INSIDE FINANCE: Bankruptcy Developments Are on Bright Side of Death

Always look at the bright side of death," went an old Monty Python song. When it comes to the Russian economy, people have been ignoring that advice far too long.

Sure, the Russian economy as we knew it died very painfully last August. As a result, the government is bankrupt.

(Though the courts will not recognize that, as evidenced by the recent Moscow arbitration court ruling against the law firm Rusatommet, which was trying to get the Finance Ministry to pay up on Minfin bonds.) Many companies are also bankrupt, either technically or in real terms.

But the bright side is there. I remember liberal economists back in 1993 and '94 moaning that the biggest problem in restructuring the Russian economy was the absence of political will and clear rules for bankruptcies. Now that is no longer true, and the economists have been proven right in that bankruptcies are useful.

Look at just one recent example. Last week, oil giant Sidanko announced it would no longer use transfer pricing in dealings with its subsidiaries.

That is a revolutionary move that was directly caused by bankruptcy proceedings against three Sidanko subsidiaries - Chernogorneft, Kondpetroleum and Varyeganneftegaz.

Sidanko managers figured out that forcing the subsidiaries to sell oil cheaply to the central office and then reselling it for a profit may be a good way to minimize taxes and simplify corporate finances, but it tends to kill off the subsidiaries.

The bankruptcies (Sidanko itself is trying to fight off insolvency) have reduced the oil holding's production capacity from almost 20 million tons of oil a year to less than 7 million tons, judging by 1998 figures.

So now, to stay alive, Sidanko will allow the subsidiaries more freedom to market their oil. That should help not just the local production companies, but also the regions where they operate.

Regional governors have long complained that large companies' taxes are mostly paid in Moscow, where the holdings have their headquarters.

Competitors doubt Sidanko can keep up the good work - it needs to pay its own creditors, and squeezing subsidiaries is a quick way to do that.

But if BP Amoco, as a Sidanko shareholder, helps pay off the debts to increase its share, Sidanko managers might stick to their novel plan.

Bankruptcy proceedings that are going on in the financial sector are also, in the long term, beneficial for Russian business as a whole.

The external management of Tokobank is selling off assets and paying creditors. The management of Rossiisky Kredit bank has agreed with foreign creditors that some assets of its industrial holding, Metallinvest, will be used to pay off the bank's debts. Foreign banks have become shareholders in theoil company Yukos for debts owed by Bank Menatep, which was affiliated with Yukos.

These are all positive developments. They prove that it is possible to get at least some money back from Russian debtors by due process.

They also show that though bankers have managed to hide large shares of their assets in complicated networks of companies, creditors see that and are able to get at some of those assets.

Obviously, the existing bankruptcy rules are not perfect, and, according to professional external managers, many insolvency cases are artificial, and quite often self-induced.

That, however, is next to impossible to prove. Mezhdunarodny Moskovsky Bank, for example, has failed to prove that Uneximbank engineered its own bankruptcy.

Russian business is notoriously criminalized, and the bankruptcy process often opens up incredible vistas of theft.

"If we had the right laws, nine out of 10 [bankruptcy cases] would be in criminal courts, not in arbitration courts," bankruptcy manager Valery Nikonov said in an interview with Vedomosti newspaper.

Nikonov, by the way, has been the court-appointed manager of a record number of companies - 15 in the last 18 months.

Bankruptcy managers in Russia are a rising class, a new elite of professional managers who can turn around any half-dead company. That this class has emerged is truly the bright side of economic death.

Leonid Bershidsky is the editor of Vedomosti.