Bogged Down by Debt

Official statistics affirm that the total amount owed by Russian enterprises has now reached 112 trillion rubles (about $37 billion). Independent experts, though, argue that this figure is artificially low, claiming instead that non-payments now amount to between 140 and 150 trillion rubles.


The extent of the inter-enterprise debt crisis becomes evident when one considers the following indicator. Under normal conditions, the ratio of a firm's available cash to the volume of produced goods equals about 65 percent. In Russia at present, that indicator is 45 percent and in some parts of European Russia it is as low as 40 percent. In short, Russian enterprises are running out of cash.


The Center for Economic Reform has warned that the crisis of non-payments is the most important problem facing Russia today in as much as indebtedness, by the middle of this year, exceeded 15 percent of Russia's gross domestic product. A recent document prepared by the Presidential Analytical Center also listed non-payments as one of Russia's most serious problems.


Discussions of the crisis generally focus on extensions of contract terms, difficulties with payments between countries of the CIS, cutbacks in orders (especially military orders) and delays in payments from local and federal governments. For their part, as shown by the recent Black Tuesday crisis, government officials are less interested in finding economic solutions to the crisis than they are in uncovering "sabotage." Alexander Livshits, a top economic advisor to President Boris Yeltsin, believes that the non-payment crisis is caused primarily by "legal, amoral production" by major manufacturers, who offer their goods to private firms which, in turn, agree to pay for them within a year and a half. He argues that to solve the crisis the government must buy a controlling share of these companies and remove their directors.


Enterprises have developed two strategies for dealing with the crisis. Some firms are following the tried and true method of passing off their financial problems onto the government and the banking system, demanding protection from inflation and additional government credits. Other enterprises, though, are taking their own measures to stabilize payments and accounts by developing pre-payment and barter systems. Other businesses are using debt transfer to cover their own costs. Only a few sectors of the economy, such as construction and research, are attempting to respond quickly to cases of non-payment by refusing to continue work when payments lapse.


One indicator of the development of market behavior is that producers are seeking out customers based on their solvency, the speed with which they make their payments and their ability to pay in advance. But only a few managers are willing to refuse their traditional customers for these reasons. In order to ensure reliable cash flow, enterprises must break their contacts with CIS partners and reorient themselves toward Russian businesses.


Those businesses whose primary customers are funded by the federal budget have run into particularly severe difficulties. This is most true in the military-industrial complex. In many cases, longstanding orders have not been renewed and in others, payment has not been forthcoming even after the order has been delivered because the government has not authorized the funds.


Unlike the Ukrainian economy, which is sinking in the sea of non-payments, the Russian economy may be able to avoid complete collapse. Not, however, because of foreign credits or the on-going reforms but only because of its oil and gas complex. Exports from this industry continue to bring in the hard currency that fills the shortfalls in the government's budget and enables Russia to import foreign consumer goods.


Moreover, considering that in August the amount owed to Russia's energy industry had reached 35 trillion rubles, it can safely be said that this sector is not only driving Russia's economy, but those of Ukraine, Belarus and other former Soviet republics as well.


Radical theorists see bankruptcy as the only way out of the crisis. However, according to official statistics, somewhere between 40 and 70 percent of all enterprises are currently insolvent. Moreover, it is very difficult to separate those that are capable of surviving from those that are not, since the debt crisis runs in a circle throughout the economy.


Theorists claim that bankruptcy does not really mean the liquidation of enterprises, but changes in ownership, new investment and a reorientation toward new products. In reality, though, the picture will be simply terrifying: Factories will close and there will be massive unemployment leading, possibly, to a major social explosion. Bankruptcy really is the path to the complete deindustrialization of the economy and the complete liquidation of entire branches of industry.


There is one other prescription for the crisis, one that has been put forward by Russia's regional governors. They feel that a regional approach is needed, beginning with the Moscow district. In this district, non-payments have reached 800 billion rubles, while the amount of money on deposit in commercial banks is 1.3 trillion. In short, the money is there to cover the non-payments, and the governors believe that banks can be enticed to invest if the government creates federally-backed regional investment funds. The problem with this idea, though, is that with the federal budget deficit running at 45.8 trillion rubles, where will the start-up funds come from?


In short, there are ideas for overcoming the non-payment problem that has developed as a result of Yegor Gaidar's unrealistic economic ideas. The main thing is that if Russia wants to save its industries, it must face this problem -- even if it means a fundamental rethinking of economic policy and the introduction of extreme protectionist measures.





Vladimir Buyev is a researcher at the Center for Economic Reform. He contributed this comment to The Moscow Times.