ADJUSTMENT LOAN

IN AN AMOUNT EQUIVALENT TO US$800 MILLION

TO THE

RUSSIAN FEDERATION

NOVEMBER30, 1997

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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Currency Equivalents(Figures are as of the end of period)

Currency Unit = Ruble (Rb) Rubles per US$1991 1691992 4151993 1,2471994 3,5501995 4,6401996 5,126

November 1997 5,902

Borrower's Fiscal YearJanuary 1 - December 31

Weights and Measures

Metric system is used

Acronyms, Abbreviations and Glossary

CAS Country Assistance StrategyCoal SECAL I Coal Sector Adjustment Loan (Loan No. 4058-RU)Coal LAP Coal Sector Restructuring Implementation Assistance ProjectEFF Extended Fund FacilityGDP Gross Domestic ProductIAC Inter-Agency Commission for Socio-Economic Problems of Coal-Producing

RegionsMOE Ministry of EconomyMOF Ministry of FinanceMOFE Ministry of Fuel and EnergyMOLSD Ministry of Labor and Social DevelopmentMOSP Ministry of State Property

Vice President : Mr. Johannes LinnCountry Director Mr. Michael CarterEnergy Sector Leader Mr. David CraigProgram Team Leader: Ms. Janet Koch

FOR OFFICIAL USE ONLY

RUSSIAN FEDERATION

SECOND COAL SECTOR ADJUSTMENT LOAN

Loan and Project Summary

Borrower: Russian Federation.

Executing Agencies: Ministries of Fuel and Energy and of Finance of the Russian Federation.

Amount: US$ 800 million equivalent.

Terms: Maturity of seventeen years, including five years of grace, at the Bank'sstandard LIBOR-based interest rate for US Dollar single currency loans.

Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days after signing,less any waiver.

Objectives andDescription: The proposed Second Coal Sector Adjustment Loan (Coal SECAL II)

will help the Government deepen the achievements of Coal SECAL I(Loan No. 4058-RU) through a program directed toward: (i) separationof state management functions and commercial activities in the industryand improvement of sector governance; (ii) continued reduction andimproved management of coal subsidies, aiming at the eventualelimination of coal subsidies; (iii) development of a strengthened andmore targetted social safety net for affected workers, their families andcommunities; and (iv) establishment of a more efficient and sustainableindustry and promotion of an accelerated privatization program.

Benefits: The proposed Coal SECAL II, together with the Coal SectorRestructuring Implementation Assistance Project (Coal LAP/Loan No.4059-RU), sustains Bank support for the Government's coalrestructuring initiatives and builds upon the progress made since theGovernment began its reform program in 1994 and since the first Bankoperation in June 1996. The proposed program extends the Bank'ssupport for restructuring a critical sector of the Russian economy thatcontinues to depend on Government subsidies. The impetus forrestructuring is the gradual withdrawal of federal subsidies that covervarious operating and investment losses for coal enterprises. The mostimmediate effect is to decrease the impact of a loss-making coal sectoron the federal budget. In tne longer term, the withdrawal of subsidiespromotes the establishment of a more efficient and sustainable coalsector through closure of unprofitable mines, privatization of regionalcoal companies, and increased reliance on competition and marketforces to establish prices and production levels. The operation supports

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

a series of programs that together forn a social safety net to mitigate theimpacts of the transition on employees of coal enterprises, their families,and communities. Under Coal SECAL II, particular emphasis will beplaced on developing the institutional capacity to deliver these socialbenefits in a transparent and equitable manner. The program isaugmented by Coal IAP, which has initiated capacity-building activitiesin key areas, including improved measures to mitigate social impacts inthe most heavily-affected regions.

Risks: This is a high risk operation. The continued reduction and redirectionand the strengthened management of subsidies all involve adverseimpacts on interest groups, which in turn could impact the pace ofreform, and the quality of the social aspects of the program. Similarrisks exist for the privatization component. These factors were evidentin the course of implementation of Coal SECAL 1. At the same time,implementing the substantial structural and social changes inherent inthe Government's program will be a considerable challenge to theGovernment's political will to deploy the necessary institutionalcapacity.

These risks should be mitigated by the major changes in themanagement of the sector now taking place, notably the liquidation ofRosugol, which itself demonstrates the Government's considerableresolve to push ahead with reform. They should also be contained by thenew expenditure control mechanisms now established. In addition, thepublic visibility of the coal sector reform program creates considerablepressure for its satisfactory implementation, especially as concerns itssocial aspects. The time limit on the privatization tranche is aimed atcreating an incentive for speedy action. Overall progress on coal sectorrestructuring during the initial phase of implementation, together withthe commitments in the Government's Policy Letter provide a reasonableassurance that the reforms will continue.

Disbursement: Three tranches: the first tranche of US$400 million on loan effectiveness(expected in December 1997), and two floating tranches of US$200million each on fulfillment of specific tranche release conditions (expectedin third quarter 1998 and first quarter 1999.)

Poverty Category: Poverty-focused.

Rate of Return: Not applicable.

Project ID Number: RU-PE-50486.

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THIE EXECUTIVE DIRECTORSON A PROPOSED

SECOND COAL SECTOR ADJUSTMENT LOANTO THE RUSSIAN FEDERATION

TABLE OF CONTENTSPage No.

PART I INTRODUCTION I

PART II THE MACROECONOMIC CONTEXT 1A. Current Macroeconomic Situation in Russia 1B. Country Assistance Strategy 2C. Coal SECAL II and its Relation to the Country Assistance Strategy 3

PART III THE COAL SECTOR 4A. Coal Sector Profile 4B.. Distortionary Effects of Subsidies on Coal Industry Performance 5C. Adapting to Changing Economic Circumstances 6

PART IV THE GOVERNMENT'S COAL INDUSTRY RESTRUCTURING 7PROGRAM

A. Government's Objectives and Strategy 7B. Reorganization of the Government Agencies Involved in the 9

Sector -- Completion of the Demonopolization andCommercialization Process

C. Mine Closures 11D. Subsidy Management System 11E. Subsidy Levels and Allocation 13F. Social Protection Payments to Individuals 14G. Support for Affected Persons and Coal Communities 15H. Public Participation and Social Impact Monitoring 16I. Privatization 17

PART V THE PROPOSED BANK LOAN 18A. Bank Involvement to Date 18B. Rationale for Further Bank Involvement 18C. Loan Features 19D. Monitoring Arrangements 20E. Poverty Category 21F. Environment 21G. Support for Coal SECAL II: Coal LAP 23

PART VI BENEFITS AND RISKS 24

PART VII RECOMMENDATION 25

Attachments and Map

Attachment 1 Main Economic IndicatorsTable 1: Key Economic IndicatorsTable 2: Key Exposure IndicatorsTable 3: External FinancingTable 4: Russian Federation at a Glance

Attachment 2 Status of Bank Group Operations in Russian FederationAttachment 3 Letter of Sector Development PolicyAttachment 4 List of Conditions/Policy MatrixAttachment 5 Social Assessment: Main FindingsAttachment 6 Timetable of Key Processing EventsAttachment 7 Documents in Project FileMap IBRD 29202R

This report is based on missions which visited Russia in June, September-October and November1997, comprising at various times Messrs./Mmes. Janet Koch (Program Team Leader), IgorArtemiev, David Craig, Ashraf Ghani, Michael Haney, Vladimir Litvak, Alexander Morozov,Friedrich Peloschek, Jeff Procak, Vadim Voronin and Cynthia Wilson. Ayse Kudat and BulentOzbilgin also provided inputs to the report. Larisa Markes provided technical support inassembling the report. David Merrick and Maurice Mould provided consulting services to theRussian Government in support of its coal restructuring program. Peer reviewers were JohnStrongman, Laszlo Lovei and Louise Fox. Michael Carter and David Craig are, respectively, theCountry Director and Energy Sector Leader, responsible for Russia in the Europe and CentralAsia Region.

REPORT AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORSON A PROPOSED SECOND COAL SECTOR ADJUSTMENT LOAN

TO THE RUSSIAN FEDERATION

I. INTRODUCTION

1. I submit for your approval the following report and recommendation on a proposedSecond Coal Sector Adjustment Loan (Coal SECAL II) to the Russian Federation for US$800million to support the Government's coal sector restructuring program. The loan would be at theBank's standard LIBOR-based interest rate for US Dollar single currency loans, with a maturityof seventeen years, including five years of grace.

2. Russia's first Coal Sector Adjustment Loan (Coal SECAL I/Loan No. 4058-RU) wasapproved by the Bank's Board of Directors in June 1996. It was declared effective and the firsttranche released in July 1996, and the second and final tranche was released in December 1996.Under Coal SECAL I, the Government has made significant progress in reducing budgetsubsidies to the coal industry, and has begun to redirect remaining subsidies away fromeconomically unjustified uses that hinder competition and financial discipline in the sector,toward purposes that strengthen the social safety net and seek to ease the transition for miners,their families and mining communities. Recently, the Government has also taken significantsteps to restructure the management of the sector, by separating out government responsibilitiesand demonopolizing and commercializing the industry, and is now shifting its emphasis towardprivatization of the industry.

3. Continuing to restructure the coal industry remains a crucial part of the Government'sprogram for reforming the Russian economy. The proposed Coal SECAL II seeks to deepen theachievements of Coal SECAL I, and to move the industry away from state support andincreasingly toward privatization.

H. THE MACROECONOMIC CONTEXT

A. Current Macroeconomic Situation in Russia

4. Since 1992 the Russian economy has been undergoing a massive transformation to amarket system. Much of 1992-96 was marked by rapid inflation, shrinking output, risingunemployment and social hardship. Average annual inflation was high for most of this period,falling below 100 percent only in 1996. By 1996 measured GDP had fallen by 40 percent in realterms since 1991, and it fell by 6 percent in 1996. Although unemployment did not increase asrapidly as the decline in GDP, there has been a dramatic increase in poverty (according to surveydata, 25-35 percent of the population are living in poverty). Financial stabilization was achievedin 1996. However, it has remained fragile because of difficulties in the area of fiscal policy.Disappointing tax revenues have led the Government to implement a series of measures toimprove collections, but these measures have proved only partially successful.

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5. Significant if uneven progress has been made towards the objectives stipulated underRussia's Extended Fund Facility (EFF) arrangement with the IMF. Structural reforms supportedby the EFF and the Bank's first structural adjustment loan (SALI/Loan No.4180-RU) have madeconsiderable headway. By October 1997, inflation stood at 0.2 percent, bringing the 12-monthincrease in the price level to 12.9 percent. There are also increasing signs of economic recovery,with small growth in real GDP from January to October 1997. The ruble has remained relativelystable. Foreign trade has been strong in 1997, and the current account balance is likely to be insurplus in 1997, with exports (dominated by energy resources and other raw materials) outpacingimports by US$20 billion. The foreign trade regime has remained liberal: average statutoryimport tariffs are below 15 percent. The Government hopes to complete accession to the WorldTrade Organization in 1998, which would help to preserve this regime.

6. Monetary policy in 1997 has been directed at keeping downward pressure on inflation.Tight domestic credit policies have contributed to a build-up in net and gross internationalreserves and have maintained the exchange rate within the stronger part of its band.

7. Despite these achievements on the inflation and balance of payments fronts, the fragilefiscal situation weakened further by the third quarter of 1997. For the January-Septemberperiod, government cash revenues amounted to Rb 174 trillion, compared with the EFF programtarget of Rb 191 trillion. By sequestering expenditures, the Government managed to limit thecash deficit in January-September to Rb 131 trillion (below the EFF program ceiling of Rb 146trillion), but at the cost of engendering large arrears and further undermining payment disciplinein the economy. As a result, at the time of its Sixth Quarterly EFF Review in October 1997, theFund mission decided not to recommend its completion.

B. Country Assistance Strategy

8. The most recent Country Assistance Strategy (CAS) for the Russian Federation waspresented to the Bank's Board of Directors on June 5, 1997 (Report No. 16549-RU, dated May 6,1997). The CAS recommended that the Bank Group be prepared to support an expandedprogram of assistance to the Russian Federation on the order of US$2-3 billion annually,provided the Government delivers on an accelerated program of structural reforms. Thisprogram should consist of policy advice, fast-disbursing adjustment lending, and projectfinancing in support of high priority public and private investments. The 1997 CAS identifiedfiscal consolidation, private sector development, reform of the social safety net, and agricultureand rural development as areas of particular importance to the reform process in Russia.

9. The economic justification for enhanced Bank adjustment lending to Russia over thenear-medium term is two-fold:

(i) Support of structural reforms. Russia has entered a new stage of transition wherebroad and consistent structural reforms are essential for the resumption of growthand sustained stabilization, both of which are necessary to help reduce poverty andaddress other pressing social issues.

(ii) Contribution to fiscal adjustment and budget financing. Although Russia's trade andcurrent accounts consistently show a surplus, federal tax revenues have fallen to lessthan 10 percent of GDP, and expenditure management is poor, despite sequestrationto contain expenditures. Under the Bank's proposed Second Structural Adjustment

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Loan (SAL2), the Government would take steps to improve revenues and rationalizeexpenditure management; Coal SECAL II would also support reductions inexpenditures. However, the main benefits of structural reforms for overall fiscalmanagement, for which revenue increases are key, will materialize only over themedium term. Meanwhile, some measures under the Bank's proposed SAL2 andCoal SECAL II (such as reducing arrears and moving to an accrual basis for taxassessment under SAL2 and payment of social benefits including arrears to allredundant workers under Coal SECAL II) are likely to increase expenditurepressures or reduce revenues in the short term.

10. Consequently, even with strong efforts at fiscal consolidation, the Government willcontinue to have considerable financing needs for the budget in the short term. Financing thesedeficits by issuing T-bills (GKOs) is expensive, and maintaining price stability will requirecontinued tight domestic credit, precluding any significant borrowing from commercial banks.The Government is thus seeking financing from external, non-inflationary sources, includingmultilateral institutions and the Eurobond market. As part of this financing package, WorldBank adjustment lending would provide additional non-inflationary budgetary support during thenext stage of economic transition--thus providing breathing space while structural reforms helpstrengthen the Government's revenue base and reduce expenditure pressures.

C. Coal SECAL II and its Relation to the Country Assistance Strategy

11. Under the first phase of the Government's coal restructuring program supported by CoalSECAL I, the final budget for coal subsidies in 1997 was nearly halved in real terms relative to1996 (and went from 0.5 percent of GDP to 0.2 percent); budgeted subsidies mitigating thesocial impact of restructuring and supporting physical mine closures were increased to nearlyone-third of total subsidies in 1997; social assets and other non-core activities were divested bythe coal companies; more than 90 loss-making mines ceased production during the period 1994-97; employment declined by over 40 percent (390,000 persons since mid-1993); beginning in thesecond half of 1996, subsidies for emergency housing and heating system maintenance and jobcreation programs were disbursed directly to the regions and coal communities; RosUgol, thenational coal company, was converted into a 100 percent federally-owned joint stock company;the shareholding structure of the industry was simplified to strengthen the regional coalcompanies; and an initial demonopolization program was implemented resulting in the transferof federal shares in four coal companies, accounting for over 20 percent of the industry's outputin 1995, from RosUgol to independent trust managers or the Russian Federal Property Fund, inthe latter case in preparation for privatization in 1997-98.

12. In the context of its specific sectoral focus, Coal SECAL II is fully consistent with thebroad reform areas identified by the CAS. In particular, it seeks to deepen the achievements ofCoal SECAL I in (i) fiscal consolidation, which is supported under Coal SECAL II throughcontinued reduction in coal subsidies; (ii) reform of the social safety net, which under CoalSECAL II will be strengthened and more targeted so that the impact of restructuring is eased forminers, their families and mining communities; and (iii) private sector development, which CoalSECAL II furthers through improved sector governance and accelerated demonopolization,commercialization and privatization of the coal industry.

13. Coal SECAL II is consistent with the Bank Group's overall program to support structuralreforms in Russia, which has been implemented in 1997 through SALI and the proposed SAL2

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as primary instruments, as well as through close coordination with the IMF's EFF. Additionally,Coal SECAL II's emphasis on strengthening the social safety net for miners, their families andcommunities is fully consistent on a sectoral level with the Social Protection Adjustment Loan(SPAL/Loan No. 4203-RU). All outstanding actions under Coal SECAL I, as described in theMay 14, 1997 Progress Report to the Board, have been completed. The companion technicalassistance project to Coal SECAL I--Coal Sector Restructuring Implementation AssistanceProject (Coal IAP/Loan No. 4059-RU)--will continue to be available to assist the Government inimplementing the next phase of its coal reform program.

III. THE COAL SECTOR

A. Coal Sector Profile

14. Production and Consumption. Russia is the world's fifth largest producer and fourthlargest consumer of coal, accounting for about 5 percent of world coal production andconsumption in 1996. As of end-1996, the Russian coal industry included 176 activeunderground mines and 63 active surface mines affiliated with RosUgol.1 These RosUgolaffiliates accounted for 226 million tons out of a total of 255 million tons of coal produced inRussia in 1996. By comparison, the Ukrainian coal industry consists of 219 mining units whichproduced about 70 million tons in 1996; the United States coal industry consists of about 2200mines which produced 964 million tons in 1996. Coal's contribution to total primary energysupply in Russia has been falling steadily since the 1960s. However, while coal now accountsfor only about 13-18 percent of total energy supply at a national level, it is very important incertain regions. In the Far East, for example, coal supplies more than half of all primary energyrequirements.

15. Geographic Scope of Production. Significant volumes of coal (in excess of 10 milliontons annually) are produced by federally owned companies in seven coal basins coveringvirtually every region of the country. The Kuznetsk Basin (Kuzbass) in Kemerovo Oblast is theheart of Russia's coal industry, accounting for about one-third of annual production. Othersignificant regions of production are: Eastern Siberia, the Pechora Basin in the Komi Republic,the Donetsk Basin (Donbass) in Rostov Oblast, the Urals and several basins in the Far East. Coalis also produced by RosTopProm (another federally-owned company that owns 11 coal-producing entities accounting for approximately 7.6 million tons annually for householdconsumption in 11 regions), by other ministries, by quasi-private companies, and by oblastowned and operated companies.

16. Workforce. About 518,000 persons were employed in the coal industry at the end ofJune 1997. The top four employers were RostovUgol (51,516), KuznetskUgol (33,639),KuzbassrazrezUgol (33,639), and VorkutaUgol (28,582). The labor force has declinedsubstantially as the coal industry has changed and been restructured. In the four years betweenmid-1993 (when coal prices were decontrolled) and mid-1997, total employment in the coalindustry has declined by 390,000 people, or more than 40 percent. Over 100,000 persons haveretired on age, years of service or disability pensions and about 28,000 have been maderedundant by administrative decision of closing mines, i.e., they have been eligible for severancepay. A large proportion of the remaining group is attributed to persons reported as voluntary

As of July 1997, this had decreased to 150 active underground mines and 60 active surface mines.

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terminations, reputedly choosing to quit their jobs because wages were unpaid. Another largegroup were transferred out of the industry when local and municipal administrations took overthe social assets where they were employed, or when ancillary activities affiliated with the coalindustry were divested.

17. Scope of Activities. Data on employment reflect a variety of occupations within the coalindustry. In addition to coal mining, mine building, and coal preparation, the industry owns andoperates machine-building plants, collective farms, construction companies, research and designinstitutes, power generation facilities, investment companies, restaurants and cafeterias, andsanatoria and vacation resorts. RosUgol itself has managed an equipment leasing operationfunded both by the state and by the lease payments made by coal companies. Ownership of mostof the major social service facilities (including housing and kindergartens) formerly owned andoperated by coal companies, has now been transferred to municipal administrations. But with thedissolution of RosUgol, the organization of the sector will change considerably.

18. Coal Demand and its Repercussions. Two major factors have led to the decline in coalproduction and use in Russia since the 1980s. First, low cost, less environmentally disruptivenatural gas has become widely available and has displaced coal; second, coal is less able tocompete with natural gas because it is inefficiently produced in Russia (when compared tointernational performance) and therefore relatively costly. The strong competitive position ofnatural gas is evidenced by its role in the stationary boiler market (power and heating plantswhere coal is most likely to be competitive); natural gas fuels 61 percent of this market whilecoal fuels only 28 percent. The reforms of the early 1990s, as reflected in declining demand forall forms of energy and by the removal of very large implicit subsidies on rail freight, havehelped to further erode coal markets. Nevertheless, timely measures that enable the industry toadapt to changing economic circumstances are expected to enable from one-half to two-thirds ofexisting coal capacity to remain viable. A contraction of this magnitude would be substantial,but only a fraction of that experienced in Europe during the 1970s and 1980s.

B. Government's Involvement in the Coal Industry

19. Subsidies. After price liberalization and the rapid price increases of the early 1990s, thefederal government began subsidizing the coal industry. The subsidies were intended to coverthe shortfalls created when the coal industry's main customers--power stations and the steelindustry--did not pay their coal bills. Coal subsidies have also included an explicit subsidy for aportion of the coal industry wagebill, as mandated in a labor accord known as the TariffAgreement. This established an implicit belief that the Government was responsible for payingminers' wages, regardless of economic conditions in the coal industry or in other industries. Theproblems inherent in this subsidy system were exacerbated by a lack of transparency in themechanisms to channel and distribute them. While the Inter-Agency Commission for Socio-Economic Problems of Coal Producing Regions (IAC) was created to improve the subsidymanagement system, vestiges of the old system, particularly the continued strong influence ofRosUgol, limited its success. Because of these problems, the Government has taken severalactions to improve the efficiency of state governance in the coal sector, including (i) liquidatingRosUgol and transferring its subsidy management responsibilities to the Ministry of Fuel andEnergy (MOFE) and (ii) establishing new subsidy categories and mechanisms for allocation,transfer and use of budget funds by amending the Regulation on State Financing of MeasuresDirected at Restructuring of the Coal Industry (initially adopted by the Government ou May 17,1996 with the issuance of Government Resolution No. 598).

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20. Structure of the Coal Industry. The former coal associations (i.e., multi-mine groups ofenterprises) and most of the enterprises (individual mines, service companies, etc.) have nowbeen converted to joint stock companies. RosUgol, prior to its liquidation, had been transformedinto a joint stock company 100 percent owned by the state. The corporatized coal companieshave taken a first step towards privatization by giving small, non-controlling packages of sharesto the labor collective (management and employees) and to local governments. In addition, thereare some ten independent mines (accounting for about 8.5 percent of production) which are saidto have been privatized since 1991. The state's shares in the coal associations and the coalenterprises are vested in the Ministry of State Property (MOSP). Until recently, MOSP haddelegated to RosUgol commercial management of the state's shareholding in coal companies.Although the formal agreements have expired, it has been reported that, up to initiation of itsliquidation, RosUgol continued de facto to exercise these responsibilities on behalf of the state.

21. Following corporatization of coal industry entities, the Government has begun a programaimed at reducing the state's equity position in the industry. A program of trust managementwas supported under the Coal SECAL I and was regarded as a prelude to privatization. Becauseof a lack of progress in carrying out this program (to date, only two trust management contractshave been concluded), the Government has adopted a more aggressive approach to reducing thestate's role in the coal industry. As a proxy for fulfilling trust management conditionality underthe Coal SECAL 1, the Government has transferred the state's interest in two coal companies tothe Russian Federal Property Fund, a government agency charged with selling off the state'sinterest in commnercial enterprises. The initial sale of federal shares in these companies isscheduled for early December 1997.

C. Adapting to Changing Economic Circumstances

22. Restructuring Strategy. Many of the world's economies have restructured their coalindustries in the latter half of the twentieth century to reduce the burden the industry places onthe economy and the costs of energy. While there are aspects of the problem that are specific toRussia and other transition economies, the basic remedies are similar. Uneconomic mines haveto be closed. Mines that stay in business also need to commercialize, reduce the size of theirworkforce, and ultimately privatize. Redundant workers have to be transferred to other mines oroffered some support while they search for new jobs. Overall, mine closures and redundanciesneed to be managed in a socially responsible manner, so that the restructuring process remainspolitically sustainable. Federal subsidies for operations and investment need to be phased outand the remaining subsidies redirected to physical closure of mines and employment/socialprograms. Ultimately, what should emerge is a competitive coal industry and governmentalagencies with authorities to regulate access to mineral resources, to protect environment, healthand safety, and to provide the social safety net.

23. Initial Response. There has been progress on coal restructuring in four areas. First, theGovernment, within the framework of its coal industry restructuring program, began to closenon-viable and unprofitable mines in 1994. Since then, production has ceased at 95 mines.While the mines vary in their state of closure according to the need for and completion of workto seal off water and gas to protect other mines, seal shafts, remove or rehabilitate surfacestructures and waste piles, at least 42 mines have completed underground work and have fewerthan 20 employees (plus additional contractors) who are completing financial liquidation andsurface closure. Second, employment in the industry has been reduced by over 40 percent sincemid-1993. Third, effectively all of the coal industry-owned social assets (housing stock,

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kindergartens, health clinics and heating systems) have been transferred to municipalgovernments. Fourth, subsidies to the coal industry have been sharply reduced.

24. Social Impacts. Three social assessments in the main coal basins of Russia have beencarried out in the course of Coal SECAL I; summary findings are in Attachment 5. Overall, coalminers and their communities were better off with the Bank support to sector restructuring thanthey would have been otherwise. Planned actions to provide social mitigation measures forsector restructuring have been undertaken successfully, with regional variations in theirimplementation and impacts. Most importantly, the Bank support to Russia's coal sectorrestructuring has resulted in significantly increased access to information on benefits andentitlements and a higher level of access to legal recourse methods for miners. In addition, Banksupport provided invaluable assistance to winterization programs in coal producing communitiesand made a real difference in people's lives through support to social assets transferred to localgovernments from coal companies. A number of participatory initiatives were also put in placein some regions to facilitate community-specific interventions. However, despite these positivedevelopments, arrears in wages, pensions and disability payments have created social tensions.Rosugol's control over subsidies was a major factor in accumulation of these arrears.

25. In response to the findings of the social assessment, the Government broadened thedefinition of social protection to include: (i) severance payments of redundant workers atdownsizing mines as well as those undergoing closure; (ii) wage arrears of redundant mineworkers, and (iii) wage arrears of mine workers leaving the industry on age or disabilityretirement. Additionally, the government has restructured the subsidy system in such a mannerto ensure that social benefits can be directly paid to individuals. The operations of this system ofdirect transfers will be monitored closely through both the social impact monitoring andfmancial audits.

IV. THE GOVERNMIENT'S COAL INDUSTRY RESTRUCTURING PROGRAM

A. Government's Objectives and Strategy

26. The Government of the Russian Federation has implemented the first phase of structuralreforms in the coal sector. The process of corporatization has been nearly completed,privatization has commenced, the influence of the state in management of coal companies hasbeen reduced, state support for the coal sector has been reduced and increasingly focused onsector restructuring, controls over allocation and delivery of state support funds are beingstrengthened, workers and their families and communities are benefiting from an improvedsocial safety net, sector efficiency is growing and occupational injuries are declining. While theGovernment has taken important initial steps in transitioning its state owned coal sector toward acommercial industry with competitive regional coal companies and appropriate governmentallaws, regulation and institutions affecting public welfare (stewardship of public resources,protection of the environment, health and safety, and preservation of social welfare), itrecognizes that further actions are required and has embarked on a second phase of reforms. Theprincipal objectives of the Government's continuing restructuring program include: (i) toseparate state management functions and commercial activities in the industry and improvesector governance; (ii) to reduce the impact of the coal sector on the federal budget bysupporting the decrease, and eventual elimination, of subsidies; (iii) to promote the long termefficiency, commercial viability and hence sustainability of the sector, together with its

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privatization; and (iv) to cushion the impact of restructuring on coal miners, their families andaffected communities. The Government's Letter on Coal Sector Policy is set forth in Attachment3.

27. Medium-term Strategy. The main elements of the Government's strategy over themedium term are:

(i) Commercialization and Demonopolization of the Coal Sector. The Governmentwill complete its commercialization and demonopolization program so that coalcompanies begin to compete, and so that the Government's remaining ownershipinterests in the sector are clearly separated from its regulatory and socialprotection roles. In this regard, RosUgol will be liquidated, and its governmentfunctions transferred to the Ministry of Fuel and Energy and management offederal shares in the coal industry to the Ministry of State Property. A regulatoryand institutional framework will enable the industry to operate competitively andwill provide for the protection of public interests, in terms of stewardship ofpublic resources, protection of the environment, health and safety, andpreservation of social welfare.

(ii) Privatization and Investment. By the end of 1998, the Government willcomplete privatization of about 45 percent of the coal industry and will prepare aplan to complete privatization of the remainder of the industry. In the interim,modernization, rehabilitation and expansion will be financed by the coalcompanies, and may include loans, direct private domestic and foreigninvestment, and extra-budgetary sources. Any state support will be in the formof loans, provided on a competitive basis.

(iii) Mine Closures and Workforce Reductions. Some 138 loss-making coalenterprises (of which 136 are mines) are in the process of closure.Modernization of the remaining mines will also result in reduction of theworkforce. The Government is committed to ensuring that the mine closureprogram is conducted in a manner that enables environmentally sound physicalclosure at minimal cost an that provides social protection benefits to all eligiblepersons.

(iv) Subsidies. Priority will be given in disbursement of subsidies to those considered"priority" subsidies; these include subsidies paid to finance: physical mineclosures; scientific research activities aimed at mine closures, environmentalprotection and worker safety; severance payments and wage arrears to workersdeclared redundant; disability payments and free coal benefits paid to personswhose eligibility is derived from a closed mine; local development andemployment programs for coal communities; and a contingency SocialProtection Reserve Fund. Priority subsidies will account for about 60 percent oftotal state support to the industry in 1998. Subsidies covering production andoperating losses of coal enterprises (including the Tariff Agreement) will beallocated according to a rule-based formula and will be reduced each year until2000 when they will be eliminated. Improved subsidy management mechanismswill ensure equitable distribution of benefits on a timely basis, with transparencyand accountability.

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(v) Public Participation and Social Impact Monitoring: The affected public will beregularly informed about the restructuring program and their legal rights andwill be consulted on the decisions affecting the social safety net for affectedindividuals, their families and communities. Social impact monitoring will beused to assess the effectiveness of the social programs and to identify whereimprovements are needed.

28. Government's Near-term Action Program, 1997-98. For the near term, theGovernment's program consists of: (i) further reductions in overall subsidy levels, with a furthershift in subsidy composition toward priority areas; (ii) reorganization of the management of thesector, including completion of the demonopolization and commercialization process; (iii)completion of mine closures in process and preparation of a detailed three-year mine closureprogram; (iv) changes in the subsidy management system to increase transparency in andaccountability for the transactions and to ensure that affected persons receive timely payment of alllegal entitlements; (v) continuation of programs to promote public participation in the coalrestructuring program and to monitor the social impacts of the program; and (vi) an acceleratedprogram of coal enterprise privatization. This action program is outlined in more detail below. Theconcrete measures associated with target implementation dates prior to December 11, 1997constitute the conditions of Board presentation and first tranche release. Subsequent measures withlater target implementation dates will be conditions of the second and third tranche release, one ofwhich will pertain to the social aspects of the restructuring program and the other to theprivatization aspects. The conditions of Board presentation and of the second and third trancherelease are summarized in Attachment 4, Policy Matrix.

29. The companion technical assistance project to Coal SECAL I--Coal IAP ($25 million,approved in June 1996 and effective since July 25, 1996)--will continue to be available to assistthe Government in implementing the next phase of its reform program (project closing date:December 31, 1999). Various activities are ongoing and planned as discussed in Chapter V,Section G.

B. Reorganization of the Management of the Coal Sector-Completion of theDemonopolization and Commercialization Process

30. The Government is moving to complete the demonopolization process, privatize theindustry, and clarify how it will protect the public's interest in a largely privatized industry.Since 1993, the Government has taken several steps to separate the coal industry's commercialfunctions from governmental responsibilities to provide stewardship of the public resources,protect the environment, health and safety, and preserve social welfare. In mid-1993, theGovernment formed the Inter-Agency Commission for Socio-Economic Problems in CoalProducing Regions to advise the Government on coal industry restructuring and to assumeresponsibility for allocating coal subsidies from RosUgol, the successor agency to the Ministryof the Coal Industry. Beginning in 1996, coal subsidies for social assets transferred from the coalindustry and job creation programs at the community level were disbursed directly to the regionsand coal communities, while subsidies for the coal companies, which still represented most ofthe subsidies, continued to be channeled through RosUgol. The Government also took the initialsteps to separate commercial functions from policy and regulatory responsibilities. RosUgol,most of the coal producing enterprises, and enterprises providing services to the coal industrywere established as joint stock companies, with as much as 100 percent federal stock ownership.Two coal producing enterprises are now being privatized, with over 50 percent of the shares

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expected to be sold to the public and commercial interests in early December 1997, and RosUgolis in the process of being liquidated.

31. The management of the coal sector is currently undergoing such reorganization so thatthe Government can improve control over the use of state support for the coal sector to ensurefull and timely delivery to the intended beneficiaries, provide adequate social support to affectedpersons, manage the coal resource (i.e., develop and administer an effective mining law andregulations), protect the environment, health and safety, and remove the potential for conflicts ofinterest between the Government, commercial enterprises and their employees. On November20, 1997, Presidential Decree No. 1243 and Government Resolution No. 1462 were issued toimprove sector governance--more specifically, to liquidate RosUgol and to strengthen the role ofthe Ministry of Fuel and Energy in day-to-day regulation and restructuring of the coal industryand ensure that it will effectively, rather than just nominally, be responsible for the allocation ofstate support provided to the coal industry. A series of Ministerial Orders has recently beenissued concerning allocation of responsibilities for the coal sector between the First DeputyMinister (Coal) and a new Deputy Minister and creating two new agencies under the Ministry.The authorities of the First Deputy Minister have been redefined to focus on coal production,including regulation of mineral rights, occupational health and safety, and environment. Thenewly appointed Deputy Minister is responsible for developing and implementing theGovernment's coal restructuring program and for allocating, directing and monitoring statesupport funds for the sector, including the activities of the new agencies. To maintain a clearseparation between the responsibilities for operations and sector restructuring, each DeputyMinister will report directly to the Minister.

32. The two agencies are responsible for designing and advising on the processes affectingmine closure and industry downsizing and its effects on individuals, their families, andcommunities. One agency, the Mine Closure Agency, has been assigned responsibility forcoordinating the physical closure of the mines, and the other, the Social Protection Agency, willoversee the programs designed to mitigate the social effects of mine closures. Charters for bothagencies have been submitted for registration, and heads of the agencies appointed.ReformUgol, the non-commercial foundation created in 1996 to assist the Government inimplementing its coal restructuring program, will assume responsibility for the data collectionand analytic support formerly provided by RosUgol, and will use this and other information toadvise MOFE and the agencies on the restructuring process. New structural units will also be setup in the Ministry of Finance and Ministry of State Property to enhance their abilities to serve tothe needs of the coal industry restructuring program.

33. As for RosUgol, a shareholders' meeting to vote its liquidation, appoint a LiquidationCommission and adopt a schedule of liquidation actions was held on November 26, 1997. Thiswas followed in early December by formal publication of the announcement, as required by law,of the liquidation of RosUgol. Transfer of all responsibilities, authorities and properties ofRosUgol to MOFE and the Ministry of State Property has been initiated and will be carried outin accordance with standard liquidation procedures. It is expected that the state would sell allshares and stock held by RosUgol in its subsidiary or affiliated companies within the next year.RosUgol's liquidation is expected to be complete, with final registration in the State Register, bythe end of August 1998. Completion of these actions is a condition of the Privatization tranche.

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C. Mine Closures

34. A key element in the Government's coal restructuring program is the closure of loss-making and non-viable mines. The Government expects to eventually close 138 coal industryenterprises, including 136 mines. As of November 1997, 95 mines have ceased production, and42 of these have completed all underground closing activities and have fewer than 20 employees.The Government plans to cease production at a further 30 mines, and complete all undergroundclosing activities at a further 47 mines, in 1998. The Government has proposed a program ofmine closures and restructuring for 1998 which will result in the effective closure of 86 mines,where closure includes completion of underground works, reduction of the number of mineemployees to less than 20, and completion of the legally mandated social protection program forthe mine. Satisfactory progress in implementing this program, in line with the mine closureguidelines and with provision of an adequate social safety net for affected workers, their familiesand communities, is a condition of Social tranche

35. Although the mine closure program began in 1993, no mines have been fully liquidated,i.e., removed from the State Register of Mines, because a legal successor to assume theresponsibilities of a closed mine for payment of social benefits has not yet been found. During1998, the Government will take several actions to accelerate the pace of mine liquidation, reducethe physical costs of mine closure, improve the delivery of social protection benefits and ensurethat the environment is adequately protected. Two new agencies have been established to overseethe process, the Mine Closure Agency and the Social Protection Agency. Updated mine closureguidelines have been adopted. One of the first tasks of the Mine Closure Agency will be todevelop a detailed three-year mine closure program; as a first step, a uniform inventory of minesand employees affected by restructuring will be created, and associated cost estimates andschedules for completing physical and social aspects of mine closures will be updated. Legalsuccessor issues will be addressed in the context of the overall review of the legal and regulatoryframework and institutional capacity of the coal sector.

36. Environmental audits will be conducted for two underground mines (one in the KomiRepublic and one in the Donbass) and one surface mine in the Far East. The audits will reviewthe environmental legislation, regulations, institutional arrangements and practices pertaining toenvironmental, public health and land-use aspects of mine closures, and the site specificdocumentation relating to these aspects. Site inspections of all facilities and properties at themine site will be completed. As necessary, environmental mitigation plans will be prepared forthe audited sites, including recommendations for and cost estimates of additional measuresneeded to comply with legislation and regulations. Recommendations pertaining to necessarychanges in the system and practices of management and regulatory oversight or in legal andregulatory requirements will also be made. Completion of the audits is a condition of the Socialtranche.

D. Subsidy Management System

37. To enhance accountability and transparency in the management of state support to thecoal sector, the Government has taken a series of major steps to restructure the entire systemincluding: (i) liquidating RosUgol, which suffered from conflict of interest in managingsubsidies; (ii) transferring responsibility for managing subsidies to the Ministry of Fuel andEnergy, to be managed by a new deputy minister and two especially created agencies; (iii)promulgating new rules for allocation, transfer, use and monitoring of funds through

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classification of subsidies into "priority" and "other" categories; (iv) establishing earmarkedaccounts for all categories of subsidies in the Treasury system that would ensure accountability;(v) establishing voluntary tripartite agreements between the Ministry of Finance, regionalgovernments and local governments for distribution of state support directly to localgovernments for social assets; and (vi) initiating selective auditing of the system by independentauditors to provide timely feedback on potential problems and allow for introducing furthercorrections. Operation of the earmarked Treasury accounts and use of tripartite agreementscommenced in October/November 1997; full operation of the system under the "revised"Resolution No. 598 is expected in early 1998. Verification of satisfactory operation of the statesupport system over a six month period is a condition of the Social tranche.

38. The "revised" Resolution No. 598, issued in early December 1997, sets the parametersfor determining categories of allocation and priorities among categories of "priority" and "other"subsidies (as described above). It also establishes, in conjunction with supporting instructionsissued by MOFE, eligibility criteria for recipients of subsidies to the coal sector and themechanisms of delivery, verification and auditing. Under the new system, budgets will beprepared and agreed on the basis of the new subsidy categories and disbursements will bemonitored on a monthly and quarterly basis to assure that they track with pre-agreed proportionsof priority and other subsidies. For each priority subsidy category, a set of rules will establish theresponsibilities and authorities of the institutions responsible for paying affected individuals andservice providing agencies. In addition, rules for determining eligibility for payment and forverifying that payment has been made according to those rules will be established. Finally, acomprehensive program of training and assistance will be directed toward the employees ofrecipients.

39. Important changes in subsidy definitions and allocation rules include, inter alia: (i) thedefinition of redundancy now includes persons from downsizing mines as well as mines that areclosed; (ii) restrictions are in place so that physical mine closure subsidies can only be providedto mines that have ceased coal production permanently and such mines are not eligible foroperating subsidies; (iii) authority has been created to approve the subsidy allocation scheduleprior to budget approval and to instruct MOFE/Ministry of Finance to ensure monthlydisbursement of priority subsidies at least in accordance with percentages in the approvedallocation schedule; (iv) a rule-based formula has been adopted for allocating operating loss andrelated subsidies among coal companies until such subsidies decline to zero by 2000; and (v)elimination of investment subsidies on any basis other than a loan. The Government will giveresponsibility for coal investment support to an Investment Tenders Commission under theMinistry of Economy. All coal companies-state-controlled, trust managed or private-will haveequal access to these funds. The Government intends to introduce a repayment mechanism toenable the federal payments and receipts system to accept interest and principal repayments.

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40. The Government has mobilized a team of management consultants, under the Coal LAPloan, to assist in the development and implementation of the improved subsidy managementsystem, in particular to assist in installation of modified or new systems to ensure adequatemonitoring and financial reporting at all levels. Audits of the modified and new systems andspecial audits of the subsidy flows will be carried out during the first six months of systemoperation to ensure the new management system for state support is operating satisfactory.Deficiencies identified in the course of the audits will be corrected. Completion of satisfactoryaudits is a condition of the Social tranche.

E. Subsidy Levels and Allocation

41. Phasing out coal subsidies is an essential part of the Government's macroeconomicstabilization program and of the strategy for establishing a profitable, market oriented coalsector. The Government has already reduced coal subsidies substantially. Under the phase of therestructuring program supported by Coal SECAL I, the total budget allocation for coal subsidiesdeclined from 0.5 percent of GDP in 1996 to 0.2 percent of GDP in 1997 and the portionallocated to other subsidies (formerly referred to as "bad" subsidies) fell in real terms by morethan 45 percent.

42. The 1997 budget passed by the Duma provided for Rb 6.5 trillion in state support to thecoal sector. This notwithstanding, the Chairman of the Inter-Agency Commission in May 1997approved an allocation for the year of Rb 4.5 trillion, the reduction in response to a generalbudget sequestration necessitated by chronic revenue shortfalls. Disbursement of this amount bythe Ministry of Finance was reported already in August, due in part to the fact that, in theabsence until early March of an approved Federal Budget and until late May of a detailedSummary Schedule, Rb 1.7 had been disbursed exclusively at the discretion of RosUgol in thefirst five months of the year. The persistent demand for subsidies prompted the Chairman of theIAC on September 19, 1997 (No. ACh-P27-102) to authorize budget financing of a further Rb 2trillion for the last four months of the year, of which Rb 1.5 trillion for the fourth quarter (adetailed Summary Schedule for fourth quarter subsidies was approved by the Chairman onNovember 12). This effectively committed the Government to honoring the original amountapproved for coal subsidies in the Federal Budget. The fourth quarter allocation commitsGovernment to disburse at least Rb 657 billion for "good" subsidies and no more than Rb 811billion for remaining subsidies. In addition to coal subsidy financing, the Government has madeavailable Rb 185 billion to local/municipal administrations for winterization of social assetsdivested by the coal industry.

43. For 1998, the proposed targets are: at least Rb 3.45 trillion will be transferred to"priority" subsidy categories (provided that the approved budget for state support to the coalsector permits a total expenditure), and no more than Rb 2.25 trillion will be transferred to othersubsidy categories. In addition to coal subsidies, Government has pledged to make available atleast Rb 400 billion financed out of federal-regional transfers to localadministrations/municipalities for sustainable improvements in social assets which have beendivested by the coal industry. The budgets for priority subsidies are based on the mine closureschedules, the estimated accumulated arrears for priority subsidies owed to individuals ororganizations that provide services to affected individuals and communities, and the rules ofeligibility and estimates of 1998 participation levels. To assure priority categories are fundedaccordingly, budget shortfalls will be fully absorbed by other subsidy categories before anypriority category is reduced, and monthly disbursements will be made so as to give absolute

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priority to the priority categories. Disbursement of fourth quarter 1997 subsidies and cumulative1998 subsidies in line with agreed targets at the time of tranche review are conditions of theSocial tranche.

F. Social Protection Payments to Individuals

44. The Government has implemented a comprehensive social protection program bydirecting the majority of priority coal subsidies to make payments to individuals and to cover thecosts of services for affected individuals, their families and communities. Pending fullimplementation of the proposed subsidy management system in 1998, the Government hasestablished and used temporary mechanisms in 1997. Beginning in 1998, the Government willintroduce a mechanism which allows the transfer of state support funds allocated for severancebenefit payments, settlement of wage arrears and disability compensation payments directly toindividual bank accounts of recipients or to the local post office. The operation of this system ofdirect transfers will be monitored closely through both the financial audits and social impactmonitoring in 1998.

45. Redundancy Payments-Severance Payments and Wage Arrears. The Government iscommitted to a comprehensive social protection program for workers made redundant throughmine closure or reduction in workforce at operating enterprises. Under Coal SECAL I, thisincluded the payment of severance benefits as required by law, and assistance with re-employment where this assistance had reasonable expectations of being successful. Amongworkers that were laid off at mines in the closure process or downsizing, the majority transferred tonew jobs in the coal industry. During 1996, the Government disbursed Rb 267 billion forseverance payments of workers made redundant due to coal sector restructuring. During 1997,this figure is expected to reach Rb 878 billion, while in 1998 it is conservatively estimated by theGovernment as Rb 430 billion; contingency funds of Rb 400 billion have been allocated to theSocial Protection Reserve Fund to offset possible underestimates of demand for such subsidies in1998.

46. Social impact monitoring conducted during 1997 indicated that wages owed in arrearswere a major issue in completing the restructuring process. The government has responded tothis finding by committing part of the state support to the coal industry to address this problem.Beginning in 1998, in accordance with the "revised" Resolution 598, the Government will paywage arrears for employees declared redundant in closing or downsizing mines and for thoseretired on the basis of age, years of service, or disability from closing mines. This is an averageof 5-6 months of wages and is, for the typical worker, at least as much remuneration as theseverance payment. The total figure for 1998 is estimated as Rb 650 billion.

47. Disability Payments. In 1996, Rb 107 billion of subsidies were spent on disabilitypayments for workers at closing mines; for 1997, Rb 195 billion is expected to be disbursed andfor 1998, Rb 305 billion. The high number for 1998 is due to estimated arrears in disabilitypayments. Beginning in 1998, disability payments to former workers of mines that are closed orare in the closure process will be processed by the Social Insurance Fund. In preparation for this,the Social Insurance Fund has created a special coal department and initiated development of therequisite data base to monitor the program. A Presidential Decree and Government Resolutionenabling this transfer to take place were issued in early December 1997. Under a draft lawpresently being considered by the Duma, it is expected that a national program will be developedthat will subsume the current coal industry specific program.

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48. Free CoaL Coal subsidies are available for persons who are eligible to receive free coalbut who are associated with mines that have closed (i.e., persons formerly associated with themine who are now age dependent pensioners, disabled, widows of deceased miners, families ofminers killed while working). The allowed benefit is 6 tons of coal per year at a cost ofapproximately Rb 1.2 million per eligible person/household. In recent years, the subsidy for freecoal has been relatively stable, going from Rb 256 billion in 1996, to Rb 221 billion in 1997 andRb 280 billion in 1998; however, it can be expected to increase further as more mines close.While widespread problems in distributing this benefit have not been reported, growing costs area major concern because there is no fund to cover them. Moreover, free coal is a benefit that isspecific to the coal industry (i.e., pensioners, disabled and redundant workers from otherindustries have no comparable entitlement), and it is difficult to devise an alternative that isequitable for all affected regions. The Government intends to carry out a review of variousoptions through technical assistance under Coal IAP during the first half of 1998.

G. Support for Affected Persons and Coal Communities

49. Pre-redundancy Consultations. The Employment Service of the Ministry of Labor andSocial Development has been providing pre-redundancy consultations to employees declaredredundant by closed, closing or downsizing mines. Through June 1997, approximately 20,000people received consultation services, with an estimated 8,000 expected to receive services in thesecond half of 1997. Total subsidies allocated for this service were Rb 4 billion in 1996 and Rb5.4 for 1997, but none of the 1997 funds have been disbursed (i.e., the Federal and LocalEmployment Services (LES) have not been paid for 1997 services). Pre-redundancy counselingas administered by the LES was considered an important program by its participants. Part of thesuccess can be explained by the willingness of the LES to strain its resources to provide servicesthat extended beyond its areas of expertise (e.g., advice on disability benefits) and to providecoal industry employees extra services while workers from other industries waited for services.As a result, a new pre-redundancy counseling program is being implemented as part of thecommunity development programs. In the new program, local administrations will coordinatethe services of the LES with those of other involved agencies (e.g., the Social Insurance Fund) toprovide redundant workers with the full package of services that experience has indicated theyneed (e.g., legal and psychological advice as well as income support).

50. Community Development and Employment Programs. The Government made asubstantial commitment toward identifying and implementing programs that provide redundantworkers with alternative employment in coal basins under its Coal SECAL I program. In 1996,Rb 200 billion in state support funds were distributed; in 1997, a comparable allocation wasmade and some disbursements have been made. However, experience with the communitydevelopment programs to date has been mixed, with job creation initiatives, e.g., throughbusiness incubators, working in some communities, while coal companies have tried to divert theresources in other communities. Difficulties in the use of these funds have led to thedevelopment of a new draft policy statement and governing regulations which establish thecontract provisions for implementing the program and address some of the issues. As for themechanism of providing funds to the communities, a standard (four-party) agreement definingthe basic framework has been designed and disbursement of subsidies will be through earmarkedTreasury accounts. At the same time, greater attention needs to be given to active participationof the Local Oversight Committees and application of sound selection criteria for projects. Someassistance in the remaining issues, e.g., in establishment of a competitive bidding procedure forproject selection, will be provided by the management consultants assisting in development of an

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improved subsidy management system. During 1998, it is proposed to increase the subsidyallocation to Rb 400 billion, of which at least Rb 100 billion would be for social assetsupgrading.

51. Divested Social Assets. Since 1995, local and municipal administrations have assumedresponsibility for most social assets (primarily heating systems and housing) formerly owned bythe coal companies and the personnel associated with them. In late 1996, Rb 1.6 trillion weredisbursed to the local administrations for emergency repairs (winterization), a program that wasgenerally well received in the coal communities as this was the year in which most of the socialassets were transferred to the communities and in need of substantial repairs and upgrading. In1997, some Rb 400 billion has been allocated for winterization, although only Rb 185 billionhave been provided through the agreed arrangement of tripartite agreements (Kemerovo/13communities). The constrained budgetary situation in 1997 has precluded the Government'sallocating more funds to general federal-regional transfers and hence to social assets support. For1998, the focus of the program will be on implementing sustainable improvements in socialassets (e.g., capital improvement projects to reduce long term heating energy requirements), forwhich the Government has committed to making available at least Rb 400 billion.

52. Because social assets are now largely owned by local governments, subsidies paid forthem are no longer coal subsidies but are federal-regional transfers to local and municipaladministrations. Beginning in the final quarter of 1997, the Government is using tripartiteagreements to facilitate the transfer of funds directly from the Federal Treasury throughearmarked accounts to the local governments and contractors servicing social assets. It isexpected that the funds will be provided as loans, and if they are used for the intended purposes,they will be converted to grants, the objective being to enhance accountability and transparency.A competitive process will be used to select coal communities and projects which will receivethe upgrading funds in 1998. As for community programs, the management consultants willprovide some assistance in establishing basic criteria and procedures.

H. Public Participation and Social Impact Monitoring

53. The main stakeholders in the coal sector have increased their participation significantlywith the establishment of regional commissions of the IAC in the main coal basins and LocalOversight Committees in some fifty coal communities. In addition, limited funds have beenprovided to the Association of Mining City Mayors and two main coal labor unions (Rosugleprofand NPG) under the Coal IAP loan to assist them in improving communications with theirconstituencies. The programs are directed toward providing adequate and timely information onthe Government's coal restructuring program and its implications and for enabling those affectedto voice their concerns. Some legal assistance has also been provided to workers. To date,public information has been distributed mainly through ad hoc actions and the general press.The Government also intends to begin a nationwide public information campaign to further thecommunication about the achievements of the first phase of the coal restructuring program andthe objectives of the second phase.

54. Three social assessments in the main coal basins of Russia have been carried out in thecourse of Coal SECAL I: a baseline assessment in 1995 during preparation of the loan and twoupdating assessments, one in September 1996 after first tranche release and one in May 1997after second tranche release. A contract supporting a more continuous social impact monitoringprogram through mid-1999 is about to be awarded under the Coal LAP loan. In addition, an

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independent Panel of Experts, comprised of experienced Russian social scientists with goodregional contacts, has been established which provides opinions/advice on mitigating socialimpacts of the Government's restructuring program. Under Coal SECAL II, social impactmonitoring will focus on regions where redundancies are expected to be the largest because ofeither mine closures or downsizing in operating mines. Social impact indicators will be used todemonstrate compliance, which means delivery of benefits and services to the individuals andcommunities entitled to receive such benefits and services within the coal industry restructuringprogram financed through state support. Implementation of a satisfactory social impactmonitoring program is a condition of the Social tranche.

L Privatization

55. Privatization of the coal companies is one of the most important policy actions for thecoal sector. The primary objectives are to create a sustainable (i.e., profitable, efficient andenvironmentally sound) coal industry by exposing coal companies to the incentives anddisciplines of the market and to enable the Government to direct its limited resources to the taskswhere they create the most value (i.e., maintenance of the social safety net, stewardship of publicresources and protection of the environment). The Government recognizes that many of the coalcompanies are in poor financial condition and face uncertain market conditions. Such companiesare unlikely to attract bids that are comparable to those made for oil properties and in some casesmay attract no bids at all. Companies which cannot become viable after indebtedness is paid willbe closed and fully liquidated.

56. The 1997 Program. Under Coal SECAL I, the Government committed itself totransferring the state's shareholdings in coal companies accounting for a total of 25 percent ofindustry's 1995 production to trust managers. Because of technical difficulties, only twocompanies were transferred to trust managers; the state's interest in a further two companies wastransferred to the Russian Federal Property Fund as a prelude to privatization. Together, thesefour companies accounted for 21.5 percent of Russian coal production in 1995. Emphasis is nowshifting to direct privatization. Two companies, KuzbassrazrezUgol and Yuzhniy Kuzbass, arealready being privatized, with commercial sales and special auctions for 55 percent of theirshares held by December 11, 1997; public notification of the un-reserving of the remaining 25.5percent federally-held shares was issued in late November, with plans to sell the remainingshares (except for a possible Golden share) in the first quarter of 1998.

57. The 1998 Program. The target by the end of 1998 is to have zero direct or indirectfederal shareholding, with the exception of a possible Golden share, in coal companies thataccounted for 115 million tons, or 45 percent, of national coal production in 1996 and a plan toprivatize or liquidate the remaining federal interests in the coal industry. Completion of theseactions are conditions of the Privatization tranche. The Government has provided an indicativelist of companies for privatization, comprising in addition to the two companies noted above, afurther eleven companies, accounting for a combined total of about 55 percent of 1996 coalproduction; the companies are at various stages of preparation for privatization. The list alsoincludes the larger of the two trust managed companies (VostSibUgol) for which theGovernment intends to try to initiate privatization actions within the coming year.

58. Companies to be put up for privatization may be drawn from this pool. In cases wherethe privatization of one company is delayed, another company with good economic prospectsmay be substituted from inside or outside the pool. Where high debt burdens inhibit the potential

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sale of a company that otherwise has strong fundamentals, the Government will take thenecessary steps to make the company attractive to private investors. In other cases, where itbecomes apparent during the privatization process that some of the mines within a company areunviable, the government will liquidate them before proceeding with the next tranche of sharesales. The Government will retain the right to issue a Golden Share in any of the privatized coalcompanies at the time of selling the final package of federal shares; this share will expire afternot more than 2 years.

59. With a view to the ongoing change in the coal industry and transition to privateownership, the Government plans to undertake a review of the legal and regulatory frameworkand institutional capacity affecting the industry. The review will include: mineral rights issues,allocation of regulatory authority/responsibilities between the federal and regionalgovernments/agencies, regulatory authority/responsibilities of the State Mining InspectionService, approvals and permitting related to coal field development plans/other coal investmentprograms, health and safety, environmental aspects, mine closure issues not otherwise includedand legal successor issues (e.g., health, subsidence, financial, environmental, and social). Thereview will specifically consider whether the current regulatory regime is appropriate for a coalsector transitioning toward privatization and whether changes are needed in the institutionalframework governing the sector. Completion of the review is a condition of the Privatizationtranche.

V. THE PROPOSED BANK LOAN

A. Bank Involvement to Date

60. The Bank's involvement in the coal sector in the Russian Federation began in 1992 withthe First Rehabilitation Loan when the Government requested that US$ 50 million be used tofinance critical imports for the coal industry. The Government also asked the Bank to provideadvice on coal sector restructuring. The results of this sector work were published in RussianFederation - Restructuring the Coal Industry: Putting People First (Bank Report 13187-RU,December, 1994). On the basis of this collaborative effort, the Government prepared andapproved its Coal Sector Restructuring Program elaborated in an IAC-issued document entitled"Main Trends for Restructuring of the Russian Coal Industry" (July, 1995). The Bank respondedby preparing and presenting to the Board for approval (in June, 1996) a Coal Sector AdjustmentLoan (Loan No. 4058-RU) to support the initial phase of implementation of the Government'srestructuring program. To further assist the Government in implementing its program, the Bankprepared and presented to the Board together with Coal SECAL I, a companion technicalassistance project--Coal Sector Restructuring Implementation Assistance Project (Loan No.4059-RU). The main achievements under Coal SECAL I are summarized in para. 11 above; alloutstanding actions as described in the May 1997 Progress Report to the Board have beencompleted. Implementation of Coal IAP continues to be satisfactory and to provide essentialsupport to the Government's ongoing restructuring program.

B. Rationale and Objectives for Further Bank Involvement

61. Recognizing the difficulties of coal sector restructuring in any country and the particularcircumstances of Russia's economic transition, it was expected from the outset of preparing CoalSECAL I that assistance beyond the first loan would likely be needed. The Russian Govermnent

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has stated that the Bank's continued support of coal sector restructuring is one of theprerequisites for real reform in the industry. The second phase of the Government's restructuringprogram, as outlined in Chapter IV above, represents a strong reform program under which theGovernment has demonstrated its commitment through substantial up-front actions. As such, theGovernment's program provides a credible basis for proceeding with the proposed Second CoalSector Adjustment Loan. Coal SECAL II would be the third sector adjustment loan to Russia.

62. Under Coal SECAL II, in line with the overall objectives of the Government'scontinuing restructuring program, it is proposed to deepen the achievements of Coal SECAL Ithrough a program directed toward: (i) separation of state management functions and commercialactivities in the coal industry and improvement of sector governance; (ii) continued reductionand improved management of coal subsidies, aiming at the eventual elimination of suchsubsidies; (iii) development of a strengthened and more targeted social safety net for affectedworkers, their families and communities; and (iv) establishment of a more efficient andsustainable industry and promotion of an accelerated privatization program. The companiontechnical assistance project--Coal IAP--will continue to be available to assist the Government inimplementing the next phase of its reform program (project closing date: December, 1999).

C. Loan Features

63. Financial Arrangements. The proposed Coal SECAL II of US$ 800 million equivalentwill be quick-disbursing and will provide balance of payments and budget support, linked to theconditionality specified for the tranche releases. The loan will be released in three tranches: thefirst tranche of US$ 400 million equivalent on loan effectiveness (expected in December 1997), andtwo floating tranches, each of US$ 200 million equivalent on fulfillment of specific tranche releaseconditions. The proposed loan, in the form of a single currency US dollar loan, will be made tothe Russian Federation, represented by the Ministry of Finance. The loan will have the standardamortization term, grace period and LIBOR-based interest rate for such loans. Disbursementswill be made into a Deposit Account of MOF established in the Central Bank of the RussianFederation for this purpose.

64. In accordance with the Operational Directive on the Simplification of DisbursementRules under Structural Adjustment and Sectoral Adjustment Loans (February 8, 1996),disbursements of the loan will not be linked to any specific purchases, and hence, there will beno procurement requirements. Disbursements of the loan will be subject to a standard negativelist of ineligible goods and countries of origin. The Government has indicated that thecounterpart funds will be used to provide support for the coal sector reform program. Uponnotification by the Bank of tranche release for each tranche, proceeds of the loan will bedeposited by the Bank into the MOF Deposit Account at the Borrower's request. If after depositin this account, the proceeds are used for ineligible purposes (i.e., to finance items imported fromnon-member countries, or goods or services in the standard negative list), the Bank will requirethe Government to either (i) return that amount to the account for use for eligible purposes, or(ii) refund the amount directly to the Bank, in which case the Bank will cancel an equivalentundisbursed amount of the loan. Although routine audits of the Deposit Account will not berequired, the Bank reserves the right to require audits at any time. The expected closing date ofthe proposed loan will be December 31, 1999.

65. Tranching. Disbursement of the first tranche of US$ 400 million equivalent will occurupon loan effectiveness, on the basis of conditions fulfilled before presentation of the loan to the

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Board. These include actions pertaining to the organization of the sector, improved subsidymanagement and a strengthened social safety net, and initial steps toward privatization of theviable portion of the industry. In addition, since Bank adjustment lending is conditional on aborrower having in place a satisfactory macroeconomic framework, the Bank will need to besatisfied at the time of Board presentation that:

(i) there is satisfactory implementation of the Action Plan to Increase Collection ofTaxes and Reduce Federal Budget Expenditures;

(ii) there is significant progress toward agreement on the main elements of the 1998macroeconomic framework, and that Bank senior management judges theprospects for its implementation are favorable; and

(iii) there are no unforeseen intervening unfavorable developments in the authorities'macroeconomic management.

Information gathered during the IMF/Bank December 1997 mission will be critical in makingthese determinations, and will be reported by Bank senior management at the time of Boardpresentation.

66. Disbursement of the two floating tranches, each of US$ 200 million equivalent, will becontingent on a review, satisfactory to the Bank, of: (i) the country's macroeconomic framework;(ii) satisfactory progress in the implementation of the coal reform program as set out in theGovernment's Policy Letter; and (iii) fulfillment of the specific tranche release conditions. Thefirst of the two floating tranches - the Social tranche - is expected to be disbursed in the thirdquarter of 1998 based on six months performance of the new subsidy management system,verified by financial and social monitoring. The second of the floating tranches - thePrivatization tranche - is expected to be disbursed in the first quarter of 1999 after the programfor privatizing coal companies accounting for 45% of production has been completed. The Bankhas indicated that, in the event this tranche has not been disbursed by March 31, 1999, the Bankwould initiate cancellation of the loan proceeds for this tranche. Specific conditions for Boardpresentation and the two floating tranches are in Attachment 4.

D. Monitoring Arrangements

67. Social Impact Monitoring. As noted above, the Government is committed to acontinuing program of social monitoring to track the social impact of the coal restructuringprogram. Submission to the Bank of a monitoring report for the three months preceding theSocial tranche release review, which demonstrates overall compliance with the social impactindicators agreed during negotiations, and publication of the findings of such monitoring reportwould be required before the Social tranche release review. The scope and details of the socialimpact monitoring program and monitoring report were agreed during negotiations.

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68. Financial Monitorilng/Special Audits.. Development and implementation of animproved subsidy management system is a major focus of Coal SECAL II. Monitoring of theoperation of the new agencies/mechanisms/procedures, in order to identify and correctshortcomings early on, will be critical to the transparency, effectiveness and sustainability of thenew system. In line with this, the Government has committed to carry out a comprehensive auditprogram, both for coal subsidies and federal-regional transfers in support of social assets. In thecase of coal subsidies, special audits will be carried out by internationally recruited auditors andwill start after three months of operation of the new system, covering the first six months ofoperation in 1998. The auditors will coordinate with the Control and Audit Department of theMinistry of Finance with a view to capacity building and potential cost savings. In the case offederal-regional transfers, special audits will be carried out by the Control and Audit Departmentof MOF and will commence in the second quarter of 1998 after tripartite agreements are in placefor 1998 support for social assets. Submission to the Bank of satisfactory audit reports will berequired before the Social tranche release review, where a satisfactory report is defined as onewhich indicates that the subsidies/budget transfers were effectively transferred to the legitimatefinal recipients and were used for the intended purposes and that the audit was carried out inaccordance with the audit terms of reference. The basic requirements of the audits and outline ofthe systems to be audited were agreed during negotiations.

E. Poverty Category

69. The proposed Coal SECAL II supports government policies that aim to make coal sectorrestructuring socially sustainable. This will be accomplished in part by strengthening the existingsocial safety net to meet the needs of those most affected by restructuring: redundant coal sectorworkers and their families and communities. While coal industry workers enjoy higher wagesthan the majority of the national workforce, impending retrenchment industry-wide combinedwith an underdeveloped safety net leave redundant coal workers vulnerable to instant povertyupon termination of employment. The Bank's intervention supports the establishment andfinancing of a minimum safety net for the unemployed and for pensioners of mines being closed,together with the creation and introduction of mechanisms which should ensure that individualbeneficiaries receive the safety net support to which they are legally entitled. The Bank'sintervention in addition supports incremental federal financing for the maintenance andoperation of essential social assets divested by the coal industry to local and municipaladministrations, together with a system which ensures that these resources are placed at thediscretion of local governments in a timely manner to allow them to meet their currentobligations. Communities unusually dependent on the coal industry suffer from the combinedimpact of reduced tax revenues generated by a contracting coal industry, which is exacerbated bythe additional burden of having to finance the maintenance and operation of essential socialassets and public utilities. The proposed Coal SECAL II is designed to ensure that restructuringof the coal industry does not result in a significant worsening of local governments' ability tomaintain the provision of essential social services, and supports the implementation of measuresto address the longer-term needs of providing such services more reliably and efficiently. Forthese reasons, Coal SECAL II will be in the category of "poverty-focused" operations.

F. Environment

70. Environmental Assessment. The Bank undertook an extensive review of theenvironmental problems of the coal industry in preparing the 1994 sector report. This reviewconcluded that the most serious environmental problems in mining areas were linked to the

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burning of coal rather than to mining activities per se. Apart from a small number of localizedissues, the main weaknesses in the environmental performance of coal-mining activities were theconsequence of poor incentives and bad management driven by a focus on meeting outputtargets, which contributed to perpetuating inefficient mining practices. Thus, reform ofincentives and operating procedures combined with the closure of the most inefficient mines,which tend to cause disproportionate environmental damage, will reduce the environmentaldamage caused by the industry, if the closure is conducted in an environmentally sound manner,in line with Russian regulatory requirements. Moreover, given that demand for coal continues todecline at a faster rate than that for natural gas and oil products, downsizing of the sector,accompanied by the closure of unviable mines and reduction in coal consumption, will result in asizable reduction of emissions of greenhouse gases and sulfur dioxide, thereby addressingproblems of global climate change, acid rain and local pollution and leading to significant netenvironmental benefits. In the future, remaining privatized viable coal mining companies will bein a position, given adequate market and regulatory incentives, to adopt more environmentallybenign technologies throughout the whole cycle of coalfield development, mining,preparation/processing, handling, and transportation, which will have further beneficial impactson both the global and local environment.

71. In the course of mine closures, specific measures must be undertaken to ensure that mineclosures occur in an orderly manner that takes account of the need to cap operating or disusedshafts, to minimize risks associated with the accumulation of gas in old mine workings, and todeal with any problems following the flooding of old workings. Design institutes and otherorganizations have the necessary experience in preparing plans and implementing the appropriatemeasures, but may require additional assistance from international experts for planning mineclosures on the basis of realistic cost estimates and sound and efficient approaches. TheGovernment has recently revised its mine closure guidelines, in particular to clarify steps andinstitutional responsibilities for technical, financial and social issues. Regulations and reviewprocedures for environmental aspects of mine closures are well-established. At the same time,the Government will undertake a review of the existing regulatory framework for the coal sector;this will be done to assess the need for adjustments and revisions necessary to ensure that theabove framework is adequate for the restructured privatized coal sector.

72. Environmental Rating. The proposed operation is a sector adjustment operation and assuch will not result directly in any significant negative environmental impact. If anyenvironmental impacts can be attributed to the operation, substantial net beneficial impacts canbe expected as an indirect consequence of the intervention, both in terms of global and localenvironmental issues. The operation has been rated "B" for Enviromnental Assessment.Technical assistance is available under the Coal IAP to assist federal and regional regulatoryauthorities in improving the Government's capacity to oversee and regulate enviromnentalaspects of mine closures, in enforcing compliance with established procedures, and instrengthening a system to manage the environmental rehabilitation of land, water, and habitatsdisturbed by past mining operations. It is expected that Coal IAP-financed technical assistancewill be made available to facilitate conduct of the environmental audits required as a condition ofthe Social tranche. Discussions are also underway to allocate part of the technical assistancefunds to address environmental aspects of privatization in order to assist the Government toadapt its system of environmental regulatory oversight to a post-privatization period, and toadvance preparation of pilot environmental remediation projects at closed mine sites, which willhave an additional focus of addressing global environmental issues. The National GreenhouseGas Reduction Strategy Study, currently under implementation, also aims at assessing near- and

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midterm trends in energy use and at identifying possible investment projects to address reductionof the GHG emissions, including in coal mining, storage, processing, and transportation.

G. Support for Coal SECAL II: Coal IAP

73. To meet the challenge of translating its reform agenda into effective actions, theGovernment requested the Bank to finance a Coal Sector Restructuring ImplementationAssistance Project; the loan was approved in June and made effective in July, 1996.

74. The IAP design was to a large extent built on a stakeholder consultation process,including social assessments in two coal basins (Pechora and Kuznetsk (Kuzbass)) affected bythe mine closures. The Project Implementation Unit was established in the form of a non-commercial foundation, ReformUgol. Despite management and staffing uncertainties during thefirst year of its existence, ReformUgol has become a key organization providing technical,analytical and implementation support for the Government's coal sector restructuring program.Its main activities to date have included:

(i) financial and advisory support (ongoing), under cooperation agreements, to thetwo main coal trade unions and Association of Coal Mining Cities to supportactivities aimed at public information, legal support for the union activists,members, and communities, training of local union and community organizers -all related to providing adequate social protection to the miners, their families,and communities affected by the coal sector restructuring;

(ii) financial, implementation and supervision support for continuing assessment andmonitoring of social impacts of the coal sector restructuring, with the objectiveof providing feedback and reality checks for the Government's restructuringeffort to ensure that it is more efficient and better targeted to assist those in need;

(iii) financial, technical and implementation support for the initial phase oftransferring selected coal companies to independent trust management;

(iv) financing and supervision, on behalf of the Government, of the first independentspecial audits of selected recipients of state subsidies, as the first step on the wayto improve the subsidy management system;

(v) financial and supervision support for the initial phase of the Government'spublic information campaign; and

(vi) analytical and technical support to the Inter-Agency Commission on Socio-Economic Problems of Coal Mining Regions and Coal Department of theMinistry of Economy, two principal Government policy development and policymaking bodies in the area of coal sector restructuring.

75. To provide timely and meaningful support to comprehensive development andimplementation of the next phase of the Government's reform program, supported by CoalSECAL II, ReformUgol needs to focus its efforts on the following: (i) technical assistance forstrengthening and transforming the system of managing state subsidies for the sector and thestate management and regulatory system for the coal sector; (ii) broader public information andparticipation program; (iii) assistance in strengthening environmental management and

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regulatory oversight system in the sector; (iv) continuing support for social and participatoryprograms; and (v) support for the Government's privatization effort.

76. As the Government's program is being further developed and fine-tuned, there may be aneed to review the current design of the IAP in order to redirect it towards support for priorityelements of the program. The Government's continuing and strengthened support forReformUgol remains a key element to the overall success of the IAP and its objectives.ReformUgol, itself, in order to carry out its important task of providing comprehensive supportfor reforms in the coal sector, may need to be further strengthened, particularly in terms of itstechnical staff and advisory consultants and in overall project management systems.

VI. BENEFITS AND RISKS

77. Benefits. The proposed Coal SECAL II (together with the Coal LAP) sustains Banksupport for the Government's coal restructuring initiatives and builds upon the progress madesince the Government began its reform program in 1994 and since the first Bank operation inJune 1996. The proposed program extends the Bank's support for restructuring a critical sectorof the Russian economy that continues to depend on Government subsidies. The impetus forrestructuring is the gradual withdrawal of federal subsidies that cover various operating andinvestment losses for coal enterprises. The most immediate effect is to decrease the impact of aloss making coal sector on the federal budget. Longer term, the withdrawal of subsidiespromotes the establishment of a more efficient and sustainable coal sector through closure ofunprofitable mines; privatization of regional coal companies, and increased reliance oncompetition and market forces to establish prices and production levels. The Government andBank recognize that the transition to a more efficient industry can impose hardships onemployees of coal enterprises, their families, and communities. Therefore, the operationsupports a series of programs that together form a social safety net to mitigate these impacts.Under Coal SECAL II, particular emphasis will be placed on developing the institutionalcapacity to deliver these social benefits in a transparent and equitable manner. The program isaugmented by support provided under the Bank-financed Coal Sector RestructuringImplementation Assistance Project, which has initiated capacity building activities in key areas,including improved measures to mitigate social impacts in the most heavily-affected regions.

78. Risks. This is a high risk operation. The continued reduction and redirection and thestrengthened management of subsidies all involve adverse impacts on interest groups, which inturn could impact the pace of reform, and the quality of the social aspects of the program.Similar risks exist for the privatization component. These factors were evident in the course ofimplementation of Coal SECAL 1. At the same time, implementing the substantial structural andsocial changes inherent in the Government's program will be a considerable challenge to theGovernment's political will to deploy the necessary institutional capacity.

79. These risks should be mitigated by the major changes in the management of the sectornow taking place, notably the liquidation of RosUgol, which itself demonstrates theGovernment's considerable resolve to push ahead with reform. They should also be contained bythe new expenditure control mechanisms now established. In addition, the public visibility of thecoal sector reform program creates considerable pressure for its satisfactory implementation,especially as concerns its social aspects. The time limit on the privatization tranche is aimed atcreating an incentive for speedy action. Overall progress on coal sector restructuring during the

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initial phase of implementation, together with the commitments in the Government's PolicyLetter provide a reasonable assurance that the reforms will continue.

VII. RECOMMENDATION

80. I am satisfied that the proposed loan would comply with the Articles of Agreement ofthe Bank, and I recommend that the Executive Directors approve it.

James D. WolfensohnPresident

by Caio K. Koch-Weser

Attachments

Washington, D.C.November 30, 1997

I

Attachment 1Page 1 of 7

RUSSIAN FEDERATIONSECOND COAL SECTOR ADJUSTMENT LOAN

Table 1: Key Economic Indicators

Actual Estimate ProjectedIndicator 1993 1994 1995 1996 1997 1998 1999 2000

National accounts(as % GDP at current market prices)

Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0Agriculturea 7.6 6.1 6.9 6.9Industrya 40.5 41.2 39.3 36.8Servicesa 46.4 49.7 47.1 50.5

Total consumption 69.1 69.7 73.2 74.6 76.9 78.1 78.2 78.0

Gross domestic fixed investment .. 21.8 20.0 19.5 17.0 17.9 18.7 19.6Government investment .. 6.1 5.2 4.4 4.3 4.4 4.6 4.7Private investment .. 19.4 18.0 17.7 15.8 15.4 16.1 16.9

Exports (GNFS)b 35.5 27.7 25.6 22.5 21.2 20.3 19.2 18.5Imports (GNFS) 31.6 22.9 22.1 19.2 18.2 18.3 18.0 18.0

Gross domestic savings 30.9 30.3 26.8 25.4 23.1 21.9 21.8 22.0Gross national savings' 28.5 28.5 24.8 23.4 20.9 19.4 18.8 19.2

Memorandum itemsGross domestic product 183,780 277,025 357,348 440,169 460,353 498,097 552,516 602,651(US$ million at current prices)Gross national product per 2,770 2,330 2,240 2,400 ..capita (US$, Atlas method)

Real annual growth rates(%, calculated from 1996 prices)

Gross domestic product at -8.7% -12.6% -4.1% -4.9% 0.0% 4.0% 6.0% 6.0%market pricesGross Domestic Income -10.1% -12.6% 4.4% -4.7% 0.5% 3.6% 5.7% 5.7%

Real annual per capita growth rates(%, calculated from 1996 prices)

Gross domestic product at -8.6% -12.5% -4.0% -4.6% 0.3% 4.3% 6.3% 6.3%market pricesTotal consumption 6.9% -3.6% -0.5% 1.6% 2.5% 5.3% 5.9% 5.7%Private consumption 5.6% 10.8% -0.7% 9.2% 3.3% 5.3% 5.6% 5.3%

(Continued)

Attachment 1Page 2 of 7

Table 1: Key Economic Indicators (Continued)

Actual Estimate ProjectedIndicator 1993 1994 1995 1996 1997 1998 1999 2000

The balance of payments(US$m)

Exports (GNFS)b 65,244 76,667 91,610 99,112 97,681 101,049 105,845 111,334Merchandise FOB 58,422 67,716 81,552 88,464 87,401 90,252 94,384 99,131

Imports (GNFS)b 58,110 63,448 78,885 84,728 83,747 91,054 99,587 108,720Merchandise FOB 44,219 48,005 60,084 67,557 67,033 73,244 80,499 88,300

Resource balance 7,134 13,219 12,725 14,384 13,935 9,996 6,258 2,614Net current transfers -59 108 167 167 167 167 167(including official current transfers)Current account balance 5,477 9,576 6,155 5,917 4,104 -2,239 -10,232 -14,466(after official capital grants)

Net private foreign direct 386 637 2,017 2,158 3,158 3,300 4,300 5,300investmentLong-term loans (net) -10,780 -12,904 -10,479 -2,734 -1,612 -1,880 -1,170 -5,616Other capital (net, including 8,317 -1,378 7,236 -10,202 1,157 11,037 17,482 27,141errors and omissions)

Change in reservesd -3,400 4,069 -4,929 4,861 -6,807 -10,217 -10,380 -12,359

Memorandum itemsResource balance (% of 3.9% 4.8% 3.6% 3.3% 3.0% 2.0% 1.1% 0.4%GDP at current market prices)Real annual growth rates(FY96 prices)

Merchandise exports (FOB) .. .. .. .. 2.2% 2.5% 3.0% 3.5%Primary .. .. 2.6% 2.2% 2.2% 2.5% 3.0% 3.5%Capital goods -23.4% 6.4% 50.0% 2.2% 2.2% 2.5% 3.0% 3.5%

Merchandise imports (CIF) .. .. .. .. 5.0% 6.6% 6.6% 6.6%

(Continued)

Attachment 1Page 3 of 7

Table 1: Key Economic Indicators (Continued)

Actual Estimate ProjectedIndicator 1993 1994 1995 1996 1997 1998 1999 2000

Public finance(as % of GDP at currentmarket prices)e

Current revenues 38.6 36.7 32.7 28.8 29.7 30.4 31.5 32.4Current expenditures 42.6 40.7 33.2 32.5 32.8 31.3 30.7 29.8Budgetary savings surplus (+) -4.1 -4.1 -0.5 -3.7 -3.1 -0.9 0.8 2.6or deficit (-)

Capital expenditures 4.8 7.4 6.0 5.1 4.9 5.0 5.2 5.3Overall balance (- = deficit) -8.7 -11.3 -5.6 -8.5 -7.8 -5.7 -4.0 -2.5Foreign financing 3.2 1.3 2.1 2.5 3.9 3.5 2.4 2.2

Monetary indicators

M2/GDP (at current market prices) 23.9 21.2 16.9 16.3 17.0 19.1 21.3 24.4Growth of M2 (%) 286.6 216.5 112.6 33.1 23.6 30.3 29.1 29.8

Price indices(1996 =100)

Merchandise export price index .. .. .. 100.0 96.7 97.5 99.0 100.5Merchandise import price index .. .. .. 100.0 94.5 96.9 99.9 102.8Merchandise terms of trade index .. .. .. 100.0 102.3 100.6 99.1 97.8Real exchange rate 35.9 59.7 74.4 100.0 100.0 101.5 103.0 103.0(US$/LCU)fConsumer price index 895.3% 303.2% 188.7% 47.5% 15.1%(% growth rate)GDP deflator (% growth rate) 888.1% 307.3% 178.4% 45.5% 18.0% 12.0% 9.0% 7.0%

a. GDP components are estimated at factor cost.b. "GNFS" denotes "goods and nonfactor services."c. Includes net unrequited transfers excluding official capital grants.d. Includes use of IMF resources.e. Enlarged government (federal and local governments and extrabudgetary funds).f "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation.

Attachment 1Page 4 of 7

RUSSIAN FEDERATIONSECOND COAL SECTOR ADJUSTMENT LOAN

Table 2: Key Exposure Indicators

Actual e Estimate e Projectede

Indicator 1993 1994 1995 1996 1997 1998 1999 2000

Total debt outstanding and 112,940 121,921 120,461 127,392 138,072 149,953 156,449 162,677disbursed (TDO) (US$m)a

Net disbursements (US$m)a 4,334 1,089 4,619 -219 2,091 3,807 -3,282 -7,213

Total debt service (TDS) 2,333 3,674 6,303 17,932 16,433 18,821 24,737 28,792

(US$m)a

Debt and debt service indicators

(%)TDO/XGSb 171.7 157.3 129.7 126.9 140.4 146.4 144.8 142.8

TDO/GDP 61.5 44.0 33.7 28.9 30.0 30.1 28.3 27.0

TDS/XGS 3.5 4.7 6.8 17.9 16.7 18.4 22.9 25.3

IBRD exposure indicators (%)IBRD DS/public DS 0.5 1.0 0.9 0.8 1.3 2.6 3.2 3.9

Preferred creditorDS/public 11.5 13.7 13.6 9.4 12.0 15.1 23.4 18.9

DSIBRD DS/XGS 0.0 0.0 0.1 0.1 0.2 0.5 0.7 1.0

Share of IBRD portfolio 0.4 0.6 1.4 2.3 4.1 5.7 7.2 8.2

a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-

termn capital.

b. "XGS" denotes exports of goods and services, including workers' remittances.e. Historical data from Debt Reporting System (DRS); other data projected by country team.

Attachment 1Page 5 of 7

RUSSIAN FEDERATIONSECOND COAL SECTOR ADJUSTMENT LOAN

Table 3: External Financing(US$ millions at current prices)

Estimated Projection1997 1998 1999 ZUUU

Sources 44,952 43,537 36,709 38,143Non-interest current account balance 12,256 6,609 2,178 -2,128Disbursement 10,372 13,779 9,044 9,241IMF 3,900 4,000 0 0Other medium- and long term 6,135 7,091 7,749 7,830

of which IBRD 2,016 2,052 2,170 1,811Net short-term 337 2,688 1,295 1,412

Private investment 14,489 13,575 15,707 17,588Direct foreign investment 3,158 3,300 4,300 5,300Portfolio investments (net) 11,331 10,275 11,407 12,288

Debt relief 7,836 9,573 9,780 13,441

Uses 44,952 43,537 36,709 38,143Debt service due 16,432 18,821 24,736 28,792

of which IBRD 217 477 767 1,107Repayments (including IMF) 8,281 9,972 12,326 16,454Interest payments 8,151 8,849 12,410 12,338

Increase in gross reserves 10,397 13,215 7,172 9,550Other capital flows 18,123 11,501 4,801 -200

Attachment 1Page 6 of 7

Table 4: Russian Federation at a Glance

Europe & Lower-POVERTY and SOCIAL Russian Central middle-

Federation Asa Incorne Development diamond-

Population mid-1996 (millions) 147.7 479 1,125GNP per capita 1996 (USS. Atlas method) 2,400 2,180 1,750 Life expectancyGNP 1996 (bilions USS, at Atlas conversion factor) 354.6 1,043 1,967

Average annual growth, 1990-96

Population (%) -0.1 0.3 1.4 GrsLabor force (%, Russia: 1992-96) -1.1 0.5 1.8 GNP Groms

Most recent estimate (latest year available since 1989) capita enrollment

Poverty: headcount index (% of populafion) 25 ci enolmnUrban population (% oftotalpopulation) 73 65 56Life expectancy at birth (years) 66 68 67Infant mortality (per 1,000 live births) 18 26 41 Access to safe waterChild malnutrition (% of children under 5)Access to safe water (% of population) .. :. 78Illiteracy (% of population age 15+) 0.2 .. .. aiGross primary enrollment (% of school-age population) 94 97 104 : Russian Federathn

Male 97 105 Lower-middle-income groupFemale .. 97 101

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1975 1985: 1995 1996Economic ratilos

GDP (billions US$) .. .. 357.3 4402Gross domestic investmentVGDP .. .. 23.2 22.1 Openness of economyExports of goods and servicealGDP .. 25.6 22.5Gross domestic savings/GDP .. 26.8 25.4Gross nabonal savings/GDP . .. 248 24.5

Current account balanceiGDP .. 1.8 1 AInterest payments paid/GDP .. 0.9 1.1: Savings InvestmentTotal extemal debtVGDP .. 33.7 28.9Total debt service paid/exports .. 6.8 7.2Present value of debtdGDP .. 31.2Present value of debtexports .. 117.3 i. Indebtedness

197545 1966-96 1995 1996 1997.05(average annual growth) IGDP . . -4.1 -4.9 5.1 -Russian FederationGNP per capita .. -4.0 -4.8 5.3 Lower-middle-income groupExports of goods and services .. 7.0 -2.0 4.8 i : __ : E : :_

STRUCTURE of the ECONOMY1975 1985 1995 1996

(% of GOP) Growth rates of output and Investment (%)Agriculture *- * 7.4 7.3 20Industry .. .. 42.1 39.1 10

Manufacturing . 10Services .. .. 50.5 53.6 *20

Private consumption .. .. 59.0 63.4 91 92 93 94 95 95General govemment consumption .. .. 14.1 11.2Imports of goods and services .. .. 22.1 19.2 GDI GDP

197545 1986496 1995 1996(average annual growth) Growth rates of expot and Imports (%)Agriculture a .. .. -8.0 -7.0Industry a .. .. -4.5 -4.0

Manufacturing ,. .. .. ./ 0Services a -10.0 -3.8 o ./

Private consumption .. .. -0.9 8.8 -. 92 92 94 95General govemment consumption .. .. 0.1 -27.3 -.10Gross domestic investment .. .. -12.0 -21.1 -15Imports of goods and services . 9.8 -1.6Gross national product . -4.5 -5.3 Exports - Iporta

a. Sectoral GDP are estimated at factor cost.The diamonds show four key indicators In the country (in bold) compared with Rts income-group average. If data are misstng, the diamond will

be Incomplete.

Attachment IPage 7 of 7

Table 4: Russian Federation at a Glance (Confinued)

PRICES and GOVERNMENT FINANCE1975 1985 1995 1996

Domestic prices Inflation (%)(% change)Consumer prices 188.7 47.5Implicit GDP deflator 178.7 454 1,

Govemrnment ffnance sw (% of GDP) oCurrent revenue 32.7 28.8 91 92 93 94 95 96Current budget balance , -0.5 -3.7Overall sur,us/defidt -5 6 -SG P e CPr

TRADE1975 1985 1995 1996

(millions USS) Export and Import levels (mill. USS)Total exports (fob) 81,552 88,463 1W,WW

Crude oil 12,741 15,724Natural gas 13,391 15,487 erMachinery, equipment, vehicles 6,240 6,216 6,o_o

Total imports (cif) 64,198 70,021 40,000Food . .. 13,041 11,500Fuel and energy . 188 2AMachinery, equipment, vehicles . .. 15,700 14.4D00

92 92 94 CC seExport price index (1987=100)Import price index (1987=100) oExports o ImportsTerms of trade (1987=100) ..

BALANCE of PAYMENTS1975 1985 1995 1998

(millions US$) Current account balance to GDP ratlo (%)Exportsofgoodsandservices 91,610 99,112 4.0Imports of goods and servrices , 78,885 84,728 4 TResource balance 12,725 14,384

3.0

Net income -6,331 -8,171Net current transfers 108 167 |o

Current account balance. -n

before offiial capital transfers 6,502 6,380

Financing items (net) -1,573 -11,241 .0-., | ,Changes in net reserves 4,929 4,861 92 93 94 e 96

Memo:.Reserves including gold (mill. US$) .. .. 17,207 15,324Conversion rate (loca'IUS$) 4,562 5,126

EXTERNAL DEBT and RESOURCE FLOWS

(millions USS) ComposWon ftotldet, B(mI US$)Total debt outstanding and disbursed 120,461 127,392 m f

IBRD 1.524 2,509 G AIDA 0. 0 7100 25G 12463 0

Total debt service paid 6,065 7,257 320IBRD 57 121IDA 0 0

FComposition of net resource flows 38(|\

Capital transfers -347 -463Official creditors 98Private creditors -1,043Foreign direct investment , 2,017 2,158 EPortfolio equity ,, -1,434 6,331 |70DO

World Bank programCommitments 1,864 1,923 A -IBRD E-Bilaeral IDisbursements 824 1,097 B-IDA D0- 0t9w Mni9la F - PdvatePrincipal repayments 0 0 C - IMF G - ShorIIten^ Net flows 824 1.097 1 1

Interest payments 57 121Net transfers 767 976

Development Economics and Russia Country Team

Note: Estimates for the former Soviet republics are subject to more than the usual range of uncertainty.

Attachment 2Page 1 of 3

RUSSIAN FEDERATIONSECOND COAL SECTOR ADJUSTMENT LOAN

Status of Bank Group Operations in Russian FederationIBRD Loans in the Operations Portfolio

DifferenceBetween expected

Original Amount in USs Millions and actual Last ARPPLoan or Fiscal disbursements a/ Supervision Rating b/

Project ID Credit Year Borrower Purpose

No. IBRD IDA Cancellations Undisbursed Orig Frm Rev'd Dev Obj Imp Prog

Number of Closed Loans/credits: 9

Active LoansRU-PE-8809 IBRD 36233 1993 RUSSIAN FEDERATION OIL REHAB. 10.00 0.00 0.00 7.51 202.07 18.32 U SRU-PE-8809 IBRD 36232 1993 RUSSIAN FEDERATION OIL REHAB. 170.00 0.00 0.00 24.17 202.07 18.32 U SRU-PE-8809 IBRD 36231 1993 RUSSIAN FEDERATTON OIL REHAB. 158.00 0.00 41 60 5.61 202.07 18.32 U SRU-PE-8809 IBRD 36230 1993 RUSSIAN FEDERATION OIL REMAB. 272.00 0.00 142.15 2.58 202.07 18.32 U SRU-PE-8810 IBRD 35460 1993 GOVT OF RUSSIA PRIVATIZATION 90.00 0.00 0.00 26.30 6.61 -4.39 S 5RU-PE-8822 IBRD 35320 1993 GOVERNMENT OF RUSSIA EMPLOYMENT SERV. & 70.00 0.00 10.00 29.59 39.58 1.00 S S

SOCIAL PROTRU-PE-8805 IBRD 37682 1994 RUSSIAN FEDERATiON OIL REHAB. II 90.40 0.00 0.00 3.40 296.97 261.97 U SRU-PE-8805 IBRD 37681 1994 RUSSIAN FEDERATION OIL REMAN. II 51.10 0.00 4.72 4.87 296.97 261.97 U SRU-PE-8805 IBRD 37680 1994 RUSSIAN FEDERATION OIL REHAB. II 24.70 0.00 0.00 5.07 296.97 261.97 U SRU-PE-8805 IBRD 3768C 1994 RUSSIAN FEDERATION OIL REHAB. II 99.60 0.00 0.00 64.95 296.97 261.97 U SRU-PE-8805 IBRD 3768B 1994 RUSSIAN FEDERATION OIL REHAB. II 108.90 0.00 0.00 89.33 296.97 261.97 U SRU-PE-8805 IBRD 3768A 1994 RUSSIAN FEDERATION OIL REHAB. II 125.30 0.00 0.00 115.65 296.97 261.97 U SRU-PE-8839 IBRD 3763A 1994 GOVT. OF RUSSIA ENTERPRISE SUPPORT 196.00 0.00 0.00 190.06 114.06 0.00 S SRU-PE-8811 IBRD 37570 1994 REP.OF RUSSIAN FED. AGRIC. REFORM IMPL. 240.00 0.00 30.00 187.41 170.75 29.02 U URU-PE-34579 IBRD 37560 1994 REP OF RUSSIAN FED LAND REFORM IMPL. SU 80.00 0.00 0.00 62.51 43.51 0.00 U SRU-PE-8828 IBRD 3734A 1994 MOF FINANCIAL 187.62 0.00 0.00 159.38 151.07 11.89 S S

INSTITUTIONAL DEV.

RU-PE-8808 IBRD 37060 1994 RUSSIAN FEDERATION HIGHWAY REHAB & MAIN 300.00 0.00 0.00 90.40 -.25 0.00 HS SRU-PE-8806 IBRD 38850 1995 RUSSIAN FEDERATION URBAN TRANSPORT 329.00 0.00 0.00 148.74 52.74 0.00 S SRU-PE-8803 IBRD 38760 1995 RUSSIAN FEDERATION RUSSIA ENERGY EFFICY 106.50 0.00 36.50 69.67 66.88 12.35 U URU-PE-40409 IBRD 38726 1995 RUSSIAN FEDERATION EMERG. OIL SPILL MIT 29.60 0.00 0.00 23.42 24.15 0.00 S HSRU-PE-38572 IBRD 38530 1995 GOVT. OF RUSSIA TAX ADMINISTRATION 16.80 0.00 0.00 16.13 13.62 2.58 S SRU-PE-8827 IBRD 3850A 1995 RUSSIAN FEDERATION HOUSING 363.72 0.00 0.00 310.06 153.88 0.00 S SRU-PE-8823 IBRD 38440 1995 GOVERNMENT OF RUSSIA PORTFOLIO DEVELOPMEN 40.00 0.00 0.00 34.44 30.69 5.73 S SRU-PE-8826 IBRD 38240 1995 RUSSIAN FEDERATION MANAGEMENT AND FINAN 40.00 0.00 0.00 23.55 3.07 0.00 S SRU-PE-8821 IBRD 38060 1995 RUSSIAN FEDERATION ENVIRONMENT MANAGEME 110.00 0.00 0.00 84.85 -3.53 0.00 S SRU-PE-45622 IBRD 40590 1996 RUSSIAN FEDERATION COAL IAP 25.00 0.00 0.00 22.23 1.84 0.00 S S

RU-PE-8831 IBRD 40350 1996 GOVT. OF RUSSIA LEGAL REFORM PROJECT 58.00 0.00 0.00 56.05 9.88 0.00 S SRU-PE-38571 IBRD 40330 1996 GOVERNMENT OF RUSSIA MEDICAL EQUIPMENT 270.00 0.00 0.00 204.26 -27.39 0.00 S SRU-PE-42622 IBRD 40290 1996 GOVT. OF RUSSIAN PEDERATI CAPITAL MARKET DEV. 89.00 0.00 0.00 89.00 7.67 0.00 S URU-PE-36973 IBRD 40120 1996 RUSSIAN FEDERATION ENTP.HOUSING DIVESTI 300.00 0.00 0.00 294.90 5.41 0.00 S SRU-PE-35761 IBRD 40090 1996 GOVT. OF RUSSIA COMMUNITY SOCIAL INP 200.00 0.00 0.00 193.71 6.88 0.00 S S

RU-PE-35764 IBRD 39900 1996 RUSSIAN FEDERATION BRIDGE REHABILITATIO 350.00 0.00 0.00 342.19 142.54 0.00 S SRU-PE-8837 IRD 39610 1996 GOVT OF RUSSIA STANDARDS DEVELOP. 24.00 0.00 0.00 23.15 4.42 0.00 S SRU-PE-38573 IBRD 42030 1997 RUSSIAN FEDERATION SOC. PROTECT. ADJ. 800.00 0.00 0.00 500.00 83.34 0.00 S SRU-PE-44200 IBRD 41850 1997 RUSSIAN FEDERATION BUREAU OF ECON.POLIC 22.60 0.00 0.00 22.60 0.00 0.00 S SRU-PE-46448 IBRD 41840 1997 MINISTRY OF FINANCE ENTERPRISE RES.SERVS 85.00 0.00 0.00 85.00 .64 0.00RU-PE-8825 IBRD 41830 1997 GOVT. OF RUSSIA EDUCATION INNOVATION 71.00 0.00 0.00 71.00 0.00 0.00 S S

Generated by the Operations Information System (OIS) on 28 November 1997

Attachment 2Page 2 of 3

Status of Bank Group Operations in Russian FederationIBRD Loans in the Operations Portfolio (Continued)

DifferenceBetween expected

Original Amount in USS Millions and actual Last ARPPLoan or Fiscal disbursements a/ Supervision Rating b/

Project ID Credit Year Borrower PurposeNo. IBRD IDA Cancellations Undisbursed Orig Frm Rev'd Dev Obj Imp Prog

RU-PE-8814 IBRD 41820 1997 GOVERNMENT OF RUSSIA HEALTH REFORM PILOT 66.00 0.00 0.00 66.00 .94 0.00 S SRU-PE-50891 IBRD 41810 1997 RUSSIAN FEDERATION ELECTR. SECTOR REFOR 40.00 0.00 0.00 40.00 2.50 0 .00RU-PE-42720 IBRD 41440 1997 RUSSIAN FEDERATION ST. PETERSBURG REHAB 31.00 0.00 0.00 31.00 .54 0.00 S SRU-PE-46496 IBRD 42340 1998 GOVERNMENT OF RUSSIA SOC. PROTECT. IMPL. 28.60 0.00 0.00 28.60 0.00 0.00

Total 5,769.44 0.00 264.97 3,849.34 3,696.14 1,703.28

Active Loans Closed Loana TotalTotal Disbursed (IBRD and IDA): 1,655.13 2,422.05 4,077.18

of which has been repaid. 0.00 0.00 0.00Total now held by IBPD and IDA: 5,504.46 2,422.05 7,926.51Amount sold 0.00 0.00 0.00

Of which repaid : 0.00 0.00 0.00Total Undisbursed 3,849.34 0.00 3,849.34

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.b. Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system was introduced (HS = highly Satisfactory, S = satisfactory, U = unsatisfactory,

HU = highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994.

Note:Disbursement data is updated at the end of the first week of the month.

Generated by the Operations Infonration System (OIS) on 28 November 1997 p:\muia\PRsM\M\L2BoaSAL2MoPUTablel.co

Attachment 2Page 3 of 3

Russian FederationSTATEMENT OF IFC's

Committed and Disbursed PortfolioAs of 30-Sep-97

(In US Dollar Millions)

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1993 Polar Lights 26.81 0.00 0.00 0.00 26.81 0.00 0.00 0.001993 Vasyugan 3.38 0.00 1.50 0.00 3.38 0.00 1.50 0.001994 Framlington Fund 0.00 8.00 0.00 0.00 0.00 8.00 0.00 0.001994 Russia Registry 0.00 1.50 0.00 0.00 0.00 1.50 0.00 0.001994 RTDC 0.00 7.50 0.00 0.00 0.00 7.50 0.00 0.001995 A.O. Volga 30.00 11.00 0.00 39.38 30.00 11.00 0.00 39.381995 Depsona Z.A.O. 5.30 1.50 0.00 0.00 0.00 1.50 0.00 0.001995 First NIS Fund 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.001995 Russ Tech Fnd 0.00 2.00 0.00 0.00 0.00 .50 0.00 0.001995 SCF 0.00 4.53 0.00 0.00 0.00 2.05 0.00 0.001996 Alpha Cement 0.00 13.49 0.00 0.00 0.00 13.49 0.00 0.001996 Pioneer First 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.001996 UNEXIM Bank 15.00 0.00 0.00 0.00 7.50 0.00 0.00 0.001997 Aminex RUS 17.00 5.49 0.00 0.00 0.00 5.49 0.00 0.001997 Intl. Bottlers 35.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Portfolio: 132.49 74.01 1.50 39.38 67.69 70.03 1.50 39.38

Approvals Pending Commitrnent

Loan Equity Quai Partic1996 ALPHA CEMENT 20.00 0.00 0.00 0.001998 BORSTEKLO - 11 0.00 15.00 0.00 0.001997 DEPSONA B LOAN 0.00 0.00 0.00 5.201997 INTL. BOTTLERS 0.00 5.00 0.00 0.001997 NIKITAS BROKER. 7.00 .01 0.00 0.001997 PLM 25.00 0.00 0.00 15.001997 PLM EASTERN 0.00 5.50 0.00 0.00

HOLD1997 POKROVSKIY MINE 16.00 0.00 0.00 32.301997 RUSSIAN IT FUND 0.00 15.00 0.00 0.001997 TROIKA DIALOG 0.00 0.00 2.99 0.001997 ZOLOTO MINING 0.00 4.00 0.00 0.00

Total Pending Commitment: 68.00 44.51 2.99 52.50

Generated by the Operations Infonnation System (OIS) on 28 November 1997 p:\Ruwia\'REM\W2\4BoMSAL2MoP\A2Tabl2.doc

Attachment 3

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Attachment 3Page 4 of 30

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Attachment 3Page 5 of 30

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Attachment 3Page 6 of 30

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Attachment 3Page 7 of 30

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Attachment 3Page 8 of 30

co6CTBeHHocTH. Ha OCHOBe 3TorO H3yqeHHS rIpaBHTeJIicTBo rioarOTOBHT H Ha4HeT peaJH3oBBLIBaTb

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pacxoloBaHHe CpeIcTB. BBereHHMIA B 1997 rogy MexaHH3M AOBegeHHA cpeICTB qepe3 KaHajbIm 4egepanbHoro

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Attachment 3Page 9 of 30

Co,epxaHHe HpOrpaMM MeCTHOrO pa3BHTHS 6yX4eT paCuHpeHO. 1 paMKax 3THX npOrpaMM, HaqHHaS C

1998 roxAa, 6yLyT npoBoqHTEcs[ rpexjyBojIHHTejTbHue KOHCYJThbTaIUHH JJa rpa)KLIaH, BbicBo6oxQeHHbIX HnIH4

BbICBo6o)xaeMbix 13 OpraHH3aUHH no0o6brqe HnIH nepepa6oTKe yr.IA.

Oco6oe BHHMaHHe 6yjaeT yireneHo opraHH3aUH4 o6iiecTBeHHo-3HatHMMx pa6oT, HaiUeneHHbIX HanoaepxaHHe H yJIyqimeHHe coilHaJibHOH HH4lpaCTpyKTypbI H )KHnXJIUHHOo 4oHJa lIaXTepCKHX ropOjaOB H

iocejiKOB. ByAeT npo;xo0jDKeHa pa6oTa. no 4OpMHpOBaHHIO HH4paCTpyKTypblI manoro 6H3Heca H

Hpe,:IpHHHMaTeJThCTBa, a TaKKe ino CogreHCTBH1O B co3XXaHHH HOBbIX pa6OtIHX MeCT.

YMaCTHe 3aHHTepeCOBaHHbX CTOPOH B *OPMHpOBaHHH H peanJH3al4HH nporpaMM MeCTHOIo pa3BHTHS

ocyinecTBniseTca qepe3 AelSTenJbHOCTb Ha6JioaaTejTbHbIx coBeTOB. B 1996 ro,ay B UiaxTepCKHx ropoxgax H

noceJIKax .geHCTBOBajio OKoJIo 30 Ha6jiiogaTejTbHbIx COBeTOB, B 1997 rogy HX 'HcjIo gOCTHmfO 50.rIpaBHTejTbCTBO IPOROJIXCHT oKa3aHHe rioIIepxKKH ,AeATenJIHOCTH Ha6JlloAaTejTbHBIx COBeTOB B 1998 roixy.

06beKTbi COIUHanbHOri C4¢epLI H KHJ1oH 4)OH, B iUaxTCPCKHX ropoxiax H nocenKax

B 1997 rogy fIpaBHTenbCTBO ninaHHPOBanjO oKa3aTb ageKBaTHyO noroepzxy nepegaHHbix MeCTHbLIM

opraHam BjiaCTH o0beKTOB COIHKanJIHO ctpepbl H xHnoro toHJa IuaXTepCKHX rOPOlOB H noceJIKOB. OqHaKo,H3-3a TpyRHOCTeR B opMHpoBaHHHH .ROXOJIHOH qaCTH 6ioaxeTa 4,HHaHCHPOBaHHe He 6bU1O BEIIOJIHeHO B

nOJIHOM o6beMe. B CBS3H C 3THM, ciieHaiaEbHIbM peeiieHHAm rlpaBHTenicTBa H3 ter;epajEHoro 6logxceTa

BbUejeHa 6ioaxKeTHaa ccyga B pa3mepe 185 mnipg.py6. Ccyja BibiaejieHa Ha OCHOBe TpeXCTOpOHHero RoroBopaMexcy MHH4,HHOM, aJMHHHCTpaIIHeH cy6ieKTa POCCHiCKOii cDegepaLUHH H aAMHHHCTpaLIeH ml axTepcKoro

ropo;ra (nocenKa).

B 1998 rogy rIpaBHTejTbCTBO i-pe,aOCTaBHT 43HHaHCHpOBaHHe xiJS npoeKToB MoAIepHH3aLUHH

coijHanbHOH c4Jepbi iiaxTepCKHx ropoxoB H rocenJKOB B o6beMe He MeHee 400 mnipa. py6neul.

CpexRCTBa Ha MORepHH3aiHio o6ibeKTOB CoiHaIbHOR ctepwl 6yqyT ripe.OCTaBjieHbLI Ha KOHKYPCHOH

OCHOBe, B cpOpMe 6iogxceTHbIx CCyJ, C HC11OJIb3OBaHHeM TpeXCTOpOHHHX coriiauieHHH, 3aKJIIo'IaeMbIX Ha

Ao6poBonbHoR OCHOBe MeAKgy MHHC3HHOM, a,gMHHHCTpaLiHAMH Cy6&beKTOB POCCHiCKOii 'DegepaLuHH H

MeCTHbIMH aaMHHHCTpalHAMH. B ciiyqae q44eKTHBHorO HCOJThb3OBaHH1 6foaxeTHbIx CCyU, HX rloralieeHHeOCY1eCTBsAeTCA 3a cMeT cpeaCTB fe,gepaJThHoro 60ogxKeTa.

nocjxenylolUe me=b

llpewpHHATblie rIpaBHTenbCTBoM pagHKajbHbie MepLi no pe4,opMHpOBaHlIO ynpaBneHHA yroJIbHbiM

CeKTOpOM H 6io.gxceTHIIMH CpegCTBaMH, BLieiAeMbIMH Ha rio1aepxKy ero peCTpyKTypH3aUHH, a HMeHHO:

JlHKBH,aJlHS OAO <<Pocyronb>, paciHpeHHe IOJIHOMO'qH H OTBeTCTBeHHOCTH MHHTorrgHepro, co3IZaHHe

RByX r'OCYapCTBeHHIX yqpexgeHHil, BHeCeHHe H3MeHeHHH B flojloxeHHe 0 4HHaHCHpOBaHHH MepOnpHATHrU

11o peCTPYKTYPH3auHH yrOMJbHOH iIpOMUiiimeHHOCTH H HHCTPYK1HIO MHH4iHHa no jIHTeBbIM CveTaM, a TaKxKeApyrHe H3MeHeHHU, B COBOKYnlHOCTH 03HaqaloT, 'ITO HOBaA CHCTeMa ynpaBneHUa CpeRCTBaMH

rOCy,apCTBeHHOIH nOAgepzKxH CMOxieT HaqaTTb 3B4eKTHBHO 4IyHKuHOHHpOBaTb, HaqHHaHa C 1 aHBapa 1998roAa.

34XFeKTHBHOCTb H npO3paMHOCTb pa6OTbl HOBOH CHCTeMbi 6yaeT npoBepeHa c IIoMouJbio

CIeuHaBjTbHOrO ayXHTa, KOTOpUiH 6ygeT ripoBeaeH 110 HToraM pa6oTEJ 3a nepBLie TPH H iueCTb MecAiieB 1998roga. Bbi6opOpHtrnM ay,HTOM 6yAyT OXBaqeHbi noJlywaTeinH CpeCTB rocyqapCTBeHHO rXioepUKH B OCHOBHblX

Attachment 3Page 10 of 30

yrJiexo6LIBaloulHX perHoHax. rlocie 3TOI'O IpaBHTeJibCTBO oLeHHT pa6oTy CHCTeMbl B CBeTe pe3yJIbTaTOB

ayAHTa H BHeCeT B Hee H3MeHeHHm, Heo6xoAHMbie Si JIHKBHIa4HH BbLSBneHH]bIX HegOCTaTKOB.

III. 06ieM H CTpyKTypa roCynapCTBeHHOii noalepxKH

06UnHr o61eM rocyAapcTBeHHoH noAICepXKH yroJTbHOH oTpacJIH B 1997 rogy coKpaTHACSA (B

peanlbHOM HCqHcineHHH) no CpaBHeHHIO C 1996 r. c 0,5% Ao 0,2% BBH. RoASi <<XOpOmHX>> HanpaBJeHHH

HCHOJIb3OBaHHA 3THX CpeACTB (AmHKBHgaiHsA y6EITOIqHl6X I1aXT H pa3pe3OB H COluHabiEHaS 3aIIHTa maxTepOB)

BO3poc31a B 1997 roxy riomTH Ao OXHOU TpeTH.

cDaKTHtqeCK4ii o 6&eM Cpe;CTB, H3pacXOAOBaHHEIX Ha "XOpOMHe" H "ruioxHe" HaHtpaBneHH5

rocrioIaepXKH 3a HepBbie geBSATb MecsAieB 1997 roga COCTaBHi, COOTBeTCTBeHHO, 1368 Mj1pI. py6nieul H 3643Minpx. py6Aeii. B qeTBepTOM KBapTaie 1997 roqa rIpaBHTenbicTBo nriaHHpyeT H3pacxoAOBaTb no 3THM 9BYM

HaripaBieHHAM eiue 657 Mnpg. py6neii H 811 Mnpz. py6nIeHi, CooTBeTCTBeHHo. TaKHM o6pa3OM, oKHgaeTcs,

'TO K KOHUY 1997 r. o6I1HH o60beM BLlenieHHbIX cpegcTB COcTaBHT, cooTBeTcTBeHHo, 2C25 impA. py6neii H

4454 Mnpa. py6neul. CooTBeTCTByIOiiaSq aonS "XOpOIUHX" HapawBJieHHi COCTaBHT 31%.

cDaKTHlecKoe CHHxCeHHe o6beMa <<nLnOXHX>> AOTa1Hu (B peanWEHOM HcqHCJIeHHH) 3a 9 MecsAieB 1997

rola no CpaBHeHHIO C TeM Ke HepHOIOM 1996 roga COCTaBHAo 6o0iee 50%, no cpaBHeHHIO C n1aHOBbIM

noKa3aTeJieM 40%.

rIpaBHTeAbCTBO orpegeIHnuo cneAymoue cpe.HecpollHbie KOHTPOJIbHU6e noKa3aTeJIH nHO3TaIHOH

OTMeHMl yrOjIHbIX Cy6CHAHH:

(a) AO KOHua 1999 roAa cpeacTBa rocyXapcTBeHHOii nioXgepKxH 6yAyr HaripaBSTbC3S Ha

'qaCTHqHOe B03MeiueHHe CBI3aHHBIX C gO6bi'eH yrns y6LITKOB yrjieAo6blBaioi1Hx opraHH3aLIHfi H HX paCXOAEJ

nO HHAeKCaixHH 3apa6oTHoH rTiaTbI B COOTBeTCTBHH C OTpaCaJeBbIMH TapH4pHbIMH corIamIeHHsIMH, C

o6ecnerTeHeM paBHOMepHOro CHHxKeHHA o0beMOB BbLieJieHHS Cpe14CTB;

(6) nocne 2002 roaa 6yqeT nOJIHOCThIO npeKparueHO BbLienIeHHe H3 cfeAeparIbHoro 6iosAKeTa

CpeACTB Ha noUAepxxy yrOjiHHOH npOMbuIUeHHOCTH.

(DOpMHpOBaHHe ofteMa rocyaapcTBeHHOH noIJaepxKH Ha 1998 H nocnieaywIouHe rogmi 6yzeT TecHo

YBA3aHo c peaH3aLaHeH rlporpaMMbI 3aKpbETHA mIaXT H Heo6XoAHMOCTblo BbilJaTbl KoMieHcaflHH H

noraiueHHA 3aaOAXCeHHOCTH no 3apa6OTHOH nnarTe IlaxTepaM, BELCBo6oK,aaeMblM KaK C JIHKBHPHpyeMbMX, TaK

H C AeHCTByIOnHX inaXT. rlpaBHTeJIiCTBO HOHHMaeT, WTO IaS BbIIIOJIHeHHS roAo6HbIX coiHaniHbix

o6313aTejmc'TB, B03MO)HO, noTpe6yeTcS COKpaieHHe HeipHOPHTeTHbMX HarpaBjieHHH qpHHaHcHpOBaHHS.

B CBS3H C 3THM, nOnJHTHKa rIpaBHTeJhbcTBa 6yAeT HaripaBnieHa Ha o6ecne'eHHe aAeKBaTHoro

4HHaHCHPOBaHHS rpHOPHTeTHblIX HaBipaBJIeHHH H COKpaiiIeHHe o6iuero 06'beMa qIHHaHCHpOBaHHS no

HeIPHOPHTeTHLIM HarpaBJeHHIM.

rIpH pa3pa6oTKe DPeAepanbHoro 6ioAxeTa Ha 1998 ro, H 4OPMHPOBaHHH niaHa-rpa43HKa

43HHaHCHpOBaHHS MepOnpHSTHH no pecTpyKTypH3aULHH yrOJTbHOi npoMEiurieHHOCTH 3a CqeT CpeaCTB

rocnoXaepXKH Ha 1998 rog 6yAeT yqTeHO, xITO:

Aftachment 3Page 11 of 30

1) He MeHee 3450 Mnipa. py6. HIH 60% cpeAcTB rocyaapcTBeHHor4 rio=epXKH 6yIreT HanpanB]eHO Ha

ITPHOPHTeTHIe HanpasneHHa rOCygapCTBeHHOH nOUepxKH;

2) He 6onee 2250 minpa. py6. 6y,eT nepeqHcjieHo Ha OCTajibHbie HaipaBjeHHA rocyapCTBeHHOH

noHAep)KKH, tTO COOTBeTCTByeT CHHxKeHHio 6oiee teM Ha 50% no CpaBHeHH1O C 1997 roIrOM (B peajibHOM

HCqHCAeHHH).

BMInOJIHeHHe ImaHOBbIX noKa3aTeJIeH HHaHCHpOBaHHS yKa3aHHbIX BbEle HpHOpHTeTHbMX

HanpaBneHHHi rocyapCTBeHHOHi iioXgepx)KH 6yqeT o6ecCieqHBaTbCA He TOJIbKO B [enjOM 3a roJg, HO TaK)Ke H

Ha KOHeI KaxKAoro KBapTaiia 1998 ro)a. KoHTpoJI BblnOJIHeHHA yKa3aHHbIX Tpe6OBaHHH 6yxeT

HpOH3BOAHTCA Ha OCHOBe O42HTXHajTbHOr1 OTTeTHOCTH FOCyIapCTBeHHOrO KOMHTeTa POCCHIHCKOH cDezepaiXHH

nio cTaTHCTHKe (FocKoMcTaT).

IV. JIHKBHiauHSA y6bITOqHbIX H HenepcneKTHBHbIX iiJaxT H pa3Pe3oB

rIpaBHTeJIbCTBy H3BeCTHO 0 TOM, 'ITO CyU4eCTBYeT 3HaqHTeJTlHOe qHCJIO mlaXT, IBA IO1WHXCS OCO6O

y6blTO'qH]MH HuH HerepcneKTHBHMlMH. B cHJIY Toror HpaBHTeJIECTBOM yrBepxaeHa nnaHoBaq nporpamma

JIHKBHAa4HH TJaxT C COOTBeTCTBYIOU1HM OCYIeCTBneHHem mep CouHajibHOH 3aliHTbM.

TeKVLUas CHTYalIHSI

K HaCTOSiueMy BpeMeHH onpegeneHb6 138 oco6o y6blTO'HblX H HeriepCneKTHBHbIX OpraHH3aiiHH

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npoilecc JiHKBH;IaUHH Ha 6ojiblJIHHCTBe maxT He 3aBepiiieH.

Ha 1 HIOJA 1997 r. 'Hcj1eHHOCTb 3aHATBIX B yKa3aHHbIX 138 oprlaHH3alHSIX COCTaBHjna 40 TbIC3iq

lejiOBeK. OxKHaeTcsi, TO K HaIajly 1998 roga 3Ta 'HcjieHHOCTb COCTaBHT 31000 'euIoBeK H B TeqeHHe

1998 roma COKpaTHTC3 Ha 23000 'ejiOBeK.

B 1997 roXRy 3aTpaTbI Ha TeXHHqeCKHe pa6oTmi no IHKBHIaTiHH IluaxT COCTaBaT 471 miip,. py6inefi;KpOMe TOrO, A,Un BbIr1JaTbI BbIXOAHbIX IIoCo6HH pa6OTHHKaM JIHKBHAHpyemMbiX u1aXT H pa3pe3OB, BKJHOioSaonraTy JIbrOT H KoMneHcaIHHi, ipe,IyCMOTpeHHbMX pOCCHHICKHM 3aKOHogaTejibCTBOM, 6yAeT H3pacXoAOBaHO

230 Mjlpg. py6nerl.

nporpaMMa Ha 1998 roa

IlporpaMMoiH IHKBH,aI4HH oco6o y6bITOqHbIX H HenepcneKTHBHbIX luaXT H pa3pe3OB Ha 1998 roanIpe,YCMaTPHBaeTCA AOCTHxeHHe CYWeCTBeHHOro nporpecca B HarfpaB3IeHHH JIHKBHuaiIHH IIlaXT, B TOM 'lHCJie

ocyiwecTiieHHe MepOnpHsTHH no COLHaBJbHOH 3a11HTe BEICBo6oxIaeMbix pa6OTHHKOB. B qaCTHOCTH, K HIOHIO

1998 rozRa 6yuyr 3aKpbITbI 60 HlaxT; K KOHIy ceHTsI6ps 1998 ro.a eLwe 8 IuaxT; K KOHLY XeKa6ps 1998 roma- eiwe 18 iuaxT. TaKHM o6pa3OM, K KOHIIY 1998 roAa 6yRyT 3aKpbiTli 86 maxT.

lUaxTa CqHTaeTCS 3aKpbLITOrH IpH BbI1OJIHeHHH ciie.yioWHx yCJIOBHH:

* 3aBepUleHbI TeXHH'eCKHe pa6oTbl Ho JIHKBHIaaHH noA3eMHbIX BEipa6OToK;

Attachment 3Page 12 of 30

* 'qHCJO pa6OTHHKOB Ha maxTe cocTasBJaeT meHee 20 qenoBeK;

* coilHaWibHLIe O6S3aTeJTcTBa niepeaabi ipaBorpeemHHKaM B COOTBeTCTBHH C pOCCHHCKHM

3aKOHOAaTenbCTBOM.

B 1998 roay 6ioaxeTHoe 4pHHaHCHpOBaHHe npOrpaMMbI JIHKBH,aaHH HeriepCneKTHBHbIX H oco6o

y6bITO'qHbx maXT H pa3pe3OB COCTaBHT 1993 Mipa. py6neA, B TOM qHcne: Ha TCXHHqeCKHe pa6oTbI 968Mapa. py6nei; Ha Bbli3aTy BEIXO,4HLX HOCo6Hi 160 mipa. py6irIeH; Ha norameHHe 3aAoJUKeHHOCTH no

3apa6OTHOH nnaTe BBicBo65oauaeMJbM -pa6oTHHKam, BKAIOMaA OT'qHCJIeHHSI BO BHe6lOa)KeTHble 4OHAU B

pa3mepe 40% H KOMneHca1JHO 3a HeHCH0JIb3oBaHHbIH OTHlyCK, 280 Mnpa.py6nei; pacxoaEi no BO3MelIeHHIO

pa6oTHHKaM Bpeaa, lIpHMHHeHHOrO TPYAOBbLIM yBeEbeM, rpO4JeCCHOHaJibHbIM 3a6oJIeBaHHeM HnH HHblM

noBpeXAeHHeM 3lOPOBbA rIPH BbIIIOJIHeHHH HMH TpyAOBEIX o6A3aHHoCTeH, 305 mnpa. py6neii; pacxoabi no

o6ecnelzeHHIO HaHKoBLiM yrIieM Ha 6bIToBBIe HY)ALI rieHCHOHepOB 280 muipA. py6neA.

rIpH riporpamMMLi nHKBHAa4IHH y6bTOMHbMX 1uaXT H pa3pe3OB B 1998 roay IIPHOPHTeT

6yAyT HMeTb MepOnpHSTHf nO 3aBepiueHHHo nHKBHRaaHOHHlIX pa6oT Ha rOBepXHOCTH, BKnioHaA pa6oTm no

peKYJThTHBaIHH HapyllleHHblX 3eMenbh H oxpaHe OKpyxKaIOLueH CpeabL. Ha Tpex yrrieao6blBaiouIHx

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PeaJxH3awHA TiporpaMMIb AHKBHJIaIHH 6yAeT KOOp;tHHHpOBaTbcA MHHTOIIsHeprO HpH COAeHCTBHH ,RByX

YHOMSHYTBIX paHee rOCyfRapCTBeHHLIX y'pexKJLeHHiI.

B aeKa6pe 1997 roaa HIpaBHTenicTBo yTBepAHT HOByIO peanHIo "OCHOBHbIX IIPHHfHriOB

JIHKBHAa4HH LaXT H pa3pe3OB yro A bHOiO npOMuLLmeHHOCTH POCCHH", B 4teBpane 1998 roaa - iepecMOTpHT H

YTsBeP,HT THIOBoe T30 rio JIHKBHJIaUHH ImIaXT H pa3pe3OB yrOJTbHOfl ipOMbIULTeHHOCTH.

Mepbi 6o0ee nourocpo'iHor xapaxTepa

B nepBoM roJIyroaHH 1998 roaa 6yaeT C4IOpMHpOBaHa nporpamma J1HKBHAaUHH y6bITOqHblx ItaXT H

pa3pe3OB Ha 1998-2000 roabl, c HOKBapTaEbHoH pa36HBKOA Ha 1998 roa. 3ToHi nporpaMMoH, qaCTHOCTH,

npeaycMaTpHBaeTcA co3AaHHe 6a3i AaHHEIX 110 JIHKBH,HHpyeMLM IllaXTaM, BKIIOqalolEEeH HH4JopMaEio o

pa6oTHHKax 3THX fllaXT. ByaeT ocyI1ecTBfeH nepecmoTp T90 JIHKBHga&HH maxT H pa3pe3OB, HaxoZISUHxcS

Ha HaMaJTbHOM aTane BbIlOJIHeHHA JIHKBH,aIHOHHbIX pa6OT, c IeJb1o 1pHBe,eHHA HX B COOTBeTCTBHe C HOBOH

pe,aKaIHeii "OCHOBHblIX HpUHHEH1OB JIHKBH,IaUHH IuaXT H pa3pe3OB yrOJlbHOH 1ipOMEiu1eHHOCT4 POCCHH'.

V. COHuHaHEnIe Meph!

fpaBHTeJbcTBO yaenAeT 6onbmoe BHHMaHHe nporpammam cMAr1eHHA coijH4anbHbLx HocJIeaCTBKH B

xoae peCTpyKT"H3auHH yroJIbHOA nipoMLienHHOCTH H ocy1IeCTBHT KOMnneKC mep nO COuHaJIEHO$i 3aiwHTe

BLICBO6oOaaeMbIx pa6oTHHKoB, COaerCTBHIO 3aHITOCTH H pa3BHTH1O COLHaJ1bHOH c4JepbI B i1aXTepCKHX

rmpoaax H TIOCeJIKaX.

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BEICBo6oXxAaeMbiX B CB3I3H c peCTpyKTypH3auHefl yrOJTbHOi HpOMmbUiJieHHOCTH, HHBanHAOB H 1neHCHOHepOB

yrOJIbHOH IIpOMBlIHUeHHOCTH.

Attachment 3Page 13 of 30

rporpecc. focTHrHyThbiH 3a nocnenHee BpeMA

B 1997 roxy TeppHTOpHaW6HbIe opraHbi CJ1YX6bl 3aHSITOCTH HPOBOAIT npegyBOJbHHTenbHbie

KOHCyJIbTaHIfH B 5 OCHOBHbiX yrnexo6iBaiouHx pernoHax POCCHH Ha DUaXTaX, o6LiSBJIeHHMIX K nHKBHgauHH.3a nepsue geBITb MecSileB 1997 roia Ha ileH coinanbHOi 3awHTLI pa6OTHHKOB, BbICBo6xocJeHHbIx B CBS13H

c pecTpyKTypH3aiHeA yroJTbHOH rIpoMbiuuTeHHOCTH, 6usIo HanpawieHo 1044 Mipi. py6.

Pe3ynbTaTmr MOHHTOpHHra COLxHaJbHHIX IOCJIeXCTBHH, IPOBseXeHHorO B 1996 H 1997 rogax rioKa3aiH,qTO COwIHaJbHaH HanIAxeHHOCTh Ha ripexnpaaTHAx yrOnIbHOH iipoMMUUIeHHOCTH o6ycnoBneHa 3aepxxKaMH

no BblruaTe 3apa6OTHOii riiaTbl H MaCCOBbIMH YBOJTH6HHS1MH C XIeHCTByIOILHX rlpejUipHATHi yrOJuhHOHupoMiLnimeHHOcTH. B CB513H C 3THM, B 1997 rogy flpaBiTenbcTBo npeDHpHHSJo AOHOAHHTeJIbHLIe MepbI B

o6nacTn COflHaBAbHO 3aIlHTLT - qoTaIHH CTaJJH HaiipasBJU1TLCS Ha 4JHaHCHpOBBHHe 3aAjOxCeHHOCTH no

3apa6oTHofl nnaTe yBOJThHmeMbiM pa6OTHHKaM aerCTBylOTIHX H IiHKBHJHpyeMbIX TiiaXT H pa3pe3OB, IipaKTHKaCpHHaHCHpOBaHHAI BbhIruaTbl BLTXOAHHOrO noco6Ha 3a cqeT CpegCTB rOCygapCTBeHHOii rIoXAlepXKH yrOJTbHOH

ripoMbIiumeHHOCTH 6bLma pacrpocTpaHeHa Ha aeiiCTByioDIHe iuaXT6 H pa3pe3bl. Ha WeHCTByIOTUHX maxTax H

pa3pe3aX, HaXOASIUHXCA B npotecce peCTpyKTypH3aJKHH, nepea MaCCOBbIMH YBOAbHeHHAMH TaKxKe HaqaIH

UPOBOAHTbCM HpeAYBOJTbHHTeJIEHBIe KOHCyJThTaIIHH.

B npouecc peCTPYKTypH3ai1HH BoBJIeqeHbi6 aAMHHHcTpaUHHu maxTepcKHX ropogoB, 11po04C0103bl,

MeCTHbIe Ha6JUoaaTeJIhHLIe COBeTbI. MexaHH3M JOBefeHHs cpeUCTB cTaW 6o0ee npo3paqHblM. KHacpoCTpaHeHHIO HHpopMalHH o npaBax pa6oTHuKOB fpH yBOJThHHeHHH 6bum rpHBJeqeHTJ rpOc0103BI.

Kaic noKa3aA MOHHTOpHHr COijHBaLHbIX nocnegCTBi4l, paciuHpeHHe HH4)OpMauHOHHOH pa6oTbi, yCHAeHHe

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cHTyaUHIO c BbiIIaTOH Bcex BHAOB KOMmieHcaLIHH H coKpaTHTb 3aAoJDKeHHOCTh Ho BIiHJIaTe BLTXOXIHI6X

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Attachment 3Page 14 of 30

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Attachment 3Page 15 of 30

Uemb rIpaBHTejibcTBa Ha 1998 ro, COCTOHT B TOM, qTO6bI Ha KOHelu roaa He MeHee 45%o61iepOCCHHCKoro o6beMa R06blqH IpOH3BOLHROCb YFOJbHbIMH KOMIIaHHAMH, aKIXHH KOTOPbIX He Haxo)RsTcS

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Attachment 3Page 16 of 30

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Attachment 3Page 17 of 30

Government of the Russian FederationMoscow

November28, 1997No. 4573p-P2

Mr. James WolfensonPresident, International Bank for Reconstruction and DevelopmentWashington, D.C.USA

Dear Mr. Wolfenson,

In keeping with our agreement I am sending you the Government of the Russian Federation's Letter ofDevelopment Policy in the coal sector in 1997-1998, signed by V.S. Chernomyrdin.

Allow me once again to express my deepest gratitude for your support of the Government's efforts inreforming the Russian economy. Your decision to increase the amount of the second loan to financestructural adjustment in the coal sector is testimony to your profound understanding of the realities ofRussian life. It is a significant contribution to the realization of measures in the coal industry that havebeen planned and agreed upon with the Bank.

With best wishes,

A. Chubais

First Deputy Chairman

Government of the Russian Federation

Attachment 3Page 18 of 30

RUSSIAN FEDERATION

LETTER ON COAL SECTOR POLICY

The Government of the Russian Federation has implemented the first phase of structural reformsin the coal sector. The process of corporatization of the sector has been essentially completed; cashprivatization has started; and the influence of the state in the management of coal companies has beenreduced. These policies have resulted in the improved economic performance of the sector, against thebackdrop of a strengthened social safety net available to the redundant workers and for the miningcommunities affected by the coal sector restructuring process.

Since 1994, 95 heavily loss-making mines have ceased production. The share of opencastmining, the most efficient method of coal production, has increased from 45 to 59%. The process ofdivestiture of social assets from coal-producing enterprises to local authorities is nearing completion.Total employment in the coal sector has decreased by one-third. Since 1993, labor productivity hasgrown by 12% while the occupational injury rate has fallen by 51%.

State support funds are now being allocated in a transparent manner, and the Government hasstrengthened control over the process. A system of state statistical reporting has been put in place toreflect the use of state support funds.

A comprehensive social safety net to provide protection for redundant workers and the creationof employment opportunities in mining communities is one of the major principles of structural reformin the coal sector. The restructuring is being implemented with the participation of stakeholders throughthe work of the Local Oversight Committees in mining communities, the regional Inter-AgencyCommissions at the oblast level, and the Inter-Agency Commission for Social and Economic Problemsof Coal Producing Regions at the federal level.

Workers made redundant at deep and surface mines have access to pre-redundancy counselingprovided by the employment service; at the mines slated for liquidation, special offices are set up toprovide legal assistance to the employees. The state participates in the financing of and takes specialmeasures to ensure control over the payment of severance benefits to workers made redundant in thecourse of coal sector restructuring, health damage compensation to workers of liquidated deep andsurface mines, and the provision of free coal to pensioners of operating deep and surface mines and thosein the process of liquidation.

Redundant workers in mining communities are benefiting from the employment supportprograms, particularly in having access to career guidance consulting services and professional retrainingopportunities. In addition, the mining communities are seeing the effects of the programs to create aninfrastructure to support employment and small-scale business activities. In the three largest coalproducing regions of Russia, i. e. Kemerovo Oblast, Tula Oblast and Rostov Oblast, centers have beencreated to provide training in the fundamentals of business, and to assist in the development of businessplans and the setting up of private businesses. New production facilities and new jobs, particularly in theconstruction industry and housing and utilities sector, are emerging as a result of these activities.

Attachment 3Page 19 of 30

I. Objectives and Strategy of the State Policy of Coal Sector RestructuringThe Government policy of coal sector restructuring, which has been supported with assistance

from a number of international organizations including the International Bank for Reconstruction andDevelopment (IBRD), is being pursued consistently, despite the difficult social and economic conditionsin the country.

The Government has started the implementation of a comprehensive reform program to deepenand accelerate the processes of sector demonopolization, and strengthen the governance structure.

The objectives of the program are as follows:

(a) completion of demonopolization, acceleration of privatization and the creation of acompetitive environment in the sector in order to enable regional coal companies to become profitableand to operate in the conditions of complete commercial independence;

(b) clear separation of state management functions and commercial activities in the coal sector inorder to eliminate conflicts of interests, achieve greater transparency in the use of budgetary resources,and enhance responsibility for their use;

(c) strengthening of state management in the areas of planning, allocation and utilization of statesupport funds during the transition period pending the cessation of state support, with a particularemphasis on social protection of the population in mining communities affected by coal sectorrestructuring;

(d) decreasing of the burden on the federal budget connected with subsidizing of loss-makingcoal enterprises.

II. Improvement of the Management of the Coal Industry and Mechanism of State SupportExperience of state financing over the period of 1996-1997 has highlighted the need to modify

the existing mechanism of state support.

The federal bodies of executive power, primarily the Ministry of Fuel and Energy of the RussianFederation, have not had sufficient resources to manage the industry effectively. As a result, Rosugolwas in fact assuming the responsibilities of the Ministry of Fuel and Energy as the body of statemanagement, creating a conflict of interest determined by the commercial status of that company.

A Government-initiated audit of the use of state support funds allocated to the coal industry hasrevealed numerous instances of misappropriation and identified weaknesses in the mechanism ofmanagement of such funds.

All this made it necessary to further develop and deepen reforms in the coal industry with a viewof strengthening the role of the state in the management of budgetary resources made available to theindustry, while at the same time accelerating privatization of regional coal companies.

Attachment 3Page 20 of 30

Liquidation of Rosugol

A pivotal point in this process was marked by decisions made by the President and Governmentof the Russian Federation at the end of November 1997, which stipulated that functions of statemanagement of the coal industry be concentrated at the Ministry of Fuel and Energy of the RussianFederation, and Rosugol be liquidated.

On November 26, 1997, acting in accordance with these decisions, representatives of the state inthe managing bodies of Rosugol held a general meeting of share-holders, which voted for the liquidationof Rosugol, and adopted the composition of the Liquidation Commission and the Schedule ofLiquidation Actions.

The general meeting also made decisions on the proposed ways to dispose of the property ofRosugol. During the liquidation process, real estate and information and computer systems owned orleased by Rosugol will be transferred promptly to and used by the Ministry of Fuel and Energy of theRussian Federation and Foundation Reformugol respectively. Other assets of Rosugol remaining aftersettlements with creditors (shares, stocks etc.) will be transferred to the Ministry of State Property of theRussian Federation which will decide on their disposal, the priority being the sale of the assets by theend of May 1998.

The Government intends to complete the liquidation process by the end of August 1998.

Strengthening the Ministry of Fuel and Energy

It is intended to considerably enhance the role of the Ministry of Fuel and Energy in day-to-dayregulation and restructuring of the coal industry; radically change the structure and functions of itsdivisions responsible for the coal industry; strengthen the human resources of the Ministry so that theMinistry will emerge, de facto as well as de jure, as the chief distributor of all state support funds.

In order to strengthen state management of coal industry restructuring, a Deputy Minister of Fueland Energy of the Russian Federation reporting directly to the Minister and responsible for developingand implementing decisions on coal sector restructuring has been appointed.

Two departmnents are being created within the Ministry of Fuel and Energy of Russia: theDepartment of Coal Industry Restructuring and the Department of Coal Industry Regulation.

The two new agencies

Two new agencies are set up under the Ministry of Fuel and Energy. The agencies will becomeoperational starting as of December 1997. The objectives and functions of these agencies have beenclearly delineated.

The following represents main objectives of the agency in charge of liquidation of unprofitablemines:

* assisting coal companies in the preparation and revision of projects and feasibility studies toliquidate underground and surface mines;

* developing a program to liquidate underground and surface mines;

Attachment 3Page 21 of 30

* monitoring the implementation of the program;

* providing information and analytical support to the Ministry of Fuel and Energy of theRussian Federation associated with the management of state support funds allocated tofinance physical work on liquidation;

The following represents main objectives of the social protection agency:

* developing proposals on the implementation and budgetary financing of measures to ensuresocial protection of coal industry workers;

* exercising control over the implementation of obligations by recipients of budgetaryresources allocated for social protection during restructuring;

* appraising draft community development programs; developing recommendations for theMinistry of Fuel and Energy on financing of such programs (including pre-redundancycounseling provided by the Federal Employment Service at the Ministry of Labor and SocialDevelopment of the Russian Federation); and monitoring such programs;

* developing proposals on financing the rehabilitation of social assets and utilities in miningcommunities, as well as monitoring such financing.

For all new appointments, especially for the Deputy Ministers and Chiefs of the new agencies,the possibility of a conflict of interest will be prevented through the requirement that upon theirappointment, and every year thereafter, they submit declarations of income and property in accordancewith the effective legislation.

Foundation Reformugol

Foundation Reformugol, which was set up in 1996 to ensure the implementation of the First CoalSector Adjustment Loan of the IBRD, will assist the Ministry of Fuel and Power and the two newagencies, as well as other bodies of federal executive power in discharging their functions in coalindustry restructuring.

To enable Foundation Reformugol to provide analytic and information support to the Ministry ofFuel and Energy and the two new agencies on issues of coal industry restructuring, the sectoralinformation and computer systems and networks of Rosugol will be transferred to the Foundation.

The Ministries of Finance and State Property

New structural units will be set up within the Ministry of Finance of Russia and the Ministry ofState Property of Russia to enhance those Ministries' capacity to perform functions related to coalindustry reform.

The mechanism of state support

A new mechanism of management of state support funds is being introduced, based on a revisionto Government Resolution 598 and incorporating the following changes:

Attachment 3Page 22 of 30

priority categories of financing of measures to restructure the coal industry for 1998 will be:(a) physical closure of mines; (b) scientific and research support to coal industryrestructuring; (c) measures on social protection of workers made redundant in connectionwith coal industry restructuring, their family members, pensioners and disabled personsformerly employed in the coal industry (severance benefits and other compensationpayments to redundant workers; free coal for workers of liquidated underground and surfacemines; expenditures on liquidation of wage arrears to workers made redundant in connectionwith underground and surface mine closures as well as to workers made redundant fromoperating underground and surface mines in connection with downsizing, old-age anddisability retirement); (d) financing of community development and employment promotionfor mining communities implemented through subjects of the Russian Federation, includingpre-redundancy counseling programs; (e) expenditures on compensation for damagesustained as a result of injury or occupational disease at liquidated underground and surfacemines; (f) a Social Reserve Fund.

* a procedure, based on model calculations, will be introduced to determine the amounts ofstate support for all recipients and categories of financing; in particular, there will be a rule-based procedure governing the distribution of funds for selective support of coal-producingenterprises and partial reimbursement of expenses on wage indexation in accordance withindustry Tariff Agreements;

* the use of primary recipients of state support funds will be discontinued; the Ministry of Fueland Energy will be the primary distributor of funds and new recipients will be designated forindividual categories; for example, starting in 1998, the Social Insurance Fund will bedesignated as the recipient of state support funds for compensation to workers at liquidatedmines for health damage and, at the same time, the Fund will take over the correspondingobligations associated with compensation payments for health damage;

* mechanisms will be introduced to ensure that the Federal Treasury system is used to channelfunds to provide severance benefits and repay wage arrears to redundant workers directly tosuch workers' bank accounts or to local post offices;

* state support funds allocated for investment purposes will be made available only andexclusively on a pay-back basis and subject to interest payments; such funds will beavailable through investment tenders carried out by a Tenders Commission under theMinistry of Economy, while the Ministry of Fuel and Energy and Foundation Reformugolwill provide support in the appraisal of proposed investment projects;

* proportions will be adopted governing the distribution of funds by category of financing forthe next fiscal year in order to regulate the process of financing at the beginning of the yearshould the adoption of the federal budget be delayed;

* the principle of time-bound implementation of the schedule will be introduced so that theproportions of actual disbursements by category of financing calculated every month on anaccrual basis since the beginning of the year are consistent with the proportions adopted forthe year;

Attachment 3Page 23 of 30

* the process of formulation of the budgetary request for state support funds for the plannedyear will start with the communication to the recipients of such funds of target numbersreflecting available fiscal capacities rather than recipients' needs;

* the Centralized Reserve Fund, the resources of which will be received and administered bythe Ministry of Fuel and Energy, may be used solely for the purposes of covering lossesresulting from natural and man-made disasters at coal producing enterprises;

* the Social Reserve Fund, resources of which will also be received and administered by theMinistry of Fuel and Energy, may be used solely for financing severance benefits, therepayment of wage arrears to redundant workers, health damage compensation to workers ofliquidated underground and surface mines, and the provision of free coal to workers ofliquidated underground an surface mines.

Earmarked treasury accounts

An important step towards ensuring that funds are used in a manner that is appropriate is thetransition to the Treasury system of delivery of state support funds to recipients. This system actuallybecame operational as of October 1997. An earmarked account is opened in the name of every recipientof state support at the corresponding branch of the Federal Treasury, so that to enable separateaccounting of cash flows by all categories of financing.

At the end of November 1997 the Ministry of Finance of Russia adopted a new instruction on themaintenance of earmarked accounts at Federal Treasury bodies that reflects the features of the newmechanism for the management of state support funds for the coal sector.

Review of the legislative and regulatory framework

As the next step in improving management of the coal industry, the Government will review theexisting legislative and regulatory framework pertaining to the issues of mineral rights, operational andlabor safety, health and environment, taking particular account of the sector's transition to private sectorownership. Based on the review, the Government will prepare and start implementing a correspondingaction plan. The Government intends to complete this review during the first half of 1998.

Community development programs

As part of the community development programs in mining communities, redundant workershave access to professional training, temporary employment opportunities support for the transition toself-employment, development of the infrastructure for small business activities and entrepreneurship,and the promotion of job creation. Stakeholder participation in community development programs isensured through the activities of Local Oversight Committees in mining communities, Regional Inter-agency Coal Commissions, and the Inter-Agency Commission on Social and Economic Problems of CoalProducing Regions.

Attachment 3Page 24 of 30

Workers made redundant from the coal industry have access to career guidance and professionalretraining. In the three major coal producing regions - the Kemerovo Oblast, Tula Oblast and RostovOblast, centers have been created to provide training in the fundamental principles of entrepreneurship,and assistance in preparing business-plans and setting up of private businesses. New production facilitiesand new jobs, particularly in the construction industry and utilities sector, have already been created inmining communities.

Deficiencies in the mechanism used to deliver funds allocated to finance communitydevelopment programs had resulted in a situation whereby in 1996 in a number of cases resources weremisappropriated. These deficiencies will be addressed by the mechanism (introduced in 1997) thatenables delivery of funds through Federal Treasury channels.

Starting as of 1998, the Regulations on Financing Community Development Programs willbecome effective, incorporating a package of documents governing procedure for the distribution offunds among mining communities, the conclusion of contracts, the setting of objectives for the use offunds and the amounts of financing by category.

In accordance with the new procedure, funding for community development programs will beallocated with account taken of redundancies from underground and surface mines, as well as the localemployment situation. In 1998, community development programs will be implemented in the 50 miningcommunities most affected by coal industry restructuring.

In 1998, funding for that part of the community development programs relating to job creation,will be made available on a competitive basis under co-financing arrangements with other investors.Projects will be selected in accordance with pre-determined criteria, and funds will be released aftercontracted work has been completed.

Community development programs will be implemented in a way that is open and transparent.Information on the transfers of funds to mining communities will be disseminated by publicannouncements in mass media in order to ensure equal access to tenders for all those willing toparticipate.

The content of community development programs will be expanded. Starting in 1998, theseprograms will make available pre-redundancy counseling to individuals made redundant, or under threatof redundancy, from coal production or processing organizations.

Special attention will be paid to the organization of public works aimed at the maintenance andimprovement of the social infrastructure and housing in mining communities. Work will continue tocreate small business and entrepreneurial infrastructure, and to assist in the creation of new jobs.

Stakeholder participation in the formulation and implementation of community developmentprograms will be ensured through the work of Local Oversight Committees. In 1996 there were about 30Local Oversight Committees operating in mining communities, and in 1997 their number increased to50. The Government will continue to support the activities of the Local Oversight Committees in 1998.

Attachment 3Page 25 of 30

Social assets and housing in mining communities

In 1997, the Government planned to provide adequate support to divested social assets andhousing in mining communities. However, financing was not made fully available due to fiscal revenueconstraints. In this connection, the Government issued a special decision to allocate a budgetary loan ofRubles 185 billion out of the federal budget. The loan is allocated on the basis of a Tripartite Agreementbetween the Ministry of Finance, the administration of the subject of the Russian Federation, and theadministration of a mining community.

In 1998, the Government will provide financing for projects to modernize social assets in miningcommunities of at least Rubles 400 billion.

Funding to support the modernization of social assets will be made available on a competitivebasis in the form of budgetary loans using voluntary Tripartite Agreements between the Ministry ofFinance, administrations of subjects of the Russian Federation, and local administrations . If budgetaryloans are used efficiently, they will be repaid out of the federal budget.

Further actions

Radical actions taken by the Government to reform coal sector governance and management ofbudget support to sector restructuring, namely - RosUgol liquidation, extension of the terms of referenceand responsibility of the Ministry of Fuel and Energy of Russia, establishment of two state agencies,amendment of the Regulations on Financing Coal Sector Restructuring and MOF Instruction onearmarked accounts, as well as other changes - taken together mean that the new state supportmanagement system will be able to begin its efficient operation as of January 1, 1998.

Efficiency and transparency of the operation of the new system will be verified through aspecial audit to be conducted for the first three and six months 1998. The selective audit will cover statesupport recipients in major coal-producing regions. Then, the Government will evaluate the operation ofthe system, taking into account the results of the audit, and make necessary changes to eliminatedeficiencies thus identified.

m. Amount and Structure of State Support

The total amount of state support to the coal sector in 1997 decreased (in real terms) relative to1996 from 0.5% to 0.2% GDP. At the same time, the share of "good" subsidies (closure of loss-generating mines and social protection of workers) increased nearly to one-third in 1997.

The actual amount of funds disbursed for "good" and "bad" subsidies over the first nine months1997 was RR 1,368 billion and RR 3,643 billion, respectively. In the fourth quarter 1997, theGovernment intends to further disburse RR 657 billion and RR 811 billion , respectively. Therefore, bythe end of 1997 the total amount of funds allocated is expected to be RR 2,025 billion and RR 4,454billion , respectively. The corresponding share of "good" subsidies will be 31%.

The actual reduction in "bad" subsidies (in real terms) during the first 9 months 1997 relative tothe same period in 1996 exceeded 50% against the planned target of 40%.

The Government has adopted the following mid-term targets for phasing out coal subsidies:

Attachment 3Page 26 of 30

(a) till the end of 1999, state support funds will be allocated to partially compensate coalcompanies for the losses related to coal production and for wage indexing under the Tariff Agreements,while ensuring an uniform reduction of the allocations;

(b) after 2002, allocation of coal sector support funds from the federal budget will be completelydiscontinued.

Budgeting of state support for 1998 and subsequent years will be closely linked with theimplementation of the Mine Closure Program and the requirement to pay compensation and settle wagearrears to coal employees made redundant both at closing and operating mines. The Government realizesthat fulfillment of the above social obligations will probably require reduction of non-priority subsidycategories.

Therefore, the Government's policy will be aimed at an adequate funding of priority subsidiesand reduction of the total amount of non-priority subsidies.

The preparation of the Federal Budget for 1998 and development of the Schedule for financingcoal sector restructuring activities from state support funds in 1998 will be based on the following:

1) at least, RR 3,450 billion or 60 % of state support will be allocated for the priority subsidies;

2) up to RR 2,250 billion will be allocated for other, non-priority categories, representing adecrease of more than 50 % (in real terms) compared to 1997.

Compliance with financing targets for priority subsidies specified above will be ensured not onlyover the year as a whole, but also as of the end of each quarter 1998. Compliance with the aboverequirements will be monitored on the basis of official reporting of the State Committee for Statistics ofthe Russian Federation (Goskomstat).

IV. Closure of Loss-Making Underground and Open-Cast Mines

The Government recognizes that there is a significant number of heavily loss-making or non-viable mines. It has therefore adopted a planned program of mine closures, together with associatedsocial protection measures.

Current situation

By now, 138 heavily loss-making and non-viable mines have been identified for closure, and, ofthese, 95 mines have ceased production. Of these mines, physical closure has been completed at 71mines. However, the closure process has not been completed at the majority of mines.

As of July 1, 1997, employment at the above 138 mines was 40,000. It is expected that by early1998 employment at these mines will be 31,000 and will decrease by 23,000 during 1998.

In 1997, the costs of the physical mine closure work will be RR 471 billion; besides, RR 230billion will be disbursed to pay severance benefits to redundant employees at mines under closure,including the payment of benefits and compensations required by Russian laws.

Attachment 3Page 27 of 30

The program for 1998

The Mine Closure Program for 1998 provides for a substantial progress in the mine closureprocess, including the implementation of social protection measures for redundant employees. Inparticular, 60 mines will be closed by June 1998, another 8 mines will be closed by late September, and18 mines will be further closed by the end of December 1998. In total, 86 mines will be closed by theend of 1998.

A mine is considered closed when the following conditions are met:

* the underground work phase of the closure plan has been completed;

* the number of employees at the mine is less than 20;

* social commitments have been devolved to the legal successors as consistent with Russianlaws.

In 1998, budget finance of the Mine Closure Program will be RR 1,993 billion, including: RR968 billion for physical closure work; RR 160 billion for severance benefit payments; RR 280 billion forthe settlement of wage arrears to redundant workers, including allocations to extra-budgetary funds in theamount of 40% and compensations for unused vacation; RR 305 billion for disability compensationpayments relating to occupational injuries, occupational diseases or other occupational health damage;and RE 280 billion for free coal benefits for pensioners.

Priority measures under the 1998 Mine Closure Program will include completion of the surfacework phase of the closure plan, including the restoration of disturbed land and environmental protectionactivities. When physical work is completed, three mines will be subject to an enviromental audit.

T he implementation of the Mine Closure Program will be coordinated by the Ministry of Fueland Energy with the assistance of the two new state agencies referred to earlier.

In December 1997 the Government will approve the new version of the Mine ClosureGuidelines, and in February 1998 it will revise and approve a Standard Mine Closure Feasibility Study.

Longer term measures

In the first half 1998 a long-term Mine Closure Program for 1998-2000 will be developed, witha quarterly breakdown for 1998. The Program stipulates, inter alia, the development of a database onmines under closure, including information on the workforce. The Mine Closure Feasibility Study will berevised for underground and open-cast mines which are at the initial closure stage in order to bring theprocess into compliance with the new version of the Mine Closure Guidelines.

V. Social Measures

The Government places great importance on social impact mitigation programs in the course ofcoal sector restructuring and will implement a package of measures to provide social protection forredundant employees, promote employment and develop the social sphere in coal communities.

Attachment 3Page 28 of 30

The Government undertakes to ensure social protection of employees made redundant as a resultof coal sector restructuring, as well as those incapacitated in the coal sector and retired coal sectorworkers.

Recent progress

In 1997, regional employment service bodies provided pre-redundancy counseling in 5 majorcoal-producing regions in Russia at mines announced for closure. During the first nine months of 1997,RR 1,044 billion were allocated for social protection of workers made redundant as a result of coal sectorrestructuring.

Social impact monitoring conducted in 1996 and 1997 indicated that social tension at coal sectorenterprises was related to delays in wage payment and large-scale downsizing of operating mines.Therefore, in 1997 the Government took additional social protection measures: it initiated disbursementof subsidies for the settlement of wage arrears to redundant workers at operating mines and those to beclosed; the practice of severance benefit payment from state support to the coal sector has been extendedto operating underground and open-cast mines. Operating mines undergoing restructuring have alsostarted providing pre-redundancy consultations prior to large-scale downsizing.

The restructuring process involves coal community administrations, trade unions and LocalOversight Committees. The fund delivery mechanism has become more transparent. Trade unions havebeen involved in disseminating information on the rights of employees made redundant. Social impactmonitoring indicated that an enhanced information campaign and more stringent governmental controlover the use of budgetary funds allowed to improve the payment of all types of compensations andreduce severance benefit payment arrears.

In 1997, some cases of unreasonable re-allocation of funds by coal company managers wereidentified. For example, resources designed for social protection of redundant workers were spent on"the summer rehabilitation campaign", while wage arrears were growing and severance benefits werenot paid to redundant employees.

Future developments

In 1998, the Government intends to play a more active role in the coal sector restructuringprogram as far as social protection of redundant workers is concerned. To this end, the following stepshave been taken:

* The Ministry of Fuel and Energy of Russia and a state agency under the MOFE speciallyestablished for the purpose have been appointed coordinators of activities to address socialproblems caused by coal sector restructuring.

* An exhaustive list of social protection subsidies has been approved, which precludes the useof state support to the coal sector for other purposes.

* The Government has introduced a mechanism that would allow, starting from January 1998,the transfer of state support funds allocated for severance benefit payments, settlement ofwage arrears and disability compensation payments to the individual bank accounts ofrecipients.

Attachment 3Page 29 of 30

* Expenditures on social protection of employees and employment promotion in coalcommunities have been recognized as priority expenditure categories and will be financed ona priority basis.

* The issue of a legal successor has been settled with respect commitments of mines underclosure to pay disability compensations to employees. Starting from January 1998, the SocialInsurance Fund will assume responsibility for disability compensation payment to workersof underground and open-cast mines to be closed. Following a Government decision, aspecial department has been established at the Social Insurance Fund to coordinate coalsector disability compensation payments. Work has been conducted to collect information onthose injured at mines under closure. In December 1997, a training workshop will be held forrepresentatives of the local bodies of the Social Insurance Fund.

The Government will take measures to provide free coal benefits to employees and retiredworkers of mines to be closed, as well as to socially vulnerable community members after mine closure.Work has been organized to prepare a free coal benefit provision program, including a revision of theRussian legislation, i.e. the specification of free coal benefit norms; the specification of categorieseligible for free coal benefits to be financed from local budgets; and the establishment of a linkagebetween personal income and eligibility for free coal. The program will include actions to ensure theconversion, as expedient, to other environmentally safe and energy efficient fuels.

Regional employment service bodies will provide pre-redundancy consultations under thecommunity development program, in order to link pre-redundancy counseling to other employmentpromotion activities, as well as to extend the topics of the consultations.

The Government intends to evaluate the efficiency of the social protection program and providefor a timely concentration of efforts on the solution of urgent social problems. To this end, social impactmonitoring will be continued with the assistance of the Expert Council. In 1998, social impactmonitoring will be conducted in 6 major coal-producing regions in Russia.

The Government also intends to take measures to enhance the involvement of stakeholders incoal sector restructuring. Further support will be given to trade unions in rendering legal assistance tocoal sector workers.

VI. Demonopolization and Privatization

The Government believes that coal sector restructuring has reached the point at which furtherprogress towards creation of an economically viable and financially sustainable coal sector requiresconsistent efforts to transfer the industry to private ownership. For this reason, it has embarked on anaccelerated privatization program for coal companies.

The Government's objective for 1998 is to ensure that at least 45% of total coal production inRussia is in coal companies which have no federally owned shares (with the exception of the "GoldenShare").

* The Government does not intend to use the trust management mechanism due to its inefficiencyunder the current regulatory framework. Instead, it will proceed directly to a full sale of coal companyshares reserved as federal property, which would allow to create prerequisites for the emergence ofefficient owners and obtain additional revenue sources for the federal budget.

Attachment 3Page 30 of 30

Next steps

Following the RosUgol liquidation, responsibility for the management of federally owned sharesin regional coal companies has been devolved to the Ministry for State Property of Russia.

The Ministry for State Property of Russia has approved a privatization schedule for 1998 whichreflects the Government's intentions to speed up coal sector privatization. The schedule identifies 13 coalcompanies (which accounted for about 52% of total coal production in Russia in 1996) to be privatizedon a priority basis.

It should be noted that at present there are already 10 small private coal companies whoseaggregate share in total coal production in Russia in 1996 was about 8.6%.

The process of direct coal company privatization has started at two large and viable companies("Kuzbassrazrezugol" and "Yuzhny Kuzbass") which accounted for about 10% and 3.8% of totalnational coal production in 1996, respectively. The first 55% of the companies' shares reserved asfederal property will be sold in the near future; it has been announced that there are plans to sell theremaining 25.5% of federally owned shares in the first quarter 1998.

The Government will make all legal steps to ensure an early termination of the trust managementcontract for federally owned shares of the OAO "Vostsibugol" in order to privatize the company in 1998.

In compliance with the effective legislation state-owned enterprises and joint stock companiescontrolled by the state shall not be eligible to participate in cash auctions and commercial bidding forthe sale of coal company shares.

The state will reserve a special right (the "Golden Share") in selected privatized coal companies.The term of the "Golden Share" shall not exceed two years. The term can be reduced if the Governmenthas assured itself that the owner can provide for an efficient operation of the company.

The Government will prepare a privatization action program for coal sector joint stockcompanies still owned by the state, to be implemented in 1999 and subsequent years.

V.S. Chemomyrdin

Chairman, Government of the Russian Federation

November 28, 1997

Attachment 4Page 1 of 4

A. RESTRUCTURING THE MANAGEMENT OF THE COAL SECTOR: The liquidation of RosUgol, and the transfer of subsidy

allocation and regulatory functions to a strengthened Ministry of Fuel and EnergyProgram Area Actions Taken under Coal SECAL I Coal SECAL II Action Program Condition of

Complete the separation of . RosUgol was converted into a 100% federally- Commence Liquidation of RosUgol: (i) a Presidential Decree and Board

governmental and regulatory owned joint stock company in 1996 Government Resolution on the restructuring of the management of presentationresponsibilities (including . However, RosUgol (i) retains effective control the coal sector have been issued; (ii) a meeting of RosUgolmanagement of coal subsidies) from of state subsidies (good and bad) to the sector; shareholders has been held to approve the liquidation and appointcommercial operation of the coal (ii) remains the manager, on behalf of the Liquidation Commission; (iii) a formal announcement of theindustry Government, of the Federal shares in the coal liquidation has been published;

companies not selected for trust management . Strengthen the Ministry of Fuel and Energy and transfer RosUgol'sunder SECAL I; (iii) provides commercial subsidy allocation and regulatory functions to the Ministry: (i)services to coal companies; (iv) retains overall Ministerial Orders have been issued by the Ministry of Fuel andmanagement control e.g. over mine closures Energy to create two new agencies under the Ministry to manageand investment; and (v) exercises de facto mine closures and social protection (see Section C of the matrix);regulatory functions. (ii) a Deputy Minister, reporting directly to the Minister, has been

appointed with responsibility for coal restructuring, subsidyallocation, and the two new agencies; and (iii) the charters of theagencies have been submitted for registration and the heads of theagencies appointedComplete liquidation of RosUgol, including the registration of the Privatizationliquidation in the State Register and the sale of all shares and stock Tranche Releaseheld by RosUgol in subsidiary or affiliated companies

B. MINE CLOSURES: Decommissioning of loss-making and unviable mines in an orderly and environmentally benign mannerProgram Area Actions Taken under Coal SECAL I Coal SECAL 11 Action Program Condition of

Provide for orderly closure of mines . RosUgol allocated Rb 383 billion for the . The Government's Mine Closure Program for 1998 has been Boardphysical costs of mine closures to its coal prepared by the Ministry of Fuel and Energy; Presentationcompanies in 1996; Rb 569 billion were . State support for 1998 has been allocated consistent with the Mineallocated for 1997 and disbursements are Closure Program (see Section C);expected to be Rb 471 billion by the end of the * The Mine Closure Guidelines have been revised by the Ministry ofyear; Fuel and Energy and approved by the Presidium of the Inter-

. Since 1994, 136 mines and 2 ancillary Agency Coal Commission;enterprises have been identified for closure; 95 * A new agency has been created under the Ministry of Fuel andmines have ceased production; and Energy to manage mine closures (see Section A)underground closure works have beencompleted at 71 mines;

. Employment at the 138 coal enterprises was40,000 on July 1, 1997, and is expected to fallto 31,000 by early 1998.

* Prepare a progress report on the Mine Closure Program Social Tranche* Prepare a three-year Mine Closure Program Release. Disburse state support for mine closures in 1998 in accordance with

the allocation (see Section C). Conduct Enviromnental Audits at two underground mines and one

. surface mine

Attachment 4Page 2 of 4

C. COAL SUBSIDIES: Continued reduction and improved management of coal subsidiesProgram Area Actions Taken under Coal SECAL I I Action Program Condi

Reduce total coal subsidies and . Total budget allocation for coal subsidies in Satisfactory allocations of budget resources for 1998 have been Boardimprove their structure 1997 is 0.2% of GDP (estimated), down from proposed, including: (i) at least Rb 400 billion in Federal-Regional Presentation

0.5% in 1995-96 and 1% in 1993-94 transfers for divested social assets; (ii) at least Rb 3,450 billion for* In 1997, budget allocation for "bad" subsidies "priority" coal subsidy categories; and (iii) no more than Rb 2,250

(operating losses, wage agreements and billion for "other" coal subsidy categories. Of this latter amount, theinvestment) was reduced by over 50% in real amount allocated by recipient for operating loss and tariffterms relative to 1996 (considerably more than agreement subsidies will be determined in accordance with a newly-the 40% called for under Coal SECAL I) devised rule-based formula approved by the Govemment and

. In 1997, allocations for "good" subsidies adopted by the Ministry of Fuel and Energy.(mine closures, social protection andcommunity programs) were increased to onethird of total subsidy allocations

. In the fourth quarter of 1997, disburse (i) at least Rb 657 billion of Social Tranche"good" subsidies; (ii) no more than Rb 811 billion for remaining Releasecoal sector subsidies; and (iii) at least Rb 185 billion in Federal-Regional transfers for divested social assets

. Disburse 1998 subsidies in compliance with amounts andproportions agreed as condition of Board Presentation

Reform subsidy mechanisms to . As primary recipient, RosUgol instructed the . The institutional changes to the management of subsidies described Boardincrease transparency and Ministry of Finance on which final recipients in Section A have been introduced Presentationaccountability (companies) were to receive subsidies .,A Government Resolution (a revised version of Resolution 598)(applies to all subsidy programs . Social assets and community program introducing changes to the subsidy management system (inincluding social asset support) subsidies were disbursed to regional/local particular to define those categories of subsidies that have priority

administrations instead of coal companies for disbursement) has been issued;. Subsidy distribution mechanisms were not . A Ministry of Finance instruction to the Federal Treasury has been

adequate to ensure delivery to intended final issued defining the system of earmarked treasury accounts for finalrecipients; actual use of subsidies has not been recipients of all categories of subsidies beginning with 1998adequately monitored . Consultants have been mobilized to assist in the development and

implementation of the new subsidy management system. A Presidential Decree and a Govemment Resolution have been

issued transferring responsibility for disability payments to theSocial Insurance Fund

. Utilize mechanisms/agencies agreed, as condition of Board Social Tranchepresentation, to channel 1998 subsidies Release

. Complete audits acceptable to the Bank of the operation of the newsubsidy system in the main regions receiving state support duringthe first six months of operation in 1998

Attachment 4Page 3 of 4

D. SOCIAL SAFETY NET: A strengthened and more targeted social safety net for affected workers, families and communitiesProgram Area Actions Taken under Coal SECAL I Coal SECAL II Action Program Cndition of

Payments to Individuals . RosUgol channeled Rb 300 billion for social , Rb 2.1 trillion have been allocated for social protection in 1998 Board* severance pay protection to its coal companies in the second . Social protection has been defined as a "priority" category for state Presentation* disability pensions half of 1996; Rb 850 billion were allocated for support (see Section C). free coal 1997 and it is expected that Rb 1.3 trillion . The definition of social protection has been broadened to include:

will have been disbursed by the end of the year (i) severance payments of redundant workers atdownsizing mines,However, severance arrears (according to the as well as those undergoing closure; (ii) wage arrears of redundantMay 1997 social assessment in 3 coal basins) mine workers; and (iii) wage arrears of mine workers leaving thewere 3-4 months industry on age or disability retirement

. A Social Protection Reserve Fund has been created as a contingencyto meet possible shortfalls in social protection and disabilityfinancing

. Disburse 1998 subsidies utilizing mechanisms/agencies agreed as Social Trancheconditions of Board Presentation Release

Support to Communities . Coal companies divested their social assets . The amount of social asset support required by coal regions for Board. Social assets (housing, heating (including associated employees) in 1995-96 1997 and 1998 has been agreed, with emphasis on targeting small/ Presentation

systems, kindergartens, and health . Rb 1.6 trillion were disbursed to the medium-sized coal-dependent communitiesclinics) regional/local administrations in late-1996 for * Payment schedules for 1997 and 1998 have been approved, and

. Community Programs (pre- divested social assets, mainly for emergency mechanisms (e.g. conditional transfers/tripartite agreements) haveredundancy consultations, repairs/winterization of housing and heating been established to deliver federal-regional transfers to localretraining, job creation and systems; this helped the public to view the coal administrations, in accordance with Part A conditions, and tobusiness development programs) restructuring program positively. finance eligible Community Support and Employment Programs

. Beginning in 1997, support for social assetswas to be handled as general federal-regionaltransfers (instead of explicit coal subsidies),but budgetary resources have not been madeavailable

. Rb 0.2 trillion were disbursed to the coalregions/local administrations for communityprograms during the second half of 1996; Rb373 billion were allocated for 1997 and it isexpected that Rb 259 billion will have beendisbursed by the end of the year

. Disburse 1997-98 transfers, utilizing mechanisms/contracting Social Tranche_______________________________ ________________________________________ arrangements agreed as conditions of Board Presentation Release

Attachment 4Page 4 of 4

Program Area Actions Taken under Coal SECAL I Coal SECAL II Action Program Condition_ofSocial Impact Monitoring and . Three social assessments have been completed * Carry out satisfactory social impact monitoring program, including Social TranchePublic Participation (baseline in 1995-96 and updates in September preparation of monitoring report for quarter prior to tranche release Release

1996 and May 1997), a contract for continuousmonitoring is about to be signed, and a Panelof Experts has been establishedThe participation of main stakeholders(miners, families and communities) affected bythe Government's coal restructuring programhas increased significantly with theestablishment of regional commissions andLocal Oversight Committees

E. PRIVATIZATION: An accelerated program of coal industry privatizationProgram Area Actions Taken under Coal SECAL I Coal SECAL II Action Program Condio f

Accelerate privatization program . Federal shares in four coal companies, * Holding of commercial sales and auctions for the sale of 55% of the Boardaccounting for 21.5% of Russian coal Federal shares in two coal companies accounting for more than 13% Presentationproduction in 1995 have been transferred from of Russian coal production in 1995 has been carried outRosUgol either to trust managers or to the . A list of coal companies deemed eligible for full privatization (otherRussian Federal Property Fund, the latter in than a "Golden Share") has been approved by the Ministry of Statepreparation for privatization in late 1997/early Property1998 . A plan to achieve, by end-1998, zero federal shareholding (otherSignificant progress was made in consolidating than a "Golden Share") in coal companies accounting for 45% ofthe Federal shares in individual mines into the Russian coal production in 1996, has been approved by the Ministrycharter capital of their parent companies in of State Propertypreparation for privatization . The duration of any Golden Share in coal companies has been

limited to not more than two years

. Full implementation of plan agreed as condition of Board PrivatizationPresentation Tranche Release

. Prepare a program to privatize/liquidate the remaining federalinterests in coal companies to be implemented in 1999 andsubsequent years

* Complete a review of the regulatory framework for coal mining andof the institutional capacity of agencies charged with regulatoryfunctions

Attachment 5Page 1 of 6

RUSSIAN FEDERATIONSECOND COAL SECTOR ADJUSTMENT LOAN

Social Impact Monitoring; An Update of the 1995 Social Assessment

1. The Russian Federation's coal sector has been undergoing significant restructuring withthe assistance of the World Bank. As one of many inputs to the preparation of the supportprogram to Russia's coal sector reform, a team of Bank and Russian social scientists carried outa Social Assessment (SA) in 1995. The SA provided a framework for developing measures tohelp cushion some of the adverse impacts of the restructuring. Since 1995, a number of largesocial surveys have been completed in the main coal regions and numerous topical qualitativeand quantitative assessments have been undertaken. The objective of this annex is (i) to assesswhether the expected beneficiaries have indeed benefitted from Bank support to Russia's coalsector reform and (ii) to evaluate the degree to which adverse impacts of such reform on miners,their families and communities have been cushioned.

2. The Bank's initial support to the Government reform program was based on theunderstanding that (i) subsidies to the sector would be reduced; (ii) the coal industry would beprogressively demonopolized and privatized; (iii) miners continuing their work within the sectorwould benefit from regular compensation for their services; and (iv) the communities would beprotected through regular pension and disability payments, support to social asset maintenanceand operations, and through community based employment generation initiatives including jobcounseling, job training and pilot projects. A special Government agency, ReformUgol, wascreated and a Bank loan for the Coal Sector Restructuring Implementation Assistance Project(Coal IAP) was put in place. The Coal LAP helped establish a participatory process for sectorrestructuring whereby unions, coal city mayors, and NGOs would be supported to strengthenstakeholders' capacity for mitigation. The Coal LAP also aimed at creating a betterunderstanding of the reforms in the public at large. In addition, a social impact monitoringmechanism (SIM) and a panel of Russian social scientists (Expert Panel) were created to monitormitigational efforts, identify emerging issues and formulate recommendations on how to proceedwith the restructuring.

Findings of the Social Impact Monitoring

3. Overall, coal miners and their communities were found to be better off with the Banksupport to sector restructuring than they would have been otherwise. Planned actions to providesocial mitigation measures for sector restructuring have been undertaken successfully withregional variations in their implementation and impacts. Most importantly, the Bank support toRussia's coal sector restructuring has resulted in significantly increased access to information onbenefits and entitlements and a higher level of access to legal recourse methods for miners. -Inaddition, Bank support provided invaluable assistance to winterization programs in coalproducing communities and made a real difference in people's lives through support to socialassets transferred from coal companies in these communities. A great deal more could havebeen achieved if more or all subsidies in the system were "good" subsidies. The fact thatRosUgol controlled an overwhelming proportion of subsidies meant that only a small amount ofState support to the coal sector could be used to facilitate winterization and maintenance ofsocial assets transferred to local governments from coal companies. RosUgol's continuedcontrol over subsidies also contributed to high wage arrears so that arrears in the coal sectorbecame substantially higher than in other sectors.

Attachment 5Page 2 of 6

4. Social impact monitoring during Coal SECAL I and Coal IAP implementation showedthat miners and their communities can be better cushioned against adverse impacts of coal sectorreform if (i) the remaining subsidies in the system are managed without conflict of interest(demonopolization), directing them for severance payments, redundancy payments, job training,counseling and placement; (i) wage arrears are minimized (privatization); (iii) support to socialassets and pilot community programs are better targeted; (iv) alternative mechanisms of dealingwith the free coal issue are identified; (v) pension and disability payments are made regularlythrough the establishment of mechanisms that would allow all pensioners and the disabled tohave access to their entitlements; (vi) stakeholder participation in sector reform is strengthenedand continued; (vii) public relations activities are accelerated; and (viii) social impact monitoringis continued.

5. The progress achieved to date in mitigating the adverse impacts of sector reform hasbeen substantial but mixed, both in terms of success achieved and with respect to various coalregions since disbursement of the Coal SECAL I in 1996. On the positive side, greater regularitywas achieved in severance payments and workers who were directly threatened by mine closureswere able to access more accurate information and seek legal recourse. Equally important, anumber of participatory initiatives were put in place in some regions to facilitate community-specific interventions and stakeholder involvement. However, the momentum of theseparticipatory processes has diminished during the second half of 1997 and community-basedorganizations such as the Local Oversight Committees have lost effectiveness because of the haltof government funding for the social mitigation aspects of the coal sector reform program.Arrears in wage, pension and disability payments have created social tension and delays in thelaunching of an effective public relations support to the reform have made it difficult for thepublic to understand several factors associated with coal sector restructuring.

6. To facilitate evaluation of the progress of mitigation efforts, several indicators weredeveloped in the context of the Coal LAP. These included (i) access to information; (ii) supportfor legal recourse; (iii) income restoration; (iv) maintaining standards of living; (v) ensuringparticipation of mining communities and other stakeholders in implementation of the coal reformprogram; and (vi) strengthening the capacity of local governments and unions to support affectedminers and their communities. The following presents a summary of the progress on each ofthese indicators.

7. Access to Information: This refers to the "right" of the miners, whether facing lay-offor not, to have adequate information on early retirement, severance and unemploymentcompensation, procedures for mine closures and legal notice. Information access improvedduring the course of sector restructuring in 1996/97 but confusion about specific amounts andtypes of entitlements that redundant coal employees were to receive continued. At the time theywere laid-off, about a third of the workers had sufficient information at Rostov and Vorkuta andvery few did in Tula and Kuzbass. Indeed, nearly 40 percent of the latter regions' miners had nosuch information at all when they were laid off.

8. At the time of the 1995 baseline social assessment, miners relied primarily on friendsand family for information. However, during reform implementation, miners were supported byemployment services, mine associations, and unions. The mass media has also played anincreasing role in providing relevant information to the miners. Acceleration of the publicrelations activities under the Coal lAP would further contribute to this process, especially in thenext phase of coal sector restructuring.

Attachment 5Page 3 of 6

9. Support for Legal Recourse: This criterion refers to the enhanced ability of workersto seek legal recourse to protect their rights under the Law, once adequately informed. There ismixed experience regarding the availability of legal enforcements to help miners to receive theirback wages and other entitlements; in most cases, these legal channels are open but not fullyeffective. The unions have increased their support to workers for legal guidance and privatelawyers are more readily available. In addition, coal miners have increasingly participated instrikes; but, cases where striking miners resume work without receiving their wages are morefrequent. While coal miners represented half of all strikers in 1996, they were ineffective inprotecting miners' interests.

10. Income Restoration: This involved (i) improved opportunities for job counseling, jobplacement and training; (ii) removal of legal constraints to workers' geographical mobility; (iii)ability to receive in full all back wages, severance and unemployment compensation in a timelymanner in order to avoid sharp declines in income during the early period of job search; (iv)enhanced opportunities for self-employment and employment in pilot projects designed foremployment creation / maintenance. Improvements in job counseling and training efforts werenoted in some regions, but these have lost momentum in 1997 owing to lack of funds. Thefollowing provides details:

(i) The Employment Service. The Service substantially improved its training,counseling and placement services and dealt with unemployment payment moreeffectively. Employers' arrears in contributing to the unemployment fund anddeclining state support to the Service as of 1997 caused loss of momentum of itsoperations. The Service nevertheless continued its support to the Local OversightCommittees and its enthusiasm for helping to cushion adverse impacts of transition.During the sector restructuring in 1996, 20 workgroups providing services for coalenterprises in 19 coal communities were created in Vorkuta, Kuzbass and Rostovregions, mostly headed by officials from local Employment Services. These andother modest initiatives of the Employment Service to make information and/ortraining for small business and the self-employed were recognized by the people asimportant.

(ii) Employment in Coal Industry.' The provision of Bank support to the coal sectorrestructuring program has been effective. For instance, in Kuzbass 24% of workersfrom closing mines found employment opportunities in other coal enterprises, utilityservices and newly created jobs. Even at closing mines of TulaUgol about onefourth of displaced workers were able to find new jobs.2 There are still vacancies inmany mines primarily because many laid-off miners are pensioners or have workedunderground for the required period and are searching for jobs at other enterpriseswhere the wage payment situation is better than at mines. In addition, due to wagearrears, some laid-off miners prefer to register at the Employment Center and receiveunemployment payments instead of searching for jobs. Overall, restructuring did not

According to RosUgol, currently, 86 rmines have ceased coal production; 63 of those havecompleted underground mine closure activities and 33 have completed surface mine closureactivities, including environ-mental protection measures.

The recent RosUgol data points at substantial lay-offs starting in 1993 and 1994; however, theselay-offs are mostly offset by additional recruitment in the same period.

Attachment 5Page 4 of 6

cause particularly difficult problems in the labor market of the majority of coalcenters as compared to other regions, except in the Northern regions and a fewsingle-industry communities.3

(iii)Employment in Other Industries and Labor Mobility. Coal miners have traditionallybeen mobile within the sector and are succeeding in finding alternative employmentdue to their basic skills and familiarity with hard physical work. Job mobility isparticularly pronounced in major urban areas and in regions such as Rostov, wherethe market economy is growing at a high pace. However, many workers continue toreport difficulties in getting permits to work in major cities. In these cities, andMoscow in particular, relocated workers find housing and subsistence far too costlyin relation to incomes generated through informal sector employment. Housing andfear of losing one's housing entitlement continue to constrain labor mobility.

(iv) Pilot Projects. During Coal SECAL I, a pilot effort was initiated to developemployment alternatives to coal. On the whole, these were not successful. Theorganizational preparation required to put them in place was too long and some ofthe early attempts were misguided. Problems included the lack of an agreedapproach, lack of training, provision of funds to a few privileged individuals duringrestructuring and the lack of capacity to administer these programs within theMinistry of Fuels and Energy. There was also a high degree of regional variabilityin existing local capacity to manage the use of federal funds for community supportand employment programs and social assets operation and maintenance.

11. Standards of Living: The maintenance of standards of living was expected to beprovided through (i) support for social assets transferred by coal companies to localgovermnents, in particular heating, water supply and sanitation, housing maintenance,kindergartens etc.; (ii) continuous access to free coal; and (iii) ability to receive wages, pensionsand disability payments as well as other entitlements provided to coal sector employees underthe Law.

(i) Social Assets. While conditions in coal communities are admittedly difficult,adverse impacts would have been much more drastic had the State not provideddirect cushioning to these communities through subsidies to partially fund socialassets transferred to local governments.4 These funds arrived at designatedcommunities, and were spent appropriately in the maintenance of social services andassets. While this support continues the historic privileged position of coal miners,this is justified in the medium term by (a) the importance of popular support for thecoal reform program and the program's importance for Russia, and (b) the fact thatcoal unemployment in the future will have a more severe impact than it has in thepast several years. By early 1997, the benefits that accrued from government releaseof funds for social assets maintenance were large and various, including maintaining

For instance, there are dying communities around Prokopievsk in Kuzbass, Novoshachtinsk andBelaya Kalitva in Rostov, and kireevsk in Tula.

While coal miners may receive higher wages, they do not necessarily live better than otherworkers due to the poor condition of infrastructure, especially housing, in coal regions. Since1994, regional governments have not been able to make resources available for housing andinfrastructure programs, including new housing to replace homes requiring demolition.

Attachment 5Page 5 of 6

employment. While this support will have to be phased out, continuity is importantin the short run provided that targeting mechanisms are improved and participatoryimplementation arrangements are strengthened.

(ii) Provision of Free Coal. During the winter of 1996/97, most households whichneeded free coal received it and no major delays were reported. Free coal has beenvery important to miners in part because of its use in heating and cooking (and sinceit was given to compensate for lower income levels). Even though there have notbeen major problems in the distribution of free coal, there are several reasons forminor failures to distribute free coal entitlements to communities. These include thefact that (a) once an individual mine is closed, the regional coal company does nottake direct responsibility for the provision of free coal to the miners; (b) the level ofproduction in the remaining mines is inadequate to meet all current obligations forfree coal; (c) the coal produced by the existing companies is not suitable for heatingand cooking; and (d) distribution costs are high and coal companies are no longerwilling to send trucks to outlying settlements for free coal distribution. A sector-wide review of the problem is needed and underway.

(iii) Wage Arrears. The greatest threat to the maintenance of living standards came fromlarge and growing arrears in wage, pension and disability payments. A majorobjective of the sector reform and the Bank's support was to cushion miners whowere to be laid-off from restructured enterprises. Coal enterprises manifestedgreater wage, pension and disability payments arrears, mainly due to delayeddemonopolization and their inability to receive payments from power comnpanies. Itis important to focus on (a) the payment of unpaid wages to employees that havebeen declared redundant as a result of either mine closure or downsizing; and (b)satisfactory progress on the issue for employees of companies which are beingprivatized or placed under trust managers.

(iv) Severance, Pension and Disability Payments. Several large scale surveys carried outin the context of SIM since the 1995 baseline indicate greater regularity in thepayment of full severance packages and there was also increased access toinformation on eligibility for receiving severance. However, there was mixedexperience in actual receipt of such entitlements. 6 Workers continued to feel that fulland timely payments were important, but reported little trade union support with thisrespect. The delays in pension payments appeared to grow, ranging in 1997 from 2to 4 months. Disability payments were likewise delayed and there was little thesemore vulnerable groups could do to further their interests. Supporting theirassociation (NGO) and strengthening the social safety systems at large areimportant, but not all required actions can be taken through sector reform; rather,nation-wide reforms are needed.

12. Participation of Stakeholders and Strengthening Institutions: One of the mostimportant outcomes of Bank support to the reform related to strengthening of participatorymechanisms, especially at the local level, and enhancing stakeholder capacity to help mitigate

For instance, existing personnel were maintained when cities took over social assets from coalcompanies. This helped protect a large number of jobs.

6 In 1997, pensions were paid with 4.4 months delay in Rostov, 4.5 in Tula; an average delay of 4-5months was generally reported. Severance arrears in 1997 were 3-4 months (primarily becausethe closures had started relatively recently).

Attachment 5Page 6 of 6

adverse social impacts of sector restructuring. The establishment of ReformUgol, LocalOversight Committees, and the Association of Coal City Mayors were all important. Likewise,supporting trade unions and public relations information activities were also critical. There isneed to sharpen and accelerate public relations programmes; it is also important to considersupport to the Association of Pensioners and the Association of the Disabled. Another NGO,Association of Private Coal Enterprises, might also be established and supported through theCoal IAP during the course of Coal SECAL I.

(i) Local Oversight Committees (LOCs). LOCs are multi-stakeholder organizationswith participation from various departments of the city administration, employmentoffice, local coal association and trade unions. LOCs were established at thecommunity level to guide subsidies directed to communities and to generatecommunity programs for possible funding. They were to mirror the Inter-AgencyCoal Commission and be established through support from ReformUgol. By the endof 1996, about 25 LOCs had been created in municipalities where coal productionwas an important economic activity. Many communities were particularlyappreciative of the involvement of the local stakeholders in the formulation andimplementation of mitigation strategies to cushion coal sector restructuring. Thiswas viewed as an important contribution to achieving objectives relating to"demonopolization" in that LOCs were able to break the local monopoly of coalassociations in designing and implementing such strategies. Although results weremixed, the LOCs were gaining experience but decreasing funding and reneweddebate over whether social assets should be supported have caused a loss ofmomentum.7

(ii) Trade Unions (Rosugleprof and NPG). There has been a visible strengthening oftrade union activities since the 1995 SA baseline. Both trade unions have receivedsupport from ReformUgol and are implementing programs intended to enhance theircapacity to assist miners at the mine level. Special information, counseling and legalsupport services are being developed by the Unions, and those that have beendeveloped appear to have benefitted miners. Under the Coal LAP, further support totrade unions is anticipated.

(iii)Association of Coal City Mayors. In order to facilitate exchange of experienceamong coal city local governments and to allow them to learn from the internationalexperience, an Association of Coal City Mayors was founded in late 1995 at theinitiative of ReformUgol. Funds were provided through the Coal LAP to make thisassociation a well functioning structure in support of sector reform. Even though theassociation has provided a framework for mayors to discuss issues, it has not been asactive as expected, with little of the progress achieved on the ground attributable toits work. However, since many of the mayors today are recently elected, a moreactive role for the Association can be anticipated.

In some regions, there were reports that the Unions, who were the direct representatives of theminers, were not regularly represented in LOCs.

Attachment 6Page 1 of 1

RUSSIAN FEDERATIONSECOND COAL SECTOR ADJUSTMENT LOAN

TIMETABLE OF KEY PROCESSING EVENTS

(a) Time taken to prepare: 5 months

(b) Prepared by: Government with IBRD assistance

(c) Project identification June 1997

(d) Appraisal/Negotiations: November 1997

(e) Planned Board presentation: December 1997

(f) Planned date of effectiveness: December 1997

(g) Expected program completion: March 1999

Attachment 7Page 1 of 1

Documents in Project File

1. Decree of the President of the Russian Federation of November 20, 1997, No. 1243, OnImproving the Governance of the Coal Sector, and Government of the Russian FederationResolution No.1462 of November 20, 1997, On Improving the Governance of the CoalSector.

2. Letter from the Minister of Fuel and Energy of the Russian Federation, No. SK-8459 ofNovember 29, 1997, with an attached series of Ministerial Orders defining and creating thenew management structure for the coal sector in the Ministry of Fuel and Energy, includingapproved charters for the Mine Closure Agency and Social Protection Agency.

3. Government of the Russian Federation Resolution revising Resolution No. 598 to introducechanges to the subsidy management system and define categories receiving prioritydisbursement, issued in December, 1997.

4. Ministry of Finance of the Russian Federation, Instruction on earmarked Treasury accountsfor disbursement of coal subsidies beginning in 1998, issued December 1997.

5. Tripartite Agreement of November 1997, between the Ministry of Finance of the RussianFederation, the Administration of Kemerovo Oblast, and Administrations of MiningCommunities of Kemerovo Oblast on the Allocation of a Budget Loan to the Administrationof Kemerovo Oblast for Financing in 1997 Social Assets Transferred from Coal Enterprisesto Local Mining Communities.

6. Letter of the Minister of Fuel and Energy of the Russian Federation, No. SK-8359 ofNovember 25, 1997, On the Realization in 1998 of the Program of Closure of Non-Viableand Particularly Loss-Making Surface and Underground Mines.

7. Summary Schedule of Allocation to Primary and Final Recipients of State Support Funds byIndicated Categories of their Use for 1997 Taking Into Consideration the BudgetSequestration, Approved by the Chairman of the Inter-Agency Commission on May 29, 1997(No. ACh-P27-45), and for 4th Quarter 1997, Approved by the Chairman of the Inter-Agency Commission on November 12, 1997, setting out the Government's proposedallocation of state support among subsidy categories in 1997 and in the fourth quarter of1997, and Letter of the Minister of Fuel and Energy of the Russian Federation, No. SK-8360of November 25, 1997, setting out the Government's proposed allocation of state supportamong subsidy categories in 1998.

8. Letters of the Acting Minister of State Property of the Russian Federation, No. FG-6/7491 ofNovember 19, 1997, and No. FG-6/7617 of November 21, 1997, setting out theGovernment's proposed program for privatizing coal companies in 1998 and early 1999.

9. Decree of the President of the Russian Federation and Government of the Russian FederationResolution to transfer responsibility for disability payments to the Social Insurance Fund,both issued December, 1997.

10. Inter-Agency Commission on Social and Economic Problems of Coal-Producing Regions,revised Mine Closure Guidelines, issued December, 1997.

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