Global Steel Trade; Structural Problems and Future Solutions

exports extremely profitable, the benefit of being able to pay off an old debt in cheaper rubles was
presumably substantial.
• In 1998, the tax arrears and other government obligations of mid-sized steel companies continued to
grow at phenomenal rates. For instance, between 1995 and 1998, Mechel’s government debt grew 230
percent; ZapSib’s 490 percent; Kuznetsk’s 530 percent, and Nizhny Tagil’s more than 600 percent. 110
Wages. Companies’ wage bills have usually been the last to go unpaid. Wages are a relatively small part of
a Russian steel company’s costs, usually accounting for approximately 10 percent of the total cost of
production. 111 Yet prior to and immediately after the ruble depreciation, many Russian steel companies
were behind on their wages. 112
Weak Bankruptcy Laws
The absence of an effective exit mechanism in Russia for nonviable enterprises was another major factor
allowing many steel companies to continue operations while avoiding restructuring.
In 1997, there were approximately 4,600 bankruptcy filings in Russia, 113 compared to 300,000 annually in
the United States, 100,000 in Canada, and 15,000 in Poland. According to the Federal Bankruptcy
Commission, more than 51,000 firms had payments in arrears, and three-quarters of those were technically
bankrupt, but only 2,000 firms were bankrupted in 1997. 114 Various sources conclude that, “a large and
well-connected company is practically impossible to shut down. Bankruptcy laws are still weak, and
companies that have been declared insolvent continue to operate.” 115 As stated by the EBRD: “a credible
bankruptcy threat still does not exist. The bankruptcy process itself is often used as another channel for
asset-stripping, with the appointment of lenient administrators.” 116
Current Bankruptcy Proceedings. The first Russian bankruptcy law was passed in 1993. When a
company exceeds a certain amount of debt, its creditors are entitled to file for bankruptcy
proceedings. A filing results in formation of a “creditors council” (determining which debts are to be
paid off first) and the freezing of the company’s funds and monetary transactions. 117 Subsequently, the
court introduces external management, generally for a period of up to six months. The job of the
outside team is to survey the company’s books and recommend whether the firm should be shut
down. 118
Role of Local Governments. Local government officials generally have not viewed company closure and asset
liquidation as an option. 119 In practice, they instead used bankruptcy proceedings to provide a fresh start for a
company and to make it “possible to change the managerial team, remove negligent owners, bring in
professionals, and carry out a program of financing normalization of the enterprise in the interests of the
collectives, the territories, and the creditors.” 120
While amendments to the bankruptcy law introduced more incentives for companies to legitimately
declare bankruptcies and for creditors to be repaid, 121 the amended law failed to address the fact that
Russia’s nonpayment dilemma was more of a political than an economic problem. The Economist
reported:
The key obstacle has always been the reluctance of local authorities to send firms into bankruptcy.
This is mainly because regional governments come a lowly third on the creditor’s list, after
employees and the federal budget. And if the region does agree to close down an enterprise, it has to
support and find jobs for unemployed workers. Easier to leave the factory open under outside
management and hope for a state bail-out. 122
The federal government’s record has not been much better (see box, next page).
Chapter 3: Behind the Crisis—Russia 55