Bankruptcy

With regard to the newspaper coverage featuring bankruptcy proceedings, 7 disputes (6 different organisations) were identified in articles published in 1998 and only one dispute (1 organisation) in 2006. A total of 13 articles captured the 7 bankruptcy disputes in 1998, whereas the single case pertaining to 2006 was reported in 8 different articles (see graph 4.6). This suggests that the single bankruptcy dispute reported in 2006 had a disproportionately large impact on perception in comparison with individual cases reported in 1998.

Graph 4.6: Bankruptcy Disputes

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Bankruptcy disputes reported in 1998 were almost exclusively connected with the unfulfilled financial obligations of affected organisations. They were as follows:

Failure to meet outstanding debt obligations (Tatneft)⁴⁷.

Creditors were pushing for bankruptcy because the parent re-diverted cash flows away from its subsidiary (Sidanko).

Unprofitable plant protected from bankruptcy because of the far-reaching social implication (Achinsk Alumina Combine).

Bankruptcy of a bank that failed to pay its depositors after the financial crisis (ABS Agro).

Two banks lost their operating licenses and were bankrupted after the financial crisis. The put option designed under the British law was not recognised by the Russian law (equal treatment of all shareholders) meaning that investors could not recover their money (EBRD).

A company failed on debt repayment when a court sent marshals to seize its property on behalf of creditors. The government issued a presidential decree extending the credit (ORT).

There was one bankruptcy dispute apparently not directly connected to a commercial entity‘s inability to meet financial obligations:

Bankruptcy proceedings were used in order to gain control of a subsidiary (Sidanko).

Three main themes emerge from the above. First, in 1998 bankruptcies affected unprofitable entities. These entities were unprofitable because they were mismanaged (Tatneft, Sidanko, Achinsk, ORT). Secondly, in addition to poor management, tough external conditions, at large caused by the uncertainty following the financial crisis, forced some companies into liquidation. The latter observation was particularly relevant to companies within the banking sector such as ASB Agro and EBRD (who had to write-off its investments into two smaller Russian banks). Finally, certain entities were protected from bankruptcy due to the far-reaching social implications that such proceedings would have caused. In the instance of Achinsk Alumina Combine, the government had no choice but to

47 The subsequent analysis of the third-order codes provides references to the corresponding second-order codes as well as relevant templates contained in appendices 9a and 9b.

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protect the entity because it was the main employer in the region, despite it being systematically misappropriated by the management. Moreover, bankrupting such an entity as ORT (main television channel) would have reduced the government‘s grip on the crucial opinion polls. An entity, that by all accounts should have been comfortably profitable, suffered from a constant drain on its resources caused by the self-centred actions of influential stakeholders.

Bankruptcy proceedings can be an adequate response in the context of the above identified themes. In a capitalist setting, unprofitable entities should be liquidated and their assets sold to the highest bidder (Fox & Heller, 2000). Unfortunately, that was rarely the case in the 1998 environment in Russia. Much too often self-centred stakeholders (unusually management) prevented bankruptcies by manipulating the system. Nevertheless, it is important to acknowledge that the system, despite being perceived as weak and incompetent, often called for the right actions. In other words, those bankruptcies should have happened but in some instances did not because of the self-centred individuals (including the government officials) who had an immense capacity to manipulate the system of governance to their advantage.

In 2006 only one case of a bankruptcy was featured in the Moscow Times articles.

As stated before, it was a much more influential (in terms of the impact it created on investor perception) case than any of the bankruptcies discussed with reference to the 1998 reporting because of the amount of coverage that this highly politicised case received.

In contrast to the previously discussed cases, the bankruptcy of Yukos was not brought about by the company‘s inability to settle its financial obligations, but by the government who systematically sought to destroy an economically viable entity. The government brought massive back-taxes claims against the company because, allegedly, its owner refused to reaffirm his loyalty to the Kremlin. It is entirely possible that the company and its owners were in fact guilty of ubiquitous tax evasion. However, it can be suggested with a reasonable degree of confidence that this is an example of a selective application of law because other Kremlin- friendly entities (allegedly just as guilty of similar violations) did not experience the same pressure from the authorities. In this regard, it is evident that contrary to the

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1998 environment, the sole case of 2006 demonstrates a severe lack of integrity in the system, which nevertheless has accumulated an unchallenged capacity to regulate the environment.

2.1.1.1 Implications for the Rule of Law with Reference to Bankruptcy Disputes

With regard to the perceived change in the rule of law, 1998 compares favourably with 2006 only on a single account. With regard to bankruptcy disputes reported in 1998, formal institutions (mostly courts) in the majority of reported cases proposed adequate rulings to bankrupt failing entities. In contrast to this, 2006 saw a corporate dispute where formal institutions (courts and tax authorities) were pressurised to produce rulings consistent with the government‘s agenda. The newspaper analysts suggested that this agenda was driven by self-centred actions of the Russian administrative elite.

However, in terms of perception, it is possible to conclude with a number of improvements with reference to the rule of law in 2006. Firstly, there were fewer reported instances of bankruptcies, despite the 2006 case being much larger in terms of coverage. Secondly, formal institutions appear to have much greater enforcement powers and the state has accumulated a greater capacity to exert influence over previously extremely powerful financial structures within the country.

Moreover, there were no reported instances when the government blocked bankruptcies of unviable entities. Finally, there were no reported instances when a bankruptcy was initiated by an interested private party in order to seize control.