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. Last Updated: 07/27/2016

Bankruptcies: Russia Must Brace Itself

In the midst of a sharp decline in industrial production, the Russian government has begun a bankruptcy process that labor officials say could leave 15 million Russians jobless by the end of this year.

Although the government is open to criticism for still not having devised policies on how to deal with such a mammoth growth of unemployment, it is at least a salutary sign that the process of weeding out inefficient industry has begun.

The time has long passed for the state to let its debt-ridden, unproductive offspring restructure or die. Under the government's bankruptcy program, investment tenders will allow some assets to become productive again, while the liquidation of the rest will help stem the country's mounting interenterprise debt crisis. If production figures drop further, so be it: The country's industrial base must restructure to produce things that people need.

But bankruptcy alone will not make a healthy economy.

The government's bankruptcy process, for example, opens up immense opportunities for corruption that could dilute the potential inflow of capital to both companies and state coffers. Since prices at bankruptcy sales will be much cheaper than at other investment tenders, officials and managers could easily cut mutually profitable deals to declare companies bankrupt and sell them cheaply to themselves or an outside investor.

Much more important, however, is the impact on workers.

According to Ella Pamfilova, the former social security minister, the government has taken no precautions to deal with the growth in joblessness that mass bankruptcy will inevitably beget. Pamfilova had been working on a plan to help the unemployed without creating a welfare state, but she resigned during January's cabinet reshuffle, leaving the country with an inadequate unemployment benefits system and no retraining or relocation programs. Furthermore, the country's political and legal climate is not conducive to the investment, most of it foreign, that the economy will need to create new jobs. True, investors will be able to buy controlling interests in bankrupt companies at investment tenders cheaply. And the financial information available on those companies -- the fact that they are insolvent -- is more than investors have been able to hope for in the past.

But Prime Minister Viktor Chernomyrdin's promises of tax breaks and legal protection for foreign investors do not appear likely to bear fruit soon, and the matter of land ownership is still a big problem.

Much like privatization, bankruptcy will take place in a country that is not quite ready for it. The government's task now is to control the fallout.