The World Bank's top official dealing with Russia and the other transition states in Central and Eastern Europe paints a sobering, even daunting, picture of what many in the region will face over the next year or so.

Johannes Linn, the bank's vice president for Europe and Central Asia, says the region faces a protracted crisis of economic, social, and, most recently, security problems, especially over the next 12 months.

Speaking to reporters in Washington on 25 April, before the start of this week's annual meetings of the bank and the International Monetary Fund (IMF), Linn said Russia and Ukraine especially face serious economic difficulties

"We continue to expect a decline in output and an uncertain political outlook due to elections that are coming up this year and next year," he said. "The social situation in these countries is fragile since incomes are continuing to decline and social support systems are continuing to weaken. Poverty is on the rise, in Russia, for example, in our estimate, almost 20 percent of the population is in extreme poverty. And we of course also see a situation where structural and social reforms are incomplete and proceeding only very slowly and with limited political support."

Hungary, Poland, and the Czech Republic are the good news, he said, noting that these countries remain relatively stable and unaffected by the ongoing Russian financial crisis because of early reforms and strong policies.

But for most former Soviet countries, the impact of that crisis has been severe and will be felt for a long time to come, according to Linn. The global economy won't make the real difference among these nations, he says, it depends on their own policies and their proximity to Russia.

Asked about the lessons learned from the Asian and Russian financial crises, Linn said there were many, including the basics of strong domestic reforms. But one lesson that was part of Russia's collapse last summer was its strong defense of currency exchange rates. A major part of the IMF's last loan drawing for Russia was eaten up in the Central Bank's attempt to defend the exchange rate of the ruble. Linn says it is clear now this can lead to severe crises: "Ukraine is a good example where in fact a rather sensible management of getting away entirely from a fixed exchange rate in fact prevented the kind of meltdown we see in Russia.

"The weakness of banking systems and supervision, linking this of course also with the exposure of short term debts, in appropriate foreign exchange positions--again Russia being a good example--are another important lesson that we are drawing for much more work and attention has to be given."

Another significant lesson, according to Linn, is the danger of a weak social safety net. Very weak social protection systems are unable to deal with the fallout of severe economic crisis, he argued, noting that the case of Russia was particularly bad.

"We had difficulty in engaging the Russians through 1996 in an active dialogue on social reforms," he noted, "and still have difficulty in Ukraine today. Earlier attention to social system reforms of social systems and then more significant action also would have helped in crisis response."

Linn pointed out that Russia has still not dealt adequately with its social safety net and the deepening crisis only makes clearer that Russia cannot afford further postponement of reform. He said that in a recent study of the social system in Russia, the bank predicted that the worst of the crisis is still ahead in the coming 12 months. Next winter will be the hardest time, said Linn, far worse than this year.

The bank projects that real personal incomes in Russia will fall an average of 13 percent through 1999, with the extreme poverty rate rising to more than 18 percent of the population, while social expenditures by the government will fall by 15 percent.

More broadly for the region, Linn said the major lesson from the crisis has been the necessity of a political consensus on reforms. He compares the examples of Bulgaria and Romania:

"Bulgaria has now in fact recovered from a severe financial crisis only two years ago because in fact it has pursued a consistent and comprehensive reform and stabilization process based on a reasonably clear and sustainable political consensus between the president, the government, parliament, and wide segments in the population. Romania, by contrast, has had considerable difficulties that one can trace back to the lack of political consensus and difficulty of forming a clear political underpinning for reform and stabilization.

"Now we're hopeful that in looking forward, Romania can find a more consensus-oriented reform process, and indeed Romania is one of the pilot countries for the comprehensive development framework where we will focus very much with the leadership and under the leadership of the president, on trying to build this broader consensus."

IMF SAYS UKRAINIAN ECONOMY FRAGILE. In an annual report released on 27 April, the IMF executive directors said Ukraine's economy remains fragile and may be further threatened by continued friction between the parliament and the government, an RFE/RL correspondent reported. The IMF praises Ukraine for "good progress" in restructuring and privatizing a number of state enterprises, but it also noted delayed reforms in the agricultural and energy sectors. The report cautioned the Ukrainian government that it may face strong pressure to settle wage and pension arrears before the presidential elections in October. And it urged government to clear as many of those arrears as possible before the election campaign starts. JM

UKRAINIAN NATIONAL BANK CUTS DISCOUNT RATE TO 50 PERCENT. Ukraine's central bank has lowered its discount rate from 57 percent to 50 percent beginning 28 April, AP reported on 27 April. National Bank Chairman Viktor Yushchenko explained the decrease by arguing that the country has achieved "stability in all segments of the currency market." Meanwhile, Ukraine's hard-currency reserves have dropped to $896 million, down from $1.05 billion at the beginning of this year. Yushchenko commented that the resumption of IMF aid will allow Ukraine to increase those reserves. The government hopes the IMF will soon release another $150 million installment of its loan to Ukraine. JM

The World Bank's top official dealing with Russia and the other transition states in Central and Eastern Europe paints a sobering, even daunting, picture of what many in the region will face over the next year or so.

Johannes Linn, the bank's vice president for Europe and Central Asia, says the region faces a protracted crisis of economic, social, and, most recently, security problems, especially over the next 12 months.

Speaking to reporters in Washington on 25 April, before the start of this week's annual meetings of the bank and the International Monetary Fund (IMF), Linn said Russia and Ukraine especially face serious economic difficulties

"We continue to expect a decline in output and an uncertain political outlook due to elections that are coming up this year and next year," he said. "The social situation in these countries is fragile since incomes are continuing to decline and social support systems are continuing to weaken. Poverty is on the rise, in Russia, for example, in our estimate, almost 20 percent of the population is in extreme poverty. And we of course also see a situation where structural and social reforms are incomplete and proceeding only very slowly and with limited political support."

Hungary, Poland, and the Czech Republic are the good news, he said, noting that these countries remain relatively stable and unaffected by the ongoing Russian financial crisis because of early reforms and strong policies.

But for most former Soviet countries, the impact of that crisis has been severe and will be felt for a long time to come, according to Linn. The global economy won't make the real difference among these nations, he says, it depends on their own policies and their proximity to Russia.

Asked about the lessons learned from the Asian and Russian financial crises, Linn said there were many, including the basics of strong domestic reforms. But one lesson that was part of Russia's collapse last summer was its strong defense of currency exchange rates. A major part of the IMF's last loan drawing for Russia was eaten up in the Central Bank's attempt to defend the exchange rate of the ruble. Linn says it is clear now this can lead to severe crises: "Ukraine is a good example where in fact a rather sensible management of getting away entirely from a fixed exchange rate in fact prevented the kind of meltdown we see in Russia.

"The weakness of banking systems and supervision, linking this of course also with the exposure of short term debts, in appropriate foreign exchange positions--again Russia being a good example--are another important lesson that we are drawing for much more work and attention has to be given."

Another significant lesson, according to Linn, is the danger of a weak social safety net. Very weak social protection systems are unable to deal with the fallout of severe economic crisis, he argued, noting that the case of Russia was particularly bad.

"We had difficulty in engaging the Russians through 1996 in an active dialogue on social reforms," he noted, "and still have difficulty in Ukraine today. Earlier attention to social system reforms of social systems and then more significant action also would have helped in crisis response."

Linn pointed out that Russia has still not dealt adequately with its social safety net and the deepening crisis only makes clearer that Russia cannot afford further postponement of reform. He said that in a recent study of the social system in Russia, the bank predicted that the worst of the crisis is still ahead in the coming 12 months. Next winter will be the hardest time, said Linn, far worse than this year.

The bank projects that real personal incomes in Russia will fall an average of 13 percent through 1999, with the extreme poverty rate rising to more than 18 percent of the population, while social expenditures by the government will fall by 15 percent.

More broadly for the region, Linn said the major lesson from the crisis has been the necessity of a political consensus on reforms. He compares the examples of Bulgaria and Romania:

"Bulgaria has now in fact recovered from a severe financial crisis only two years ago because in fact it has pursued a consistent and comprehensive reform and stabilization process based on a reasonably clear and sustainable political consensus between the president, the government, parliament, and wide segments in the population. Romania, by contrast, has had considerable difficulties that one can trace back to the lack of political consensus and difficulty of forming a clear political underpinning for reform and stabilization.

"Now we're hopeful that in looking forward, Romania can find a more consensus-oriented reform process, and indeed Romania is one of the pilot countries for the comprehensive development framework where we will focus very much with the leadership and under the leadership of the president, on trying to build this broader consensus."