What Happened To The Russian Coal Miners' Dollars?

At least $100 million from a World Bank loan is lost

As the chill of impending autumn settles on mining towns across Siberia, Russia's coal industry is again sending distress calls to the World Bank. A year ago, the Bank provided loans of $500 million to help the industry restructure. Now, Russia is asking for another half-billion. But there's a problem: A chunk of last year's loan--one of the World Bank's largest ever--disappeared down a black hole. Most of the aid was either stolen by corrupt officials, handed over to foes of reform, or spent on projects unrelated to coal. "It didn't do a thing for the coal industry," complains Yuri Dashko, a mining expert for a U.S.-funded reform project in the northern city of Vorkuta.

The misspent World Bank loan is only the latest brouhaha over aid to Russia. Critics have long faulted aid organizations for channeling funds through high-paid Western consultants rather than directly to Russians. With its coal loan, the bank for the first time tried to shake up a subsidy-guzzling Russian industry. The loan also gave President Boris N. Yeltsin's government a boost during his reelection fight. But instead of controlling how the money was spent, the bank handed over cash in exchange for Kremlin promises to reform the industry.

Such laissez-faire lending proved to be risky in Russia. Although the government is eager to close nearly 100 of its 250 mines, it faces fierce opposition from Rosugol, the state monopoly that runs the industry. Even so, the government turned over tens of millions in aid to Rosugol and now says most was misspent. And the government failed to curb corrupt local officials, who also helped themselves to miners' aid.

Despite these problems, the World Bank seems set to make a second loan. Indeed, the bank plans to ramp up lending in Russia to a total of $6 billion over the next two years. The government says it has established tougher controls. Still, reform-watchers are dismayed. "We have $500 million that has disappeared into the abyss, and the World Bank is ready to lend more," worries David Kramer, executive coordinator of the Russian-Eurasian program at the Carnegie Endowment for International Peace. Another loan, he adds, would saddle Russia with debt repayments it can ill afford. Russia is already the bank's third-biggest borrower.

The trail of last year's $500 million loan shows how complicated aiding Russia can be (table). When the first $250 million installment arrived on the eve of Yeltsin's reelection on July 3, 1996, it looked like relief was at hand for mining regions. The money was aimed at closing unprofitable mines and providing severance pay and retraining for laid-off miners. It was also geared to easing the burden of services transferred from mining companies to local governments.

So much for the plan. On the campaign trail, Yeltsin had made dozens of promises, from paying overdue salaries to spending more on kids' camps. But the government was strapped for cash, and the World Bank windfall arrived just in time. Federal officials admit they tapped the money for other budget needs, and not a kopeck went to mining regions.

By autumn, officials from mining regions were howling. Miners, too, had not been paid. Local governments stopped paying doctors to free up money for heating bills. So the bank delayed sending the second $250 million installment to Moscow. Finally, in November, the Finance Ministry began channeling funds to the miners. A month later, the bank sent the second installment.

But that was just the start of problems. No one seemed to keep tabs on the money. To the dismay of bank officials, the government channeled $55 million of the remaining $100 million to Rosugol. The money was earmarked for miners' severance pay, but the bank says workers saw only $6 million and Rosugol never accounted for the rest. Critics think Rosugol diverted funds to projects such as new mines, undercutting the drive to shrink the industry.

Rosugol rejects such claims. It says the funds were just part of its $1.4 billion in federal subsidies last year. Of that, the company says it spent $94 million on aid to laid-off workers, including severance pay. It also admits that corrupt managers siphoned off $11 million in subsidies to coal companies. The company launched 16 investigations and fired or demoted some 400 executives for misuse of funds.

FEW NEW JOBS. But managers were not the only culprits. Nearly $400 million went to mining regions, where local governments misspent at least 15% of the money, the Finance Ministry says. Officials grabbed some. The rest was lost to inexperience. Ironically, local officials, unaware of how to set up job programs, turned to the coal companies.

In the Kemerovo region of Siberia, for example, authorities asked a Rosugol affiliate for help. The company promised to employ laid-off workers in a garment factory and brickmaking plant. But the ventures created few new jobs. Now, bank and government officials suspect the affiliate diverted money to new facilities. Rosugol says it doesn't know how the money was spent. Aman Tuleev, Kemerovo's new governor, complains Rosugol is building new coal terminals in his region while existing terminals are underutilized. Yeltsin removed Tuleev's predecessor in June, saying $32 million in coal aid had disappeared on his watch.

World Bank officials seem surprisingly unperturbed by the misspending. They contend that offering loans to spur change is better than micromanaging expenditures. In the last year, they note, the government has cut mine operating subsidies by 40%--a key reform. And even if miners got little relief, local governments spent on other good causes. "The first phase helped the government focus on some social aspects, but it also pointed up that real structural change in this industry is going to be a lengthy process," says Michael Carter, who heads the bank's Russia mission.

As the World Bank steps up its lending, miners are watching anxiously. Paychecks are late, and living conditions remain wretched. But the loan will help only if it is used carefully this time. Dozens more mines need to be closed. Miners must be relocated. If $500 million more goes down a hole, not only miners will suffer. Russia's reputation will be blackened, and so will the World Bank's.

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