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. Last Updated: 07/27/2016

Software Company Copes With Debt Crisis

It was April when Dmitry Chernikh saw the first ripples of Russia's financial crisis lapping at the door of Galatica, one of Russia's hottest computer software companies.

It was not the collapse of the Russian financial markets, or the dizzying leap in interest rates, or even the first uncertain steps of the country's new untested government that worried Chernikh or his fellow directors. Like most other young Russian businesses, Galatica, with $8 million in sales last year, does not trade its shares publicly, nor has it ever sought bank loans.

What hit Galatica last spring was something more basic, and more endemic to Russia's unfinished economic crisis: a pileup of unpaid bills, which by midsummer had topped $3 million, as the company's biggest clients -- mostly in the rich and powerful energy sector -- stopped payments on Galatica's popular management software package.

Even after the agreement last month for a $22.6 billion package of credits and loans, Russia's financial crisis is still playing itself out on the wider landscape of the Russian economy.

Like the government, Galatica swung quickly into crisis mode.

The company's directors -- computer whizzes from Moscow State University who founded Galatica in the early days of Soviet economic reform -- briefly considered a get-tough approach. Threatening letters were sent out to clients, warning them that Galatica would cut off consulting services to companies that did not pay their bills.

But the bluff fell flat.

"The response was so tough that we backed off," Chernikh said. "At that point we decided that if the country is in bad shape and our clients are in bad shape, we would just have to suffer, too."

Small companies anywhere are vulnerable to sudden financial shifts, but in Russia, the small-business sector is particularly exposed, lacking both access to credit and the protection of a well-developed system for bankruptcy and other restructuring.

For most Russian businesses, borrowing money from local banks is not feasible, given the continuing rise in interest rates.

For small companies like Galatica, which employs almost 500 people in offices scattered around the former Soviet Union, seeking investors through a public offering of shares is not realistic either.

Galatica's crisis strategy has been to look beyond its big clients in Russia's energy sector and focus on more stable sectors, like retailing and food processing, which have more direct links to consumers. It has been helped by a recent merger with Parus, another Russian software company that built up a diverse clientele, and by its operations outside Russia, in former Soviet states like Kazakhstan and Uzbekistan.

Coping with financial crises is not a new challenge for Galatica, which also saw payments grind to a halt in the period before the 1996 presidential elections. Then Russia's money supply dried up dramatically for several months as foreign investors, fearing a Communist victory, stayed away.

"In 1996, the crisis was much bigger than now," Chernikh said. "Then people stopped paying altogether. But each passing crisis is a little less alarming."

Two years later, after a boom year in 1997 when sales more than tripled, Galatica's directors are relatively sanguine about their ability to survive without layoffs or major restructuring.

Since 1992, when the company developed its first program to help companies manage their resources, Galatica has geared its management programs to reflect the way their clients actually do business, not the way they should according to Western business school textbooks.

From Soviet-style bookkeeping to barter transactions, Chernikh says Galatica's programs have kept up with Russia's reality.

"Western companies solve their problems very differently from Russian companies," he said. "Here, for instance, a contract is not a contract in the Western sense. It can change during implementation, which is something we have taken into account."