WORLD BANK IN BELARUS: FUTURE ENGAGEMENT RESTS ON

UNCLAS MINSK 001525

SIPDIS

KIEV FOR USAID

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: EFIN EAID ENRG SENV UNDP BO

SUBJECT: WORLD BANK IN BELARUS: FUTURE ENGAGEMENT RESTS ON
CHERNOBYL PROJECT



1. SUMMARY: Increasing GOB impediments to the provision of
foreign assistance and further resistance to outside advice
call into question the future of World Bank operations in
Belarus. The Bank is pinning its hopes on realization of a
proposed $50 million project in energy conservation and gas
distribution in the Chernobyl affected area. The project
addresses what UN agencies see as the most critical problem
in the zone - poverty. The country resident representative
stresses that the project is geared to helping the
impoverished communities and not supporting infrastructure
or the regime. In addition to conserving energy and
financial resources, the project provides a health benefit
by replacing wood as a heating fuel, which is a source of
radiation exposure. Progress on project implementation to
a great degree will determine the future scope and
direction of Bank activities in Belarus. Post urges
careful consideration of the project in light of the
desperate situation in the Chernobyl affected area and the
need to keep IBRD engaged in Belarus. END SUMMARY


2. In its recently completed country economic memorandum
the Bank concluded that the Belarusian economy had achieved
significant growth, but non-sustainable in the absence of
structural reform (septel). Although the economic success
is largely a consequence of high energy prices and
preferential access to the booming Russian market,
microeconomic reforms, particularly in the budget and
energy efficiency spheres, have helped the economy capture
the benefits of the external factor. In fact, the GOB has
implemented many of the measures the Bank and the IMF have
recommended, i.e., technical measures not requiring
political approval. However, these steps have taken the
economy about as far as it can go without major reforms
that would fundamentally change the economic structure.
And there is clearly no will on the part of the
increasingly Soviet nostalgic leadership to take the
country in a more market-oriented direction.


3. In the face of the regime's increasing hostility to
Western countries and institutions, growing bureaucratic
and political impediments to technical assistance, some
World Bank members are questioning the appropriateness of
continued engagement in Belarus. Its sister organization,
the IMF, pulled its resident representative out of country
a year ago, now maintaining a very small, locally staffed
office to administer small technical assistance missions.
The local office World Bank office argues for maintaining
at least the current project level. Bank staff cites the
long-term impact on the country's economic policy, in
particularly, keeping up the skill levels of the very
competent staff at the technical staff in the ministries
and preparing for future leadership. Outside economists
unanimously praise the capabilities and dedication of their
Belarusian counterparts. However, in the country's self-
imposed isolation these skills will dry up without the
constant contact with the IFI experts, training and access
to new information.


4. In the quest to stay engaged, the World Bank has been
working over the past year to design a loan project which
the GOB will accept and which also meets IBRD development
goals (Global Public Goods). The result is the $50 million
loan Post-Chernobyl Recovery Project, focusing on energy
efficiency and gas distribution. In recent conversation
with DCM and pol/econ chief, the head of the World Bank
office in Minsk, Vadim Voronin, stressed that the project is
directed at helping local communities, not building
infrastructure. He explained that the project will help
alleviate the difficult financial straits that municipal
budgets face in the Chernobyl zone. Given the very low
fiscal revenues, local budgets can be as low as USD one per
member of community. Installation of energy efficient
equipment, which can cut energy use by some 50 percent,
could result in significant cost savings for these villages.
The gas distribution component of the project would be
directed at villages, which are already connected to the
network and would be used to provide street pipelines and
house connections. The substitution of gas for wood - the
most common heating fuel in the region - also provides a
health benefit by reducing risk of radioactive exposure
through burning contaminated wood.


5. The Belarusian government has approved the loan proposal,
but it is still awaiting final approval by the presidential
administration. (In its original design last year the
project was to be multisectoral, including a component on

forestry, but the Bank found it too difficult to work with
the unreformed forestry industry. The energy sector, in
contrast has already made significant reforms.) If approval
is secured, the project will be presented to the Board on
January 27. Realizing that some member countries will
object to the project, Voronin intends to explain the
project to Bank President Wolfowitz in advance of the Board
meeting. He claims to have already won the agreement at the
vice-presidential level in the Bank.

Looking Ahead
--------------

6. Preparation of the next Country Assistance Strategy
(CAS),which will take place next year, is constrained by
the lack of areas where assistance is acceptable to both the
GOB and the IBRD. According to Voronin, the CAS will
probaby concentrate on broadening the current Chernobyl
proposal. In addition to continuation of energy eficiency
and gas distribution, likely proposals re improving water
quality in rural areas, foresry management and agriculture
development. Voroin laid out the rationale behind
selection of thse topics. Before the Chernobyl
catastrophe, thearea relied on surface water - lakes and
rivers - for household use. When these sources became
ontaminated, they switched to underground water. owever,
the quality of the underground water is ery poor with high
levels of iron (exceeding the orm by 20 times),zinc and
other heavy metals. oronin estimated that bringing the
quality up toacceptable levels would cost $15-20 million.


7. Voronin continued to explain that forests in the egion
ae poorly manged and vulnerable to fires,which create
radioactive clouds that can threate neighboring countries.
He did not envisage a mater forestry plan for the region,
but a focused roject to improve management in the areas of
lowand average contamination and to develop small
enerprises by privatizing forest farms (leskholkhoz) If
such wood is processed under IAEA approved tandards for
commodities, such wood could be exprted. According to
Voronin, only the surface iscontaminated, so that log cores
are safe. Develoment of agriculture in the zone is, not
unexpectdly, very controversial and the government's
annunced plans to do so have been criticized in theindependent press. Voronin
stressed that the Bank however,
would focus on non-food agriculture, asthere is no way to
avoid risk from radioactive pllutants in food grown in
contaminated areas, esecially meat and milk.


8. Voronin noted that frther development of these ideas is
contingent o the GOB's level of cooperation on the first
Cherobyl project. He predicted that approval of the nw
CAS would occur by the end of 2006, at best. n addition to
these programs, the CAS would probbly include continued
technical assistance on th budget, taxes and WTO accession.


9. COMMENT: Pst urges Washington to seriously consider the
Bak's proposed loan project, weighing the risk of cuting
off Bank involvement in Belarus against thepresumed benefit
this project would bring the reime. As the GOB
increasingly isolates itself by losing down exchanges and
forbidding officials fom travel abroad, it is ever more
important thatinternational organizations, such as the
World Bnk, remain engaged in Belarus. The flow of expert
into Belarus is one of the few means that Belaruian
technical level government officials have to expand their
knowledge and sharpen their skills - skills that will be
essential when Belarus does eventually undertake democratic
and market-oriented reforms. Furthermore, the Chernobyl
project addresses the very serious problem that Belarus
faces revitalizing a significant portion of its landmass and
people - a problem that will continue to bedevil any future,
democratically elected, government, as well.

KROL