Russian enterprises are issuing each other IOUs that could help stem the country's decline in industrial production, though experts say that the promissory notes are valueless under Russian law.


The notes are designed to cancel circles of debt that have crippled enterprises throughout the nation. At last count, Russian companies had run up a total of 15 trillion rubles ($7.43 billion) in debts to each other, and neither the government nor outside investors are likely to provide the cash to solve the problem anytime soon.


Despite the absence of cash, nine Russian railways have managed to cancel about 62 percent of the industry's 260 billion rubles in debt over the past six months under a circular-promissory-note system developed with United Energy Systems, the country's largest power producer, and state coal concern Rosugol.


The railways use the notes to pay for electricity from United Energy Systems, which uses them to settle its coal debts with Rosugol, which in turn gives the notes back to the railways to pay for transportation.


When the debt circle is closed, the railways simply destroy the notes.


"The system saved nine railways out of Russia's 19 from losing their electricity supply," said Dmitry Pyshkin, chief economist at the Railway Ministry.


Alexander Livshits, top economic advisor to President Boris Yeltsin, called the promissory note system "a useful business," but warned that the notes were highly unreliable, since most of the enterprises issuing the notes are in financial trouble.


The notes are not backed by any assets or commodities, and Russia has no legislation that would require an enterprise to honor its own note, said Maxim Kvasha, an expert with the government Center for Economic Reform."Promissory notes of industrial enterprises are useless without a well-developed bankruptcy system," he said, explaining that a note holder has no legal claim to an enterprise's assets and cannot force the enterprise into bankruptcy.


Russia has passed a bankruptcy law, but only a handful of enterprises have actually gone bankrupt. Government officials have said that they are preparing a list of some 60 major enterprises that must face bankruptcy proceedings.


Pyshkin admitted that the railways were worried about the possibility that the notes would fall into the hands of a firm outside the intended debt circle, which might require that the IOU actually be paid in cash.


To reduce this risk, the notes pay no interest and usually have a maturity of a year or more, meaning that when the time comes to pay them off they will have been rendered nearly worthless by inflation.


"It is a mediocre system, but it helps to untie some knots," Pyshkin said.


Problems with the notes' validity have already arisen, according to Vladimir Kovalev, chief engineer of Rosugol division Tulaugol.


He said Tulaugol had received a 2 billion ruble promissory note from a power-generating station in April, but when Tulaugol offered it as a payment to the Moscow railway, it refused to accept it, saying it wanted cash.


"We are all for promissory notes, but if they are used seriously, when they are guaranteed by the Central Bank," Kovalev said over the telephone from Tula.


Vasily Ilyin, head of the Central Bank's promissory-note circulation department, said that the state bank provided advice on the railroads' promissory notes, but has yet to back any notes itself.


Earlier this year, the Finance Ministry announced that it would issue about 1 trillion rubles in one-year promissory notes to cover the government's debts to enterprises, as well as create a secondary market for the notes, but the plan has not yet come to fruition.


In the absence of government action, Tveruniversalbank, one of Russia's largest commercial banks, has launched its own promissory-note program.


Since April, the bank has been issuing notes for enterprises in return for payment of 30 percent annual interest on a given note's face value, said Pavel Zotov, head of the bank's advertising department. If the bank must honor the note before it receives the note's total value in cash from the enterprise, the bank charges market interest rates, now about 140 percent annually, on the outstanding balance.


The volume of promissory notes issued by Tveruniversalbank has risen from 25 billion rubles in April to 60 billion in June, according to Zotov. The bank issues notes in denominations of 500,000, 5 million and 50 million rubles, with or without maturity dates.


Zotov said that although the notes are backed only by Tveruniversalbank's reputation, they are now accepted by 60 other banks throughout Russia.


"As people grow less and less afraid of the promissory note, the number of companies wishing to participate increases," he said.


Yury Tatarkin, financial director of ferrous metal producer Magnitogorsky Metallurgichesky Kombinat, one of Tveruniversalbank's clients, said the factory was quite happy with the notes since they were cheaper than borrowing cash. He said the factory was trying to widen its promissory-notes spectrum, and was in talks with United Energy Systems to start dealing with their promissory notes as well.


Despite the legal problems and risk, the notes are so far the best option for companies like Magnitogorsky to avoid economic paralysis, said Svetlana Bik, an expert with the International Stock Market Institute.


"Taking into consideration all the negative sides of it, it is an economic method," she said. "It is closer to a normal economy than anything we have had before."