Prof. Alla Bobyleva , The Lomonosov Moscow State University, School of Public Administration,

1. Analytical Review of Informal Workouts and Non-Insolvency Procedures in Russia: examples of failure and success Prof. AllaBobyleva, The Lomonosov Moscow State University, School of Public Administration, Russia

2. What areInformal Workouts and Non-Insolvency Procedures in Russia? “Traditional” informal workouts: • out-of-court agreements between management of troubled companies and their creditors Specific features: • agreements for getting the state support by a particular company (financing, guarantees, tax privileges) • “grey schemes” for repartition of property, raider captures, non-fulfillmentof financial obligations with the help of the institution of bankruptcy

3. Are informal workouts significant in Russia? This is caused by a number of factors: • high influence of the state and municipal enterprises, • businesses with the state share, • existence of «strategic» enterprises, • large number of giant companies and holdings, • the economic situation in the country as a whole, where the proportion of loss-making companies reaches one third.

4. What are the criteria for the identification of the success of informal workouts? • prevention of bankruptcy of “strategic” companies; • elimination of expensive procedures of bankruptcy; • supporting the value of business of troubled companies; • reduction of the business recovery time; • more complete satisfaction of requirements of all stakeholders.

5. Are informal workouts successful in Russia? • The number of companies in the group of risk (with losses) exceeds 25% • The overdue accounts payable are 85-90% of the total accounts payable But: • the number of bankruptcy cases, initiated in court, is less than 1%. It means: many of issues associated with insolvency are solved through informal workouts However, there is a question: does the existing practice of informal workouts in Russia increasesthe viability of the business or givesonly a temporary respite?

6. Informal Workouts with Government support to a particular companies • JSC «AvtoVaz»: additional financing in the form of interest-free loans ($1 billion). Former experience (late 20 years): the debt would not be repaid, «AvtoVaz» should ask government for support again... • JSC «Russian Railways»: additional funding in the equivalent of a $2 billion and increasing its stock to the amount of US 100 mln. • JSC«Magnitogorsk Steel Company»(MMK) has been exempt from the payment of some taxesfor a large new project, government guarantees were given and company increased its debt in spite of aggravation of economic indicators.

7. Some other examples: • Oil and Gas companies (Gazprom, Rosneft, TNK-BP): • refinancing of debts by credits of banks with state participation • tax privileges • Aviation(«Aeroflot», «Siberia», «Transaero») : support in the form of direct contracts with fuel suppliers and Bank loans at rates lower than market, the moratorium on tariffs for using foreign aircrafts. Result: Companies overcome the crisis and continue to exist, althoughthe situation with debts is still very serious. 2011 – the leverage(debt-to-equity) is: «Aeroflot» (most stable): 2,5 «S7 Airlines» - 11 (in 2008 – 47) «Transaero» - 19

8. Less monopolistic industries: Informal Workouts with the Government participation are often even less successful(construction, agriculture). Why? Inefficient mechanism of transferring budgetary funds, based on the idea of injecting money into the banks and issuing credits on preferential conditions to the companies. Practice: most of the funds were used inadequately: they were invested by the banks into financial instruments and did not reach the real sector. Enterprises in other sectors, in particular consumer and food industries were not direct beneficiaries of state support.

9. Informal Workouts with Government support: Conclusion • The Government support does not allow giant companies to undergo bankruptcy but as a rule they stay unsustainable. • More successful were informal workouts of companies which in addition to government support actively conducted their own crisis policy (MMK, Aeroflot) Nevertheless: the question, whether most of workouts with Government support can be considered successful, is controversial

10. Informal Workouts on the basis of mergers, divisions??? • Russia: decreasing trend According to KPMG, the market dropped more than five 5 times in crisis (during the second part of 2008). • Good practice: The integration of the Russian Aircraft Manufacturing Company JSC «RSK «MIG» into the United Aviation Company JSC “ “: Company’s losses were reduced from 800 million in 2009 to 80 million in 2011, the capital structure of the company has become more balanced, company has a stable portfolio of orders now.

11. Small Business and Informal Workouts • The number of small firms in Russia: one-third of all existing companies. • Our empirical study confirms: the largest number of bankruptcies in the last years in Russia concerned small and medium-sized business. • Informal Workouts among these firms were not effective enough. More successful were firms who have been integrated into the activities of large enterprises

12. The main instruments for Informal Workouts in Russia 1. Delay of payment: brings the desired results in relatively simple and short-term problems. The use of this instrument can restore solvency but does not ensure the sustainability of the business. 2. Changes in the capital structure (substitution of the debt by the rights of property, mergers, divestments, etc.): • provide wide opportunities for recovery, but have limitations: • high risks while entering a troubled business; • orientation of stakeholders on quick results and unwillingness to wait for the increase of the business value, resulting from the joint efforts; • the unwillingness of owners to go for such options and phasing their business out; • delay in taking crucial decisions, which decreases their efficiency or make them inapplicable. 3. Direct State support and creation privileges for some companies: usually do not reach the goal to ensure, because it reduces the incentives to increase competitiveness, improve product quality, create conditions for inefficient activities and corruption.

13. Can “grey schemes” for repartition of property, raider captures, nonfulfillment of financial obligations be considered as Informal Workouts? The instruments of such a policy: • intentional non-payment of accounts receivable, • purchase of “cheap” assets, arising as a result of the aggravation of financial situation; • bankruptcy “by agreement” of the parties, etc. • Beginning of XXI century: 12,5% of assets was involved in Informal Workouts aimed at hostile takeovers, corporate raids allowed to make a profit of up to 500%. In the last ten years such activities have decreased significantly but still remain

14. The results of informal workouts in Russia Can be both positive and negative: • On the one hand, informal agreements may give fresh start to business, a unique chance for a recovery. • On the other hand, informal workouts may artificially extend the life of an unviablebusiness, increase the losses for all stakeholders or contribute to the development of criminal corruption schemes.

15. Thank you! Prof. AllaBobyleva Lomonosov Moscow State University, Russia azbobyleva@yandex.ru