. Last Updated: 07/27/2016

Battling Bankruptcy's Myths

It is no secret to anyone following the pace of Russia's economic reforms that progress has so far been achieved only in the credit and monetary spheres. Russia has nothing to boast of when it comes to structural policy. Production has changed minimally since socialist times, or to put it more accurately, it has not changed at all.


Those enterprises that attained huge shares of export revenues and were the nation's pride when it entered the industrial age have remained just as they started. The military-industrial complex still hangs like a weight around the economy's neck. And most importantly, natural selection has not yet begun.


In the industrial sector, there has been a bankruptcy law on the books since 1992. There is also a special organization called the Federal Bankruptcy Affairs Department, or FUDN, headed by Pyotr Mostovoi. Mostovoi has no doubt been one of the Russian government's most outstanding personalities, as far back as the Gaidar government. During voucher privatization, Mostovoi was Anatoly Chubais' right-hand man. He is a man capable of presenting worthwhile ideas and then putting them into action. But in several years in his bankruptcy job, he has made little progress.


Actually, that is not the true picture. In 1993-94, the FUDN was involved in only a handful of industrial bankruptcy procedures. In comparison, one could call the 1995-96 period very fruitful. In the first 10 months of 1996, the FUDN has handled nearly 800 industry bankruptcy procedures, with several reaching conclusion.


Mostovoi himself is dissatisfied -- not only with his organization's slow pace but also with the abundance of myths surrounding the concept of bankruptcy in Russia.


The first of these concerns the common view that bankruptcy is a process initiated from above -- there was mass privatization, and now there is mass bankruptcy. Few realize that bankruptcy is a normal way to regulate debtor-creditor relationships when they get out of control. The result of this ignorance is that nearly half of all bankruptcy proceedings in Russia are initiated by the FUDN, acting on the government's behalf. Very few are initiated by debtors, using their rights under bankruptcy to defend themselves. In 1995, such cases accounted for only 15 in 1,000.


According to Mostovoi, this has resulted in FUDN playing a purely repressive role, blocking the development of an understanding for the real reasons behind bankruptcy.


The second myth is that bankruptcy involves taking property away from some and giving it to others. This has created a fear of the process.


The third myth involves the belief that none of Russia's industrial enterprises are competitive. Because of this, no process of natural selection should be allowed to take place. Sooner or later, it is feared, bankruptcy will lead to the total destruction of domestic industry.


But according to Mostovoi, less than one third of Russia's businesses are incapable of surviving in the free market. In addition, of the nearly 1,900 proceedings over the past two years, only about 40 percent of them resulted in liquidation of a business' assets. Along with this, Mostovoi has emphasized that most of these cases of liquidation affected "fictitious" front companies which were designed to hide a money trail and were never intended to exist for long in the first place. Following bankruptcy, legitimate businesses as a rule continue to exist, and about 80 percent of jobs are saved as well.


Thirty-eight percent of bankruptcies result in installation of outside management, after which 80 percent of businesses return to normal activities and begin to pay taxes. In another 12 percent, creditors and debtors reach a settlement and proceedings are abandoned.


These figures dispel the fourth myth -- that bankruptcy leads to negative social and economic consequences. Of course one would have to agree that, for all intents and purposes, bankruptcy is a poor employer. However it is more humane than businesses that do not let workers go, instead sending them off on unpaid holidays with the illusion that their job is safe. It's an old dilemma, whether to cut the cat's tail off all at once or one piece at a time.


I believe the fifth myth is more widespread and entrenched in people's heads -- that businesses' financial misfortunes are not the result of unskilled management, but, to put it mildly, of anti-social government policy.


All business directors curse the government. But few actually pay attention to their own blunders, laying the blame instead on the failures of monetarists who do not want to weaken inflation and thus stimulate production. Most directors consider the FUDN as enemy, and act accordingly. I am not coming out in defense of the government -- the all-encompassing barter system and bills of exchange exist with its quiet approval. What I am saying is that the government is not the only guilty party. They all are.


Perhaps the clearest example of the FUDN's unhappy predicament is the recent series of attempted bankruptcy cases against tax defaulters unearthed by the Emergency Tax Commission, or VChK. With KamAZ and ZiL, the two best-known, the bankruptcy cases were quickly killed by the heads of their respective local administrations. However, Mostovoi himself acknowledges that KamAZ is not bankrupt in the literal sense. The enterprise is both viable and solvent; it just does not want to pay the taxes it must.


It should be pointed out that, according to Mostovoi, not all local administrations are so zealous in defending their own. Although a good quarter to one-fifth of the members of the Federation Council are prepared to fight the VChK and the FUDN over anything, just as many have jumped to the opposite extreme, wanting to bankrupt everything on their territories.


In such circumstances, can the bankruptcy process escape its bogeyman identity and become a key phase in structural economic changes, as it is in every other country in the world? So far, it is unclear. The causes of corporate insolvency are closely related to the Finance Ministry's use of legally questionable quasi-money to pay its debts and to the excessive expenditures in the budget. These days, when Pyotr Mostovoi is asked: "How do you see your future?" he answers: "I'm grabbing my machine gun and going over to the French Resistance."