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. Last Updated: 07/27/2016

Firms Are Swimming Naked, KPMG Says

Many companies in Russia live like there is no tomorrow and pay little attention to contingency planning and cost reduction, a new study by KPMG suggests.

Because the current economic situation is so favorable and companies here are generally more profitable than their Western counterparts, many do not bother to have contingency plans -- leaving themselves vulnerable to sudden economic changes, Tony Thompson, head of advisory at KPMG's Moscow office and one of the authors of the study, said in presenting the report Wednesday.

"Some Russian businesses are swimming naked," Thompson said, citing U.S. billionaire investor Warren Buffett, who once famously said: "It's only when the tide goes out that you learn who's been swimming naked."

While more than half of the surveyed companies regularly restructure to become more efficient, only 5 percent said they conducted reorganization because of a worsening economic situation or tighter regulation, according to the firm's six-month study of more than 30 companies, including Vneshtorgbank, VSMPO-Avisma, Unified Energy Systems, Irkut, Basic Element and Delta Capital Management.

Acute vulnerability in the face of unfavorable economic changes was never mentioned as a reason for reorganization, the study said.

The top three motives for restructuring mentioned by companies were to better business practices (67 percent of respondents), to raise capital or attract investors (52 percent), and to integrate newly acquired companies or improve lax control over subsidiaries (52 percent), the study said.

Sergei Bazoyev, head of business restructuring at PricewaterhouseCoopers in Moscow, said he had also noticed a similar tendency. Companies based in Russia primarily restructure to increase efficiency and make the company more attractive prior to initial public offerings, Bazoyev said by e-mail Wednesday.

Bazoyev added that "we have seen a sharp increase in Russian businesses' interest in restructuring recently," and that the trend was expanding from "large corporations to mid-level enterprises."

Types of restructuring in Russia differ from those in the West as the companies are pursuing different goals, KPMG's Thompson said. "In Germany, most restructuring is about cost reduction and the need to raise profitability, whereas most restructuring in Russia is about strategic and organizational measures, often in the run-up to initial public offerings," he said.

Another author of the report, Alexander Yerofeyev, head of restructuring at KPMG's Moscow office, said: "Even when Russian companies declare strategic restructuring goals, in practical terms they often limit their restructuring activities to quick fixes."

According to the study, the surveyed companies were only thinking long-term in 37 percent of restructuring cases.