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. Last Updated: 07/27/2016

State: Firms Investing Rather Than Paying Bills

Factory directors who complain they cannot pay their bills often have billions of their plant's rubles tied up in outside investments, a government research report says.


The researchers concluded that a group of major firms are at the heart of the country's so-called cash crisis, regularly failing to pay suppliers and creditors while choosing instead to place company earnings in loans, bank deposits and other investments. One unnamed company cited in the report had 52.5 billion rubles ($22.8 million) in a foreign currency account as of Jan. 1994.


Russia's arrears crisis, or krisis neplatezhei, has left employees at many major plants unable to collect their salaries, frequently for months on end. The problem has often reached absurd proportions, with staff being paid with merchandise -- sewing machines, pencils or bottles of wine -- because the company has no cash.


In Arkhangelsk last month the crisis verged on the ridiculous when lumberjacks at the Yarensky logging company were paid in tampons.


The government report, published last Saturday in the government daily Rossiiskiye Vyesti, studied 15 enterprises with a total of about 200,000 employees. Researchers compared the firms' balances in 1989, when none had arrears problems, and in 1993, when 10 were short of cash.


The firms cited in the report have the outward appearance of successful companies, producing goods and generally paying their employees. But they are perennially late in paying their suppliers, and are among the 100 or so companies that are to blame for the two-year-old bottleneck of cash across the country, the report says. According to government statistics, Russian firms now owe each other the equivalent of about $51 billion. The report says that firms in arrears have learned to profit from the difference between what they earn by investing and lending money, and what they owe their creditors. Annual interest rates at commercial banks hover well over 100 percent, but some large state firms with strong lobbies in Moscow are still able to obtain government loans at 10 percent.


One firm in arrears managed to maintain nine foreign currency accounts in seven banks, the report says. Its earnings in the first quarter of 1994 from its bank deposits accounted for 75 percent of profits. Meanwhile, Gorkneftorgsintez, a producer of gas and oil products, earned 46 percent of its income in 1994 from activities unrelated to gas and oil, the report says.


One of the most striking sections of the report describes how some suppliers deliver goods more readily to companies that do not pay in advance. It says that "interested individuals" on both sides arrange the delivery of goods without pre-payment, privately profiting from the deals. The longer a debtor firm can avoid paying for a shipment of goods, the greater the profit it can earn by investing the money elsewhere.


The result, the report says, is that an oil products manufacturer like Yaroslavnefteorgsintez is being audited by the Interior Ministry and the Tax Police for delivering major shipments without demanding pre-payment.


Charles Blitzer, chief economist at the World Bank in Moscow, said it is understandable in a changing economy like Russia's for some company directors to invest in more profitable areas outside their plants. "We observe things like this happening in other developing economies," he said.


But the question, he added, is how much of the money invested outside the firm originated in government subsidies.


Dmitry Rozhkov, a staff member at the Center for Economic Performance, a Moscow-based free market think tank, said: "It's normal in a market economy for a business to be reluctant to pay for goods immediately."The government researchers reject some of the major explanations for the cash shortage that have gained currency in the Russian media. It has been argued, for instance, that Russian firms are short of cash because earnings are down, or because the firm is overtaxed. But the summary notes that earnings for some cash-short firms have increased.


Researchers found that the firms in arrears were not overly concerned by their outstanding loans, and in fact made little effort to pressure their debtors. One company, unnamed in the published report, was owed 400 billion rubles by its debtors, but its legal department only made attempts to retrieve 122 million rubles, or 3 percent of the total.


The researchers offered only vague recommendations to solve the debt crisis. They suggested that the Russian government take steps to limit the activities of perennially cash-short companies, and that it introduce regulations to alter the conditions that make it profitable for companies to remain in arrears.