PEST RUSSIA and Study of IMF

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ENVIRONMANTAL SCANNING - RUSSIA
Political Developments and Trends in Russia

Many factors have converged to create a unique investment opportunity in Russia. The transition from a communist state to a market economy based on protection of private property and rule of law continues to progress at a rapid pace, with information technology expanding dramatically, new legislation recently enacted, and growth in Western-style retail chains changing the business landscape.

This convergence is occurring within a country of highly educated, Internet savvy, entrepreneurial workers and tremendous resources. Combined, these factors have produced an investment climate that many Western corporations and independent analysts have found compelling.

Under Putin's tenure as President, a number of significant and long-awaited new laws have been passed, including a land code, providing for private ownership of land; a new tax code that substantially reduces corporate and personal income tax rates and has already resulted in improved tax collection; a new labor code, reflecting international norms; liberalized currency legislation that permits the easier flow of capital to and from Russia; legislation streamlining and simplifying the registration of legal entities; and legislation protecting the rights of minority shareholders, including applicable amendments to the Law on Joint Stock Companies.

Although it lacks the force of law, a Corporate Governance Code, developed by the Russian Federal Securities Commission (FSC,) was approved by the Russian Government in the spring of 2002 and has been voluntarily adopted by a number of major Russian companies which recognize the need for improved corporate governance in order to attract international investors and strategic partners.

Progress is being made toward Russia's accession to the World Trade Organization (WTO), which will remove trade barriers and stimulate economic growth.

In addition to these ongoing legislative and regulatory reforms, Russia has a 99% literacy rate, and a large percentage of its work force has advanced engineering education.

Also, the Russian population is increasingly computer literate and Internet savvy. Levels of computer and Internet use in the country are growing rapidly.

Economic Indicators of Russia

2006
Population, total (millions) 142.50
Population growth (annual %) -0.46
Life expectancy at birth, female (years) 72.52
Life expectancy at birth, male (years) 58.92
GDP (current US$) (billions) 990.58
GDP growth (annual %) 7.40
GNI, Atlas method (current US$) (billions) 826.23
Inflation, consumer prices (annual %) 9.68
Foreign direct investment, net inflows (% of GDP) 3.11
Unemployment, total (% of total labor force) 7.2
Time required to start a business (days) 29.00
Internet users (per 100 people)
Reserves (including gold), USD Billions
Industrial production growth (%)
Fixed Capital Investment growth 18.03
303.7
6.3
16.7

Russia has some of the world’s largest reserves of oil, natural gas and other raw materials, many of which are critical to industrialized countries. Many European countries and former Soviet states are highly dependent on Russian natural gas.


Figure: Comparison between Russia, China, and USA

Internal Economic Conditions and Trends

Russia has experienced strong economic growth over the last nine years (1999-2007), during which time its GDP has increased 6.9% on average per year in contrast to an average annual decline in GDP of 6.8% during the previous seven years (1992-1998). The positive GDP trends are reflected in other measurements that point to an improved Russian standard of living throughout the period. Average real wages in Russia increased 10.5% per year from 1999-2007. (Real wages actually increased 14.7% from 2000-2007, having declined by 23.2% in 1999 because of spike in inflation that year). In addition, real disposable income (the income that the average Russian resident has available from all sources after taxes) increased 10.7% from 2000 to 2007 (8.5% from 1999 to 2007). The Russian unemployment rate has also declined during the 1999-2007 period, from 12.6% to 6.2%.

During the first years after the collapse of the Soviet Union, the Russian population was plagued by increasing rates of poverty. In 2000, 29% of the Russian population was living below the officially calculated poverty line. By 2006, the rate had dropped to 15%.15 In addition, household consumption has increased–another sign of improved living standards-- from 42.8% of Russian GDP in 1992 and to 57.3% of Russian GDP in 2006.



Figure: Growth of Real Russian GDP, 1992-2007



Figure: Major Russian Internal Economic Indicators, 1999-2007
(Percentage growth from previous year)

While the Russian economy has been able to greatly temper inflation from the sky-high rates of the 1990s, inflation rates remain high. In 2006, the consumer price index rose 9.7%, and is estimated to have risen 9.0% in 2007, a rate that was above the government target. The life expectancy of the average Russian citizen, particularly males, remains low for an advanced country. In 2006, it was 72.4 years for a Russian woman and 58.9 years for a Russian male.17 Increases in alcoholism and other diseases, some of which like tuberculosis have been nearly eradicated in developed countries, have contributed to the decline. It is also explained by the poor and deteriorating health system which has been slow to adjust to the transition from central planning. The high mortality rate is contributing to shrinkage of the Russian population of an average of 0.5% during 2002-2006 period. That means that the average age of the Russian population will increase, leading to a decline in the pool of working age individuals– a trend that does not bode well for economic growth in the future. Russia had a lower birth rate (10.92 births per 1000 population) than the death rate (16.04 deaths per 1000 population). By 2025, 18% of the total population would be aged over 65, up from 12% in 2000. These demographic trends were expected to adversely affect labor supply, which would decline by 10% (about 11 million people) over the next two decades.


Foreign Trade and Investment Trends

The roots of Russia’s robust economic growth during the last eight years are reflected in the surge in Russian trade and capital flows.



Russia foreign trade has increased sharply in the last nine years (1999-2007). During that period Russian exports grew close to 400%, from $75.5 billion to $355.5 billion and Russian imports rose over 450%, from $39.5 billion in 1999 to $223.4 billion in 2007. As a result, Russia has experienced rapidly increasing trade surpluses. Its merchandise trade surplus rose from $36.0 billion in 1999 to $132.0 billion in 2007. Russia’s current account balance (which includes balances on merchandise trade, trade in services, investment income and unilateral transfers) increased substantially, from $24.6 billion in 1999 to $78.3 billion in 2007. As a result, Russia has accumulated one of the world’s largest foreign reserve holdings that have skyrocketed from $12.5 billion in 1999 to $476.4 billion in 2007.

Oil and petroleum-related products have dominated Russia’s exports for some time, even during the Soviet period. However, they have become even more significant. In 2006, oil, natural gas, and other fuels accounted for 64.6% of Russian exports. If metals are included, the share of raw materials was 78.6% in 2006. More than half (51.7%) of Russian imports consisted of machinery and equipment and another 16.9% consisted of food and other agricultural products.

The 27-member European Union (EU) is by far Russia’s most significant trading partner. In 2007, the EU accounted for 53% of Russian exports, mostly energy, and for 43% of Russian imports. China has emerged as the second most important trading partner, accounting for 5% of Russian exports and for 13% of Russian imports in 2007. If the EU members are considered separately, the Netherlands is the leading market for Russian exports, accounting for 15% in 2007, while Germany is the leading source of Russian imports, accounting for 13% in 2007.

Russia’s investment climate has improved significantly during the last few years a byproduct of Russia’s robust growth. Between 1999 and 2007, annual foreign direct investment flows into Russia rose from $3.3 billion to an estimated $55.0 billion, or 4.5% of GDP, nearly double the FDI flows in 2006, and close to the flows recorded by China.25 However, the Russian government recently passed a law which will restrict foreign investment in key sectors, which could hamper foreign investment in the future.

Russian Economic Policies

The 1998 financial crisis proved to be a blessing in disguise, albeit one that exacted a huge price in terms of Russian financial credibility. The economic growth that Russia has experienced since 1999 has been largely driven by favorable trends in the Russia’s international economic interactions. The sharp depreciation of the ruble in 1998 cut demand for imports and encouraged domestic production of goods. But by definition, such factors are ephemeral. When Putin took the reins of authority in 1999-2000, first as acting President, then in March 2000 as President, his task was to avoid the economic chaos that had plagued Russia earlier and to put Russia on track toward long-term economic growth. To do so required the Putin leadership to take advantage of the window of opportunity of the post-1998 crisis economic surge and undertake some major economic reforms.

By the end of 1999, the Russian government had achieved a degree of financial stabilization as former Prime Minister Primakov had instituted measures to cut government spending and increase tax revenues. The Russian economy had begun to grow because of the severe depreciation of the ruble as a result of the 1998 financial crisis which boosted exports. A key objective of the Putin regime would be to make sure to maintain stability especially after the effects of the depreciated ruble had disappeared.

The high inflation and general economic chaos of the 1990s contributed to political and social instability. The instability undermined the government’s ability to build a market economy.

Russian government national accounts data show that the government has improved budget balances and maintained tight control over fiscal policy. At the end of 1998, the Russian federal government had a budget deficit equal to 6.0% of Russian GDP with revenues equal to 11.4% of GDP and expenditures equal to 17.4%. In 1999, the budget deficit declined slightly to 4.2% GDP. During the ensuing years, Russian government revenues soared from 12.6% of GDP in 2000 to 23.6% of GDP in 2006, largely because of tax revenues generated by the surge in oil revenues. At the same time, the government managed to resist expanding expenditures, keeping them far below revenues with expenditures equal to 16.1% GDP in 2006. As a result, the Russian government has consistently earned budget surpluses and had a surplus of 7.5% of GDP in 2006. The Russian government’s ability to maintain prudent fiscal balances is due in part to the establishment in January 2004 of a stabilization fund. The Ministry of Finance deposits in the fund government tax revenues obtained from oil production at oil prices (Urals crude) above $27/barrel. (When the fund was established in 2004, the threshold price was $20). The funds are to be used to finance government deficits that result when the oil price falls below $27. On February 15, 2008, the price of Urals crude was $90.75/barrel. In addition, by law the government is to use funds in excess of a balance of 500 billion rubles for purposes approved by the Federal Assembly, the legislature. On January 30, 2008, the fund held an aggregate amount of 3.9 trillion rubles. The Russian government has used these funds to pay off partially its IMF and Paris Club debts and also to finance a deficit in the government operated pension fund.

Despite the declared policies, the results in integrating with the world economy have been mixed. From 1994 to 2000, Russian exports as a percentage of GDP increased from 27.7% to 44.1% but declined to 30.3% in 2007. Russian imports as a percentage of GDP have declined from 22.9% in 1994 to 21.9% in 2007. On the other hand, trends in Russian foreign investment show clearer signs of economic integration. The stock of foreign direct investment in Russia as a percent of GDP rose from 0.1% in 1993 to 11.4% in 2007 and Russian foreign direct investment abroad has increased from 1.3% of GDP in 1993 to 9.7% of GDP 2007.


The Role of Oil and Other Natural Resources

Russia possesses the world’s eighth largest reserves of oil and is the world’s second largest oil exporter (next to Saudi Arabia). It also possesses the world’s largest natural gas reserves and is the largest exporter of natural gas. In addition, Russia has the second largest coal reserves. These natural resources, particularly oil, have been a major driving force of the Russian economy for a long time and a significant determinant of Russia’s economic health. Therefore, the role of oil requires special attention in a discussion of Russia’s economic conditions.


Figure: Russian Oil Production, 1989-2007
(millions of barrels/day)

The levels of Russian oil production have varied over the years and have roughly mirrored overall conditions of the Russian economy. The graph in figure 2 above indicates that from 1989 to 1996, the volume of oil production decreased appreciably, from 11.1 million barrels/day to 6.1 million barrels/day or about 45%. This period is contemporaneous with the deep slide in Russian economic growth shortly before and immediately after the collapse of the Soviet Union. The decline was caused by a dramatic drop in world demand for oil, a decrease in world oil prices, the depletion of exploited Russian oil fields, and the lack of investment in discovering new ones. Production began to grow in 1997, at first gradually, then more rapidly reaching 9.9 million b/d in 2007, till below the 1989 level. Oil production has continued to increase but at a decelerating rate, with possible implications for the future. One report estimates that Russian oil production may have already peaked in early 2008 and could begin to decline.

Among the factors which contributed to the deceleration of oil production was the Yukos case which led Russian oil companies to reduce investment in upstream activities. Also, the heavy taxation of oil revenues is another contributing factor. Most oil-sector investment in Russia is aimed at increasing current production rather than developing new fields; therefore, any slowdown in the growth of capital spending is soon reflected in slower growth of production and exports. Russia will be not be able to sustain oil production over the long term if the investment in the sector is not increased.

While oil production activities represent a small direct part of Russian GDP, the income derived from oil production has contributed significantly through the multiplier effect to overall GDP growth. According to the International Monetary Fund (IMF), the Russian federal government budget enjoyed a fiscal surplus equivalent to 7.4% of GDP in 2006; however, if oil-related revenues are excluded, the budget would have been in a deficit equivalent to 3.8% of GDP. Of course, the IMF calculation assumes that the Russian government would have maintained the level of expenditures. This analysis suggests that Russia is becoming more reliant on world oil prices increasing or at least remaining high.



Figure: Oil Prices, 1989-2008
($/barrel–Urals-32)

The significance of oil and other natural resources to the Russian economy is perhaps no more evident than in Russian foreign trade. Even during the Soviet period, oil and other natural resources were by far the primary source of hard currency revenues. They have maintained and, at times increased, their importance in post-Soviet era Russian foreign trade. In 2006, energy resources (oil, natural gas, and coal) accounted for 65% of total Russian export revenues. Exports of crude oil accounted for 34% of that share. Russia’s increasing reliance on exports oil and other energy resources makes Russian trade vulnerable to the volatility of international commodity prices. Exports of machinery and equipment accounted for only 6% of Russian exports outside the former Soviet Union.


Figure: Net Russian Exports of Oil, 1992-2006
(millions of barrels/day)

In 2005, the volume of net oil exports reached 6.8 million barrels/day and remained at that level in 2006. Nevertheless, the overall Russian trade surplus continued to expand in U.S. dollar terms, as the increase in oil prices offset both the weak export performance and the rise in imports. The trade surplus reached a record of $US140 billion in 2006, up from US$118 billion the year before, owing to an increase of more than 20% in export prices.

Share of FDI by Different Sectors (% of Total)

The World Investment Report of the UNCTAD, published in Oct 2007, had placed Russia fourth in the world in foreign direct investment (FDI) (after China, India and the US), however most of this FDI was concentrated in the resource extraction industry.

2006 2007
Agriculture, hunting, forestry 1.4 0.6
Extraction of mineral resources 33.1 70.6
Manufacturing 19.0 11.1
Production and distribution of electricity, gas and water 0.4 0.2
Construction 2.0 2.9
Retail trade, maintenance of vehicles, home appliances, etc 6.1 4.1
Hotels and restaurants 0.2 0.1
Transport and communication 2.8 1.0
Real estate operations 23.5 5.2
Finance 11.0 4.0
Other public utilities, social and personal services 0.4 0.2

Figure: Share of FDI by Different Sectors (% of total)

Is Russia’s Economic Growth Sustainable?

According to some economic forecasts, Russia’s economic growth will continue for the next few years, albeit at lower rates. The IMF, for example, projects Russia’s real GDP to average 6.1% between 2008 and 2013. Global Insight, Inc. forecasts Russia’s economic growth to average 5.9% between 2008 and 2012.

One favorable sign for continued growth is that the sources of GDP economic growth are becoming more balanced. For example, Russia has experienced double digit growth in domestic consumption. In 2006, household consumption increased by 11.1% and by 12.9% in 2007, outpacing overall GDP growth. Furthermore, the sources of growth have spread from the metropolitan areas, such as Moscow and St.Petersburg, to outlying industrial regions in the Ural Mountains and in the Volga river basin.

Russian fixed capital investment has increased 11.7% on average per year 1999-2007. In 2007 alone, it increased 21.1%, the highest in recent Russian history. Official Russian economic data show that investment is spread throughout the economy. About 14% of the fixed investments (in 2006) were in the energy sector, 16% were in manufacturing, 24% were in transportation and communication, and 16% were in real estate, renting, and business activities. Growth in fixed investment indicates confidence in the future as firms replenish or add to production capacity.

2005 2006 2007
Agriculture, hunting, forestry 3.2 4.0 4.7
Extraction of mineral resources 15.2 17.3 20.4
Manufacturing 17.6 16.4 17.5
Production and distribution of electricity, gas and water 7.8 7.8 6.9
Construction 2.9 3.3 2.9
Retail trade, maintenance of vehicles, home appliances, etc 2.8 2.9 2.9
Transport and communication 28.8 26.8 23.3
Real estate operations 11.5 11.5 12.0
Finance 2.3 2.5 1.9
Other public utilities, social and personal services 2.3 2.5 2.1
Figure: Fixed Capital Investment by Different Sectors (% of Total)

The OECD indicates that despite the surge, Russia still lags far behind other emerging economies in terms of capital investment. The OECD calculated that from 2000-2005, Russia’s average capital investment as a percent of GDP was around 18%, while that of China was close to 40%, South Korea’s was 30%, and the Czech Republic’s was 27%. These data would indicate that Russia still has much room to catch up with similar economies. Philip Hanson, an expert on the Russian economy, has suggested that the excess industrial capacity that Russia inherited from the Soviet period has been used up or has become obsolete implying that Russia will need large amounts of new investments to ensure continuing economic growth.



Figure: Percentage Changes in Russian Annual
Fixed Investment, 1998-2007

Other factors could present problems for the Russian economy. One factor is ruble appreciation. Between 1998, the year of the financial crisis, and 1999 the ruble depreciated 25% in real effective terms. The ruble appreciated in real terms from 1999 onward but only gradually, reaching its pre-financial crisis level not until 2002.

Year Exchange Rate (against USD)
1999 25.00
2000 28.00
2001 30.00
2002 31.34
2003 30.69
2004 28.81
2005 28.28
2006 27.20
Fig: Exchange rate of Ruble against USD


During that period Russia’s domestic producers benefitted from diminished competition from imports because they had become much more expensive. Since 2002, the ruble has appreciated much more rapidly, 43% by the end of 2007. The rapid appreciation is causing concerns, particularly among Russia’s manufacturing industries which are facing stronger import competition while they are still trying to develop.

The ruble appreciation has been caused in part by the strong demand for Russian energy exports, particularly oil. The trend has led some observers to surmise that Russia may have caught the “Dutch disease.” This is a term that is applied when a country that is heavily dependent on one product, such as oil, in its exports, experiences a surge in export revenues. That country’s currency will appreciate accordingly, forcing other industries to face stronger foreign competition and dampening exports of those other products. While ruble appreciation makes imports cheaper and help to dampen inflation, it also makes diversification of Russia’s export base much more difficult. Whether or not Russia has the “Dutch Disease,” the strong ruble has put downward pressure on Russian non-energy exports.

Inflation has been another factor of concern for Russia. Russia had been making considerable progress in controlling inflation, which had been a constant problem since the collapse of the Soviet Union. At the end of 2006, inflation was 9%, still high by U.S. standards but the first single-digit inflation since 1991. However, consumer prices in Russia began to rise more rapidly in 2007, 11.9% by the end of 2007. The rate of inflation has continued to increase, reaching 14.3% in April 2008 compared to April 2007. A sharp rise in food prices has been the primary cause of the inflation spike, as well as increases in prices for raw materials and other industrial inputs.72 Another contributing factor may be the increase in government spending. In 2007, Russian government expenditures rose to 18.1% of GDP from 16.0% GDP the year before, and are projected to increase to 21.2% GDP in 2008. High inflation causes economic instability and political instability as it reduces consumer buying power and saps savings.

The increase in state control over the economy has also coincided with a sharp decline in the pace of economic restructuring and reforms that occurred during Putin’s first term. One indicator of the decline in economic reforms is the measure of the business environment in Russia. Each year the World Bank evaluates the ease of doing business in 178 countries by examining a range of criteria, such as ease of starting a business, closing a business, employing workers and, protecting workers. In April 2006, Russia ranked 96th.75 In April 2008, it ranked 106th, although it had improved from 112th during the previous year. Nevertheless, Russia ranked behind such former Soviet republics as Azerbaijan (96th), Armenia (39th), Georgia (18th), and Kazakhstan (71st). Singapore was ranked (1st) and the United States was ranked (3rd) The Congo Democratic Republic was ranked 178th. Another indicator is Russia’s economic growth compared to those of other former Soviet states. In 2007, even though Russia’s real GDP increased 8.1%, it was only 9th among the other former Soviet states.

2007 2008 2009 2010 2011 2012
Real GDP growth (%) 7.2 6.4 5.5 4.8 4.5 4.3
Consumer Price Inflation (%) 8.6 9.0 7.7 7.2 6.7 6.3
Budget Balance (% of GDP) 4.0 0.8 0.7 0.8 1.0 1.0
Exchange rate: Rb:USD 25.7 25.1 26 26.3 27.0 27.5

Figure: Some projected Economic Indicators for Russia 2007-2012

However, it is Russia’s continue dependence on oil and the world price of oil that will be a dominant factor in Russia’s economic prospects for the time being. As indicated earlier, this is a double-edged sword for Russia. On the one hand, Russia is clearly benefitting from record-high prices. On the other, its oil production capacity is limited and showing signs of strain.

Socio-cultural conditions in Russia
Russia, the largest country in the world, has a rich cultural identity that has been shaped and moulded by its distinguished history and vast geography. For those organisations wishing to develop a successful penetration strategy for the Russian business market or employees tasked with working in Russia, an understanding of Russian social and business culture is key to your success.
Russian culture - key concepts and values
Collectivism - Throughout its notable history, Russia has assumed a strong communal spirit that is still reflected in Russian business practices today. Russia's severe climatic conditions have also meant that co-operation and collaboration, rather than competition, have been vital for survival. This sense of togetherness is one of the traits that distinguish Russians from many Westerners. Russian collectivism dates back to the peasant farmers, who lived in agricultural villages known as 'mirs' or 'obschina' and worked together in an organised and self-managed community.
Egalitarianism - An important concept related to the village milieu is 'egalitarianism', the social philosophy that supports the removal of inequity and promotes an equal distribution of benefits. In Russian business terms, this equates to important strategies of equality, reciprocity and mutual advantage. Russians are very status conscious and believe in co-equals. A "deal" is often thought of from the perspective of equally shared benefit.
Dusha - The famous and enigmatic Russian 'dusha' or 'soul' remains central to everyday Russian behaviour and as a result when building successful business relationships with Russians you will find that mutual liking and emotion will from a strong basis.
Doing Business in Russia
Russia is a vast and diverse nation that after several decades of communism continues to evolve politically and economically. With the world's largest resource of raw materials, oil and gas revenues heavily support Russia's economy. Recently, within the big cities, a consumer economy has been established. This, along with an improvement in the country's financial position has raised business and investor confidence in Russia's economic prospects. However, in order to conduct business successfully in Russia, there are a number of important issues to take into consideration both before and during your time there.
Russia business Part 1 - Working in Russia (Pre-departure)
• Working practices in Russia
o The Russians attitude to time means that a few minutes delay on their part is of little importance. However, they will expect you to be punctual.
o Faxes and emails are the best way to communicate in Russia, as the post can often be unreliable. It is customary before making a trip to Russia to inform the prospective company of your intended business proposals and objectives.
o Paperwork and putting pen to paper is an essential part of all working practices in Russia. In general, they have little faith in unsigned documents.
• Structure and hierarchy in Russian companies
o The hierarchical structure in Russian business practices means that the decision makers higher up have authority over their subordinates. However, the nature of the collective good often encourages a flexible and democratic work ethos.
o Showing respect for seniority and recognising the hierarchical structure is vital for establishing and maintaining strong business relationships.
• Working relationships in Russia
o Personal and informal contact is a central part in doing business in Russia.
o Physical contact during business meetings, for example a simple hand on the arm or even embracing is a positive sign. There is no word for 'privacy' in Russia; therefore the notion of social space is much closer in Russia.
o In situations of conflict try to avoid taking an official stance and remember that Russians are 'people orientated' and will respond to a more personal approach.
Russia business Part 2 - Doing business in Russia
• Business practices in Russia
o Business cards are essential. If possible, ensure that one side is printed in Russian and one side in English.
o Presentations should be straightforward and comprehensible.
o Although many principal concerns are discussed in an informal environment final negotiations will be conducted in the office.
o Generally, when beginning a meeting, the head of the organisation will open the discussion and introductions should then be made in order of importance.
Russian business etiquette (Do's and Don'ts)
• DO shake hands firmly when greeting and leaving your Russian partners and make direct eye contact.
• DO partake in small talk, which normally involves talk of family and personal matters, before dealing with business.
• DO take a gift that symbolizes the stature of your company and the importance of the impending business deal, preferably an item characteristic of your local area or one that displays the company logo.
• DON'T be afraid to show some emotion, the Russians won't!
• DON'T as the Russian proverb states 'hurry to reply', but 'hurry to listen'.
• DON'T praise or reward anyone in public as it may be viewed with suspicion or cause envy and jealousy. Remember the collective rules over the individual.
Fun Fact
Negotiations with Russians often involve flared tempers. During negotiations and meetings, temper tantrums and walkouts often occur.
After the break up of the old Soviet Union, fifteen new independent states emerged. This number, however, is ever changing as boundaries are continually being modified.
Appearance
• Businessmen in Russia usually wear suits that are dark and well tailored along with good dress shoes. A businessman’s wardrobe demonstrates the individual’s image as a professional.
• Men often do not take off their jackets in negotiations.
• Do not stand with your hands in your pockets. This is considered rude.
• Women dress rather conservatively, avoiding overly flashy or gaudy outfits.
• Women should always cover their heads when entering into any Russian Orthodox Churches.
• Skirts should be worn rather than pants.
• When attending dinner in a citizen’s home, casual dress of slacks and a nice shirt without a tie are appropriate.
Behaviour
• As a foreigner, you are expected to be on time to all business appointments. However, your Russian counterpart may be late, as this may be a test of your patience. Do not expect an apology from a late Russian, and do not demonstrate any kind of attitude if your business appointments begin one or two hours late. This may also be a test of your patience.
• Social events are more relaxed. It is acceptable for foreigners to be 15 to 30 minutes late.
• Patience is an extremely important virtue among Russians; punctuality is not.
• Russians are known as great "sitters" during negotiations, this demonstrates their tremendous patience.
• The U.S.S.R. was officially an atheist nation in the days of communism. Now, however, participation in religion in increasing, with many citizens practicing Protestantism, Islam, Russian Orthodoxy, and Judaism.
• Some 'hard-line' Russians still view compromise as a sign of weakness, and often refuse to back down. To these individuals, compromising is bad business.
• As a foreigner, you should realize that "Final Offers" are often not actually the end of the negotiations, and that often times the outcome will be more beneficial and attractive if you can hold out.
• There is a Russian term meaning "connections" or "influences. It is extremely difficult to do business in Russia without help from a local. To help with this, gifts, money or other items are often a good idea when doing business in Russia.
• If attending dinner at a family residence, it is appropriate to bring a gift, such as a bottle of wine, dessert, or a bouquet of flowers.
• When shaking hands with someone, be sure to take off your gloves, as it is considered rude not to.
• When attending any formal engagements such as the theatre, it is appropriate to check your coat and other belongings at the front door of the establishment.
• Do not show the soles of your shoes, as this is considered impolite. They are considered dirty, and should never come in contact with any type of seat (like on a subway or bus).
• Be sure to have plenty of business cards with double sides of information. One side should be printed in English, the other side in Russian.
• Be alert and open to taking a drink or having a toast, as refusing to do so is a serious breach of etiquette.
Communications
• Russian is the official language.
• Speaking or laughing loudly in public is considered rude, as Russians are generally reserved and somber.
• Many Russians speak English, as it is often taught beginning in the third grade.
• Russians are highly literate, and have almost a 100% literacy rate.
• Good topics of conversation include peace, the current changes taking place in Russia, and their current economic situation.
The Russian Language
Of Russia's estimated 150m population, it is thought that over 81% speak the official language of Russian as their first and only language. Most speakers of a minority language are also bilingual speakers of Russian. There are over 100 minority languages spoken in Russia today, the most popular of which is Tartar, spoken by more than 3% of the country's population. Other minority languages include Ukrainian, Chuvash, Bashir, Mordvin and Chechen. Although few of these populations make up even 1% of the Russian population, these languages are prominent in key regional areas.
Russian Society & Culture
The Russian Family
• The Russian family is dependent upon all its members.
Most families live in small apartments, often with 2 or 3 generations sharing little space.
• Most families are small, often with only one child because most women must also work outside of the house in addition to bearing sole responsibility for household and childrearing chores.
Russian Pride
• Russians are proud of their country
• Patriotic songs and poems extol the virtues of their homeland.
• They accept that their lives are difficult and pride themselves on being able to flourish in conditions that others could not.
• They take great pride in their cultural heritage and expect the rest of the world to admire it.
Communal Mentality
• For generations until the 1930's, Russian life centred on the agricultural village commune, where the land was held in common and decision-making was the province of an assembly of the heads of households.
• This affinity for the group and the collective spirit remains today. It is seen in everyday life, for example most Russians will join a table of strangers rather than eat alone in a restaurant.
• Everybody's business is also everyone else's, so strangers will stop and tell someone that they are breaking the rules.
Meeting Etiquette
• The typical greeting is a firm, almost bone-crushing handshake while maintaining direct eye contact and giving the appropriate greeting for the time of day.
• When men shake hands with women, the handshake is fewer firms.
• When female friends meet, they kiss on the cheek three times, starting with the left and then alternating.
• When close male friends meet, they may pat each other on the back and hug.
Naming Conventions
Russian names are comprised of:-
• First name, which is the person's given name.
• Middle name, which is a patronymic or a version of the father's first name formed by adding '- vich' or '-ovich' for a male and '-avna' or '- ovna' for a female.
• The son of Ivan would have a patronymic of Ivanovich while the daughter's patronymic would be Ivanovna.
• Last name, which is the family or surname.
• In formal situations, people use all three names. Friends and close acquaintances may refer to each other by their first name and patronymic. Close friends and family members call each other by their first name only.
Gift Giving Etiquette
• Gift giving using takes place between family and close friends on birthdays, New Year, and Orthodox Christmas.
• If you are invited to a Russian home for a meal, bring a small gift.Male guests are expected to bring flowers.
• Do not give yellow flowers.
• Do not give a baby gift until after the baby is born.
• It is bad luck to do so sooner.
• Russians often protest when they are offered a gift.
• Reply that it is a little something and offer the gift again and it will generally be accepted.
Dining Etiquette

If you are invited to a Russian's house: -
• Arrive on time or no more than 15 minutes later than invited.
• Remove your outdoor shoes. You may be given slippers to wear.
• Dress in clothes you might wear to the office. Dressing well shows respect for your hosts. Expect to be treated with honour and respect.
• Offer to help the hostess with the preparation or clearing up after a meal is served. This may be turned down out of politeness. Asking 'are you sure?' allows the hostess to accept your offer
Table manners
Table manners are generally casual.
• Table manners are Continental -- the fork is held in the left hand and the knife in the right while eating.
• The oldest or most honoured guest is served first.
• Do not begin eating until the host invites you to start.
• Do not rest your elbows on the table, although your hands should be visible at all times.
• You will often be urged to take second helpings.
• It is polite to use bread to soak up gravy or sauce.
• Men pour drinks for women seated next to them.
• Leaving a small amount of food on your plate indicates that your hosts have provided ample hospitality.
• Do not get up until you are invited to leave the table. At formal dinners, the guest of honour is the first to get up from the table.
Relationships & Communication
• Russians are transactional and do not need to establish long-standing personal relationships before they do business with people.
• It is still a good idea to develop a network of people who you know and trust. The Russian word "svyasi" means connections and refers to having friends in high places, which is often required to cut through red tape.
• Patience is essential.
• It is best to err on the side of formality when you first make contact.
• Sincerity is crucial as it is required to build trust, and trust is needed to build a relationship.
• Most Russians do not trust people who are 'all business'.
• An indication that you have successfully developed a personal relationship is being asked for a favour by that person.
Business Meeting Etiquette
• Appointments are necessary and should be made as far in advance as possible.
• It often takes roughly 6 weeks to arrange a meeting with a government official.
• Confirm the meeting when you arrive in the country and again a day or two in advance.
• The first week of May has several public holidays so it is best avoided.
• You should arrive punctually for meetings.
• Typical Russian schedules are constantly changing and everything takes longer than expected, so be prepared to be kept waiting.
• Meetings can be cancelled on short notice.
• The first meeting is often a vehicle to determine if you and the company you represent are credible and worthy of consideration for future business dealings.
• Use the time effectively to demonstrate what differentiates your company from the competition.
• Expect a long period of socializing and getting-to-know-you conversation before business is discussed.
• Have all printed material available in both English and Russian.
• Russians expect long and detailed presentations that include a history of the subject and a review of existing precedents.
• Meetings are frequently interrupted. It is common for several side conversations that have nothing to do with the topic of the meeting to be carried on during the meeting.
• At the end of the meeting, expect to sign a 'protokol', which is a summary of what was discussed.

Business Negotiating
• Meetings and negotiations are slow. Russians do not like being rushed.
• It is a good idea to include technical experts on your negotiating team.
• Hierarchy is important to Russians. They respect age, rank and position. The most senior person reaches decisions.
• Russian executives prefer to meet with people of similar rank and position.
• Russians see negotiations as win-lose. They do not believe in win-win scenarios.
• Have written materials available in both English and Russian.
• Russians view compromise as weakness. They will continue negotiating until you offer concessions.
• Russians may lose their temper, walk out of the meeting, or threaten to terminate the relationship in an attempt to coerce you to change your position.
• Russians often use time as a tactic, especially if they know that you have a deadline. Be cautious about letting your business colleagues know that you are under time pressure or they will delay even more.
• Nothing is final until the contract is signed. Even then, Russians will modify a contract to suit their purposes.
• Do not use high-pressure sales tactics as they will work against you.
Dress Etiquette
• Business dress is formal and conservative.
• Men should wear business suits.
• Women should wear subdued coloured business suits with skirts that cover the knees.
• Shoes should be highly polished.
Business Cards
• Business cards are exchanged after the initial introductions without formal ritual.
• Have one side of your business card translated into Russian using Cyrillic text.
• Include advanced university degrees on your business card.
• Hand your business card so the Russian side is readable to the recipient.
• If someone does not have a business card, note their pertinent information.

Russia Bids to Become a Tech Tiger

Offshore Software

Russia is the most promising new entrant in the field of outsourcing offshore software services. It has many promising natural resources, including, a large well-educated low-cost workforce. Although, Russia does not have any dominant software firms, the Russian outsource software services sector has grown to USD $200 million1 annually with a 50% annual growth rate2. Unfortunately, there are obstacles to the continued growth of the market in Russia. These obstacles include immature marketing, sales and project-management skills, not enough promotion of English-language skills, a decrepit telecommunications infrastructure, and a shortage of qualified managers.

The primary problem that the Russian industry faces is the small size of Russian companies. It is estimated that between 30,000 and 40,000 people3 are engaged in software outsourcing, however the average size of Russian software services firms is only about 110 employees. Another important issue that the industry faces is that the industry has not developed an industry infrastructure to certify software quality and promote the industry to the global community. Finally, Russia still has a Wild West image in which rampant corruption, a lack of protection of intellectual property, and a lack of overall business transparency has scared away many global corporations.

The parallels between the Russian software services industry and the Indian software services industry as quite striking. Both industries started out with numerous small firms going after international contracts to do software outsourcing services. Both industries had to overcome dubious reputations in the international marketplace to win the confidence of Multinational Corporations. However, unlike the Indian industry - which was the pioneer - Russian software firms are now going down a well established path and are competing with many countries for software outsourcing contracts.

The advantage that the Russians posses is that they have eschewed low-level maintenance and coding work for higher-level software engineering and R&D work. This lets the Russian industry immediately add value to their services without getting bogged down in a bidding war for contracts with low-wage nations such as the Philippines and China. If the Russian software services industry can overcome some of the obstacles that it currently faces, it has the potential to target the Indian software services industry for global supremacy in offshore software outsourcing.


Human Capital

Human capital is Russia's primary resource. Russia has more people working in R&D per capita than any other country and ranks third in the world for the number of scientists and technicians per capita, after the US and Japan. Although there are only about 40,000 people currently working in the Russian software services industry, it is estimated that Russia has one million specialists who are capable of quickly joining the IT sector. The Russian government itself puts the number of programmers in the country at 1.3 million.

Russia's real strength is that, unlike China or India - where students learn generic software skills - Russian schools impart advanced levels of mathematical and computational techniques to students. This enables them to solve hard-core technical problems, perfect for R&D work. Most of the Russian software professionals are mathematicians or scientists, who later changed their career path to computing. It is estimated that at least 10% of employees in software services have PhD's. Tapping Russia's goldmine of technical talent requires paying wages that are in line with India's - the average programmers salary is USD $7,940. This combination of excellent skills and at rock-bottom wages provide the Russian software services industry with a powerful advantage in the global marketplace.

Telecommunications Infrastructure

Communications

Telephones - main lines in use:
43.9 million (2006)

Telephones - mobile cellular:
170 million (2007)

Telephone system:

General assessment:

The telephone system is experiencing significant changes; there are more than 1,000 companies licensed to offer communication services; access to digital lines has improved, particularly in urban centers; Internet and e-mail services are improving; Russia has made progress toward building the telecommunications infrastructure necessary for a market economy; the estimated number of mobile subscribers jumped from fewer than 1 million in 1998 to 150 million in 2006; a large demand for main line service remains unsatisfied, but fixed-line operators continue to grow their services domestic: cross-country digital trunk lines run from Saint Petersburg to Khabarovsk, and from Moscow to Novorossiysk; the telephone systems in 60 regional capitals have modern digital infrastructures; cellular services, both analog and digital, are available in many areas; in rural areas, the telephone services are still outdated, inadequate, and low density.


Russia is connected internationally by undersea fiber optic cables; digital switches in several cities provide more than 50,000 lines for international calls; satellite earth stations provide access to Intelsat, Intersputnik, Eutelsat, Inmarsat, and Orbita systems

Radio broadcast stations:
AM 323, FM 1,500 est., shortwave 62 (2004)

Television broadcast stations:
7,306 (1998)

Internet country code:

.ru; note - Russia also has responsibility for a legacy domain ".su" that was allocated to the Soviet Union and is being phased out

Internet hosts:
2.844 million (2007)

Internet users:
30 million (2007)

Government Support

The Russian government is one of the biggest impediments to the growth of the Russian outsourcing software services sector. Instead of providing valuable support, such as India or China, Russia hinders development by a complex bureaucracy and restrictive tax, customs and immigration laws. On the regulatory side, Russian laws are arcane and customs regulations are extremely complicated. On the tax side, the laws are ambiguous and the taxes endless - there are payroll tax, excess wage tax, investment tax, capital tax, retroactive tax and Value Added Tax (VAT). The Russian government at least recognizes the importance of the IT industry and the need to nurture the software services sector. As such, in 2001 they initiated a "Electronic Russia" program whose aim is to boost the Russian ICT sector such that it accounts for 2% of the economy and generates up to 2 billion in exports. The program will focus on easing the regulatory and legal requirement, increasing government transparency, and facilitating the delivery of distance learning programs via the Internet. Although the "E-Russia" program has been well received by the Russian IT industry, the fact remains that the Russian government has invested very little in the IT sector compared to India and China. For Russia, natural resources - especially Oil - are king, while the software services sector gets lip service without much investment.

Industry Association Support

RusSoft is the closest thing that Russia has to a national software services industry association. However, unlike India's NASSCOM, RusSoft is a small association made up of about 50 member companies whose exports totaled approximately USD $150 million. RusSoft's main mission is to promote the Russian software services industry. It does this by sponsoring such events as outsourcing software summit in St. Petersburg, and promoting member companies to foreign investors. As of yet, RusSoft has not been very successful in promoting the software services industry within the Russian government or outside of Russia. However, as the software services industry grows in Russia, RusSoft has the opportunity to become an important player in the industry.


Regional IT Cluster



The vast majority of Russia's offshore software services firms are located in three major cities which are geographically and culturally close to Europe: Moscow, St. Petersburg and Novosibirsk. The main reason that these three cities have attracted the majority of software services firms is that each city is each home to a major university: Moscow State University, St. Petersburg State University and Novosibirsk State University. These three universities produce a significant number of Russia's graduates in mathematics, physics and electronics and are well known for the high quality of education that they provide. It was natural that a concentration of engineering graduates would lead to a high-tech software cluster in each city.


Nanotechnology

It has been fifty years since the Soviet Union launched Sputnik, proving to an astonished world that the Russians could beat the West at its own scientific game. Now a vastly different Russia is once again back in the technology race. The country has embarked on a sweeping program to promote a high-tech economy. The prize this time: a position in the emerging technologies that will shape the future global economy.

Former president Putin set the tone in April when, in his annual address to the Russian senate, he announced a massive $7 billion program, financed from the state budget, to promote the development of nanotechnology—a new science that involves manipulating matter at the microscopic level, with applications from industry to medicine. Russia's fledgling venture capital industry also is getting a shot in the arm, thanks to a $1.2 billion state-backed technology fund. And construction began last year on seven new technology parks at locations around Russia, aimed at encouraging technology businesses to set up shop near scientific research centers.

Strong Educational Foundations

On the face of it, Russia has strong tech foundations. Despite the economic tribulations that followed the Soviet Union's collapse, its scientific legacy lives on in the form of 3,500 scientific research institutes employing 600,000 scientists and engineers. Russian universities churn out some 200,000 science and engineering graduates each year. "We identify Russia as one of the emerging countries with an excellent education system, and a culture of developing high technology," says Ashish Patel, managing director for Intel Capital (INTC) in Europe, which has so far invested in a smattering of Russian technology ventures.

Optimists can point to the growth of Russia's information technology sector, which has taken off in recent years despite minimal government support. Russian software exports have risen from just $120 million in 2000 to $1.5 billion last year—surging by 54% last year alone. The sector's growth also has been boosted by the arrival of in-house programming centers for major multinational corporations including IBM (IBM), Motorola (MOT), and Boeing (BA). Indigenous Russian IT companies are now mulling $1 billion initial public offerings (see BusinessWeek.com, 6/26/07, "A Russian Tech Pioneer Sets the Pace").

The downside? Russia's IT industry still represents just 1.5% of gross domestic product. That compares with 5% in the U.S.—or 12% in Ireland, a model for high-tech success. Russia's annual software exports are one hundred times smaller than its exports from oil and only around one-tenth those of India. And in other sectors besides software, Russia still lags technologically. At 1.2% of gross domestic product, the country's research and development spending is still just half the Organization for Economic Co-operation & Development (OECD average.

Nanotech Cronyism

That explains why the Kremlin now wants to pump more of Russia's huge oil and gas profits into high-tech research. So far, nanotechnology has especially captured the imagination of politicians. This year $5 billion is being plowed into a new state corporation, Rosnanotech that will be responsible for overseeing and coordinating research in the area. Russia will certainly need to invest billions to catch up with other countries.

But Putin's initiative has also raised eyebrows. "It looks like monopolization of finance," says Irina Dezhina, an expert on science policy at the Institute for the Economy in Transition in Moscow, who notes that the nanotech program will receive three times more state funding than the rest of Russia's scientists put together. Mikhail Kovalchuk, the director of the Kurchatov Institute that will be the center of the new corporation, is a close friend of Putin's from his St. Petersburg days. That has fed gossip that nanotech funding is being awarded on personal or political grounds—hardly a recipe for future commercial success.

That's a risk with any large state funding program. To kick-start innovation, private cash will be critical—as will be the financial savvy of hard-headed investors. So it may be more encouraging that Russian business also seems to be jumping on the high-tech bandwagon. In May, Mikhail Prokhorov, a leading Russian metals and banking tycoon, announced the creation of a $17 billion holding company that will focus on high-tech investments, including alternative energy and nanotechnology.

State-Private Investment Outfit

Russia's other recent governmental initiative, the launch of the Russian Venture Company, may well prove to be a smarter bet than simply pouring state funds into research. Russia plans to invest $1.2 billion via 10 to 12 privately managed funds, with 49% of the finance coming from the state and the rest from private investors. The first three management companies were selected in May, having already raised $150 million in private funding. As well as Russia's VTB Asset Management & Finance Trust, they include Bioprocess, a U.S.-backed investment fund specializing in biotechnology (see BusinessWeek.com, 5/30/07, "Where the VCs Are Flocking Now").

Russia borrowed the idea from Israel, where a similar scheme begun in 1993, called the Yozma fund, helped kick off a venture capital industry that has since raised $10 billion for high-tech investments, including around 4,000 startups. But some are doubtful. "The problem with Russia isn't a lack of money. It's a deal-flow problem. There are not enough investment opportunities" says Thomas Nastas, president of Innovative Ventures, a U.S. investment fund that has been searching for high-tech investments in Russia since 2001.

He and other investors emphasize a lack of business skills on the part of Russian scientists—many of whom are aging and have limited English proficiency and business experience. (There are, however, a small but growing number of Russian entrepreneurs and executives returning home to launch new ventures after successful gigs in the U.S.) Then there's the absence of seed capital for new businesses, which are rarely funded from scratch by venture capitalists. "Even if you're a motivated researcher who wants to start a business, you face huge problems" says Dezhina. In the U.S. the government provides $2 billion each year to start new companies through the Small Business Innovation Research Program. In Russia, she notes, the equivalent government program has a budget of just $40 million a year.

One Problem: Intellectual Property

But the biggest problem, investors and entrepreneurs complain, is Russia's hazy protection of intellectual property rights. In particular, the state is reluctant to let scientists exploit their inventions if they were funded with the government's help. "There are lots of bright scientists in Russian government institutions, and I'd love to work with them. But I can't because my invention will be claimed by the government," says Dmitry Kulish, a former Intel venture capitalist who recently formed a biotech startup to make anti-hepatitis drugs. Alexei Oblayov, global business analyst with U.S. biotech giant Genencore in Moscow, says that the company has rejected the idea of working with Russian academics for similar reasons. "If it's academic research, it's unclear who owns this. The only business model that works is a private research institute," he says.

All of which explains why, outside the blossoming IT industry, so few Russian innovations have yet enjoyed commercial success. Still, many observers are now more optimistic, pointing out that Russia's big technology push is only just beginning, with more initiatives likely now that the issue is being prioritized by the government. "All the pieces of this innovative ecosystem are now coming together," says Oleg Koujikov, a former Intel executive who returned to Russia to head venture funds at Russian investment bank Troika Dialog. "The key asset is human capital, and that's what Russia has."

Russia is the most promising new entrant in the field of outsource offshore software services. It has many promising natural resources, including, a large well-educated low-cost workforce. Although, Russia does not have any dominant software firms, the Russian outsource software services sector has grown to USD $200 million annually with a 50% annual growth rate. Unfortunately, there are obstacles to the continued growth of the market in Russia. These obstacles include immature marketing, sales and project-management skills, not enough promotion of English-language skills, a decrepit telecommunications infrastructure, and a shortage of qualified managers.

The primary problem that the Russian industry faces is the small size of Russian companies. It is estimated that between 30,000 and 40,000 people are engaged in software outsourcing, however the average size of Russian software services firms is only about 110 employees. Another important issue that the industry faces is that the industry has not developed an industry infrastructure to certify software quality and promote the industry to the global community. Finally, Russia still has a Wild West image in which rampant corruption, a lack of protection of intellectual property, and a lack of overall business transparency has scared away many global corporations.

The parallels between the Russian software services industry and the Indian software services industry as quite striking. Both industries started out with numerous small firms going after international contracts to do software outsourcing services. Both industries had to overcome dubious reputations in the international marketplace to win the confidence of Multinational Corporations. However, unlike the Indian industry - which was the pioneer - Russian software firms are now going down a well established path and are competing with many countries for software outsourcing contracts.

The advantage that the Russians posses is that they have eschewed low-level maintenance and coding work for higher-level software engineering and R&D work. This lets the Russian industry immediately add value to their services without getting bogged down in a bidding war for contracts with low-wage nations such as the Philippines and China. If the Russian software services industry can overcome some of the obstacles that it currently faces, it has the potential to target the Indian software services industry for global supremacy in offshore software outsourcing.

International Monetary Fund

Introduction

The IMF is the world's central organization for international monetary cooperation. It is an organization in which almost all countries in the world work together to promote the common good.

The IMF's primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to buy goods and services from each other. This is essential for sustainable economic growth and rising living standards.

To maintain stability and prevent crises in the international monetary system, the IMF reviews national, regional, and global economic and financial developments. It provides advice to its 185 member countries, encouraging them to adopt policies that foster economic stability, reduce their vulnerability to economic and financial crises, and raise living standards, and serves as a forum where they can discuss the national, regional, and global consequences of their policies.

The IMF also makes financing temporarily available to member countries to help them address balance of payments problems—that is, when they find themselves short of foreign exchange because their payments to other countries exceed their foreign exchange earnings.

And it provides technical assistance and training to help countries build the expertise and institutions they need for economic stability and growth.

Creation of IMF

The IMF was conceived in July 1944, when representatives of 45 governments meeting in the town of Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework for international economic cooperation. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s.
During that decade, attempts by countries to shore up their failing economies—by limiting imports, devaluing their currencies to compete against each other for export markets, and curtailing their citizens' freedom to buy goods abroad and to hold foreign exchange—proved to be self-defeating. World trade declined sharply, and employment and living standards plummeted in many countries.
Seeking to restore order to international monetary relations, the IMF's founders charged the new institution with overseeing the international monetary system to ensure exchange rate stability and encouraging member countries to eliminate exchange restrictions that hindered trade. The IMF came into existence in December 1945, when its first 29 member countries signed its Articles of Agreement. Since then, the IMF has adapted itself as often as needed to keep up with the expansion of its membership—184 countries as of June 2006—and changes in the world economy.

The IMF's membership jumped sharply in the 1960s, when a large number of former colonial territories joined after gaining their independence, and again in the 1990s, when the IMF welcomed as members the countries of the former Soviet bloc upon the latter's dissolution. The needs of the new developing and transition country members were different from those of the IMF's founding members, calling for the IMF to adapt its instruments. Other major challenges to which it has adapted include the end of the par value system and emergence of generalized floating exchange rates among the major currencies following the United States' abandonment in 1971 of the convertibility of U.S. dollars to gold; the oil price shocks of the 1970s; the Latin American debt crisis of the 1980s; the crises in emerging financial markets, in Mexico and Asia, in the 1990s; and the Argentine debt default of 2001.

Despite the crises and challenges of the postwar years, real incomes have grown at an unprecedented rate worldwide, thanks in part to better economic policies that have spurred the growth of international trade—which has increased from about 8 percent of world GDP in 1948 to about 25 percent today—and smoothed boom-and bust cycles. But the benefits have not flowed equally to all countries or to all individuals within countries. Poverty has declined dramatically in many countries but remains entrenched in others, especially in Africa. The IMF works both independently and in collaboration with the World Bank to help its poorest member countries build the institutions and develop the policies they need to achieve sustainable economic growth and raise living standards.

The IMF has continued to develop new initiatives and to reform its policies and operations to help member countries meet new challenges and to enable them to benefit from globalization and to manage and mitigate the risks associated with it. Cross-border financial flows have increased sharply in recent decades, deepening the economic integration and interdependence of countries, which has been beneficial overall although it has increased the risk of financial crisis. The emerging market countries—countries whose financial markets are in an early stage of development and international integration—of Asia and Latin America are particularly vulnerable to volatile capital flows. And crises in emerging market countries can spill over to other countries, even the richest. Particularly since the mid-1990s, the IMF has made major efforts to help countries prevent crises and to manage and resolve those that occur.

In 2004, the year the IMF marked its 60th anniversary; its Managing Director initiated a broad strategic review of the organization's operations in light of the new macroeconomic challenges posed by 21st century globalization. The emergence of new economic powers, integrated financial markets, unprecedented capital flows, and new ideas to promote economic development required an updated interpretation of the mandate of the Fund as the steward of international financial cooperation and stability.

Globalization, poverty, the inevitability of occasional crises in a dynamic world economy—and, no doubt, future problems impossible to foresee—make it likely that the IMF will continue to play an important role in helping countries work together for their mutual benefit for many years to come.

Three main activities of IMF

• Monitoring national, global, and regional economic and financial developments and advising member countries on their economic policies ("surveillance");
• Lending members hard currencies to support policy programs designed to correct balance of payments problems; and
• Offering technical assistance in its areas of expertise, as well as training for government and central bank officials.

Advice on policies and global oversight

When a country joins the IMF, it agrees to subject its economic and financial policies to the scrutiny of the international community. And it makes a commitment to pursue policies that are conducive to orderly economic growth and reasonable price stability, to avoid manipulating exchange rates for unfair competitive advantage, and to provide the IMF with data about its economy. The IMF's regular monitoring of economies and associated provision of policy advice—known as surveillance—is intended to identify weaknesses that are causing or could lead to trouble.

Country surveillance takes the form of regular (usually annual) comprehensive consultations with individual member countries, with interim discussions as needed. The consultations are referred to as "Article IV consultations" because they are required by Article IV of the IMF's Articles of Agreement. During an Article IV consultation, an IMF team of economists visits a country to collect economic and financial data and to discuss the country's economic policies with government and central bank officials. IMF staff missions also often reach out beyond their official interlocutors for discussions with parliamentarians and representatives of business, labor unions, and civil society. The team reports its findings to IMF management and then presents them to the IMF's Executive Board, which represents all of the IMF's member countries, for discussion. A summary of the Board's views is transmitted to the country's government. In this way, the views of the global community and the lessons of international experience are brought to bear on national policies. Summaries of most discussions are released in Public Information Notices and are posted on the IMF's Web site, as are most of the country reports prepared by the staff.
Global surveillance entails reviews by the IMF's Executive Board of global economic trends and developments. The main reviews are based on World Economic Outlook reports and the Global Financial Stability Report, which covers developments, prospects, and policy issues in international financial markets; both reports are normally published twice a year. In addition, the Executive Board holds more frequent informal discussions on world economic and market developments.

In 2006, the IMF introduced a new tool, multilateral consultations, designed to bring small groups of countries together to discuss a specific international economic or financial problem that directly involves them and to settle on a course of action to address it.

Regional surveillance involves examination by the IMF of policies pursued under regional arrangements such as currency unions—for example, the euro area, the West African Economic and Monetary Union, the Central African Economic and Monetary Community, and the Eastern Caribbean Currency Union.

The growing interdependence of national economies and the potential impact of national economic policies on the world economy and vice versa, have prompted the IMF increasingly to integrate the three levels of surveillance. Through its Article IV consultations, the IMF pays close attention to the impact of the larger economies' policies on smaller economies. It also studies the impact of global economic and financial conditions on the economic performance of individual countries and the repercussions of national policies at the regional level.

Lending To Countries in Difficulty

Any member country—rich or poor—can turn to the IMF for financing if it has a balance of payments need—that is, if it cannot find sufficient financing on affordable terms in the capital markets to make its international payments and maintain an appropriate level of reserves. The IMF is not an aid agency or a development bank. Its loans are intended to help its members tackle balance of payments problems, stabilize their economies, and restore sustainable economic growth. Unlike the World Bank and other development agencies, the IMF does not finance projects.

In the first two decades of the IMF's existence, over half of its lending went to the industrial countries, but, since the late 1970s, these countries have been able to meet their financing needs in the capital markets. At present, all IMF borrowers are developing countries, countries in transition from central planning to market-based systems, or emerging market countries. Many of these countries have only limited access to international capital markets, partly because of their economic difficulties.

In most cases, IMF loans provide only a small portion of what a country needs to finance its balance of payments. But, because IMF lending signals that a country's economic policies are on the right track, it reassures investors and the official community and helps generate additional financing. Thus, IMF financing can act as a catalyst for attracting funds from other sources.

IMF-Supported Program

When a country approaches the IMF for financing, it may be in or near a state of economic crisis, with its currency under attack in foreign exchange markets and its international reserves depleted, economic activity stagnant or falling, and a large number of firms and households going bankrupt.

The IMF provides the country with advice on the economic policies that may be expected to address its problems most effectively. The IMF and the government agree on a program of policies aimed at achieving specific, quantified goals. For example, the country may be expected to reduce its fiscal deficit or build up its international reserves. Loans are disbursed in a number of installments over the life of the program, with each installment conditional on targets' being met. A program may range from 6 months to 10 years, depending on the nature of the country's problems. Program details are spelled out in "letters of intent" from the governments to the Managing Director of the IMF, which can be revised if circumstances change.

Instruments of IMF Lending

The IMF provides loans under a variety of "facilities" that have evolved over the years to meet the needs of its membership. The duration, repayment terms, and lending conditions attached to these facilities vary, reflecting the type of balance of payments problem and circumstances they address.

Countries that borrow from the IMF's regular, non concessional lending windows—all but the low-income developing countries—pay market-related interest rates and service charges, plus a refundable commitment fee. A surcharge can be levied above a certain threshold to discourage countries from borrowing large amounts ("exceptional access," as it is called in the IMF). Surcharges also apply to drawings under the Supplemental Reserve Facility. Low-income countries borrowing under the Poverty Reduction and Growth Facility pay a concessional fixed interest rate of 0.5 percent a year.

The foreign exchange provided by the IMF is subject to limits determined partly by a member's quota in the IMF and is deposited with the country's central bank to supplement its international reserves. To strengthen safeguards on members' use of IMF resources, in March 2000 the IMF began requiring assessments of central banks' compliance with desirable practices for internal control procedures, financial reporting, and audit mechanisms. At the same time, the Executive Board decided to broaden the application, and make more systematic use, of the tools available to deal with countries that borrow from the IMF on the basis of erroneous information.

Technical Assistance and Training

The IMF is probably best known for its policy advice and its loans to countries in times of economic crisis. But the IMF also shares its expertise with member countries by providing technical assistance and training in a wide range of areas, such as central banking, monetary and exchange rate policy, tax policy and administration, and official statistics. The objective is to help improve the design and implementation of members' economic policies, including by strengthening skills in institutions such as finance ministries and central banks.
The IMF began providing technical assistance in the mid-1960s, when many
newly independent countries sought help setting up their central banks and finance ministries. Another surge in technical assistance occurred in the early 1990s, when countries in Central and Eastern Europe and the former Soviet Union began shifting from centrally planned to market-based economic systems. More recently, the IMF has stepped up its provision of technical assistance as part of the effort to strengthen the architecture of the international financial system. Specifically, it has been helping countries bolster their financial systems, improve the collection and dissemination of economic and financial data, strengthen their tax and legal systems, and improve banking regulation and supervision. It has also given considerable advice to countries that have had to reestablish government institutions following severe civil unrest or war and has stepped up trade-related technical assistance since the launch of the Doha Round of trade negotiations in 2004.
More than 75 percent of the IMF's technical assistance goes to low-income and lower-middle-income countries, particularly in sub-Saharan Africa and Asia. Post conflict countries are major beneficiaries, with Timor-Leste, the Democratic Republic of the Congo, Iraq, and Afghanistan among the top recipients in the early 2000s.

IMF help poor countries

Most of the IMF's loans to low-income countries are made on concessional terms, under the Poverty Reduction and Growth Facility. They are intended to ease the pain of the adjustments these countries need to make to bring their spending into line with their income and to promote reforms that foster stronger, sustainable growth and poverty reduction. An IMF loan also encourages other lenders and donors to provide additional financing, by signaling that a country's policies are appropriate.
The IMF is not a development institution. It does not—and, under its Articles of Agreement, it cannot—provide loans to help poor countries build their physical infrastructure, diversify their export or other sectors, or develop better education and health care systems. This is the job of the World Bank and the regional development banks.

Some low-income countries neither want nor need financial assistance from the IMF, but they do want to be able to borrow on affordable terms in international capital markets or from other lenders. The IMF's endorsement of their policies can make this easier. Under a mechanism introduced by the IMF in 2005—the Policy Support Instrument—countries can request that the IMF regularly and frequently review their economic programs to ensure that they are on track. The success of a country's program is assessed against the goals set forth in the country's poverty reduction strategy, and the IMF's assessment can be made public if the country wishes.

The IMF also participates in debt relief efforts for poor countries that are unable to reduce their debt to a sustainable level even after benefiting from aid, concessional loans, and the pursuit of sound policies. (A country's debt is considered sustainable if the country can easily pay the interest due using export earnings, aid, and capital inflows, without sacrificing needed imports.)

Governing Body of IMF

The IMF is governed by, and is accountable to, its member countries through its Board of Governors. There is one Governor from each member country, typically the finance minister or central bank governor. The Governors usually meet once a year, in September or October, at the Annual Meetings of the IMF and the World Bank.

Key policy issues related to the international monetary system are considered twice a year by a committee of Governors called the International Monetary and Financial Committee, or the IMFC. A joint committee of the Boards of Governors of the IMF and the World Bank—the Development Committee—advises and reports to the Governors on development policy and other matters of concern to developing countries.

The day-to-day work of the IMF is carried out by the Executive Board, which receives its powers from the Board of Governors, and the IMF's internationally recruited staff. The Executive Board selects the IMF's Managing Director, who is appointed for a renewable five-year term. The Managing Director reports to the Board and serves as its chair and the chief of the IMF's staff and is assisted by a First Deputy Managing Director and two other Deputy Managing Directors.

The Executive Board usually meets three times a week, in full-day sessions, and more often if needed, at the IMF's headquarters in Washington, D.C. Of the 24 Executive Directors on the Board, 8 are appointed by single countries—the IMF's 5 largest quota-holders (the United States, Japan, Germany, France, and the United Kingdom) and China, Russia, and Saudi Arabia. The other 16 Executive Directors are elected for two-year terms by groups of countries known as "constituencies."
Unlike some international organizations (such as the United Nations General Assembly) that operate under a one-country-one-vote principle, the IMF has a weighted voting system. The larger a country's quota in the IMF—determined broadly by its economic size—the more votes the country has, in addition to its "basic votes," of which each member has an equal number. But the Board rarely makes decisions based on formal voting; most decisions are based on consensus. In the early 2000s, in response to changes in the weight and role of countries in the world economy, the IMF began to reexamine the distribution of quotas and voting power to ensure that all members are fairly represented.

IMF employees, who come from over 140 countries, are international civil servants. Their responsibility is to the IMF, not to the national authorities of the countries of which they are citizens. About one-half of the IMF's approximately 2,700 staff members are economists. Most staff works at the IMF's Washington, D.C., headquarters, but the IMF also has over 85 resident representatives posted in member countries around the world. In addition, it maintains offices in Brussels, Paris, and Tokyo, which are responsible for liaison with other international and regional institutions and civil society organizations, as well as in New York and Geneva, which focus on liaison with institutions in the UN system. The Geneva office is also responsible for liaison with the World Trade Organization.

SDR (Special Drawing Right)

The SDR, or Special Drawing Right, is an international reserve asset that member countries can add to their foreign currency and gold reserves and use for payments requiring foreign exchange. Its value is set daily using a basket of four major currencies: the euro, Japanese yen, pound sterling, and U.S. dollar.

The IMF introduced the SDR in 1969 because of concern that the stock and prospective growth of international reserves might not be sufficient to support the expansion of world trade. (The main reserve assets at the time were gold and U.S. dollars.) The SDR was introduced as a supplementary reserve asset, which the IMF could "allocate" periodically to members when the need arose, and cancel, as necessary.

IMF member countries may use SDRs in transactions among themselves, with 16 "institutional" holders of SDRs, and with the IMF. The SDR is also the IMF's unit of account. A number of other international and regional organizations and international conventions use it as a unit of account or as the basis for a unit of account.

Resources of IMF

The IMF's resources come mainly from the quotas that countries deposit when they join the IMF. Quotas broadly reflect the size of each member's economy: the larger a country's economy in terms of output, and the larger and more variable its trade, the larger its quota tends to be. For example, the United States, the world's largest economy, has the largest quota in the IMF. Quotas are reviewed periodically and can be increased when deemed necessary by the Board of Governors.

Countries deposit 25 percent of their quota subscriptions in Special Drawing Rights or major currencies, such as U.S. dollars or Japanese yen. The IMF can call on the remainder, payable in the member's own currency, to be made available for lending as needed.

Quotas, together with the equal number of basic votes each member has, determine countries' voting power. Quotas also help to determine the amount of financing countries can borrow from the IMF, and their share in SDR allocations.

Most IMF loans are financed out of members' quotas. The exceptions are loans under the Poverty Reduction and Growth Facility, which are paid out of trust funds administered by the IMF and financed by contributions from the IMF itself and a broad spectrum of its member countries.

If necessary, the IMF may borrow from a number of its financially strongest member countries to supplement the resources available from its quotas. It has done so on several occasions when borrowing countries needed large amounts of financing and a failure to help them might have put the international monetary system at risk.

Like other financial institutions, the IMF also earns income from the interest charges and fees levied on its loans. It uses this income to meet funding costs, pay for administrative expenses, and maintain precautionary balances. In the early 2000s, there was a decline in the demand for the IMF's no concessional loans, reflecting benign global economic and financial conditions as well as policies in many emerging market countries that had reduced their vulnerability to crises. To diversify its income sources, the IMF established an investment account in 2005. The funds in the account are invested in eligible marketable obligations denominated in SDRs or in the securities of members whose currencies are included in the SDR basket. The Fund also began to explore other options for reducing its dependence on lending for its income.
 
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