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. Last Updated: 07/27/2016

Bankruptcy Plan Raises Fears of Abuse

The government's bankruptcy program will ease Russia's growing interenterprise debt crisis and boost investment, but could also breed abuses and even social unrest, officials and experts said Friday.

Alexander Livshits, top economic adviser to President Boris Yeltsin, said that the bankrupting of loss-making firms would have a positive impact on the economy, helping to cancel debts estimated at 15 trillion rubles ($7.43 billion) that have crippled enterprises.

"Since firms are sold along with their debts, it will ease the crisis," Livshits said.

Russian bankruptcy officials this week declared three state firms insolvent in the first application of a bankruptcy decree signed by President Boris Yeltsin in June. They said that another 2,000 companies were under investigation and could soon also face bankruptcy procedures.

Under the bankruptcy regulations, control of insolvent firms is handed over to bankruptcy officials, who then either liquidate the firms to cover debts or auction them off at investment tenders.

Livshits said that although investors would be obliged to pay off an enterprise's debts, an opportunity to gain full control over bankrupt firms could still make them attractive. Under voucher privatization, most private investors wound up as minority shareholders, making it difficult for them to take decisive steps towards restructuring.

"As far as I know, the federal bankruptcy agency makes a decision to hold an investment tender only if it sees potential investors," Livshits said.

Ilya Shchyogolev, the deputy head of the Federal Bankruptcy Agency's industry department, said that quite often potential investors can be found among the enterprises' creditors, which are usually suppliers.

"Creditors are willing both to get their money back and expand their business by purchasing a debtor partner," Shchyogolev said. "They know better than anyone what needs to be done to turn the insolvent company profitable, because they work in the same industry."

But Valentina Levina, who heads the regional policy department at the government Center for Economic Reform, warned that the bankruptcy process was wide open to abuses, since investors could gain control of profitable companies cheaply by getting them declared bankrupt and buying them at tenders.

Furthermore, she said, imposing bankruptcy on huge coal mining and metallurgy firms, which often support entire regions, could lead to social unrest since the government so far lacks a program to aid unemployed workers. Labor officials predicted earlier this year that real unemployment could soar to almost 15 million this year if the bankruptcy law is fully implemented.

Despite the undesirable side effects, however, Levina maintained that bankruptcy will ultimately be much healthier for the economy than continuing state support to inefficient firms.

"After all, a new owner will not sit on the top of his purchase, but will employ people and pay taxes," she said.

Levina added that even trade union officials had acknowledged that actual unemployment was in a sense better than so-called hidden employment, in which cash-poor companies send workers on unpaid or partly paid vacations.

"At least workers, when fired, will know that they need to look for a job," she said. "Today they just sit there, hoping that the director will manage to beat out some money from the government to pay wages once a quarter."