A Wave of Bankruptcies Is Coming to Add to Putin’s Economic Pain

(Bloomberg) -- Russia’s $1.6 trillion economy is going to be dealt another blow when a moratorium is lifted on companies filing for bankruptcy.

The measure, which was a condition of government pandemic support, helped protect healthy businesses from creditors but left those that won’t survive limping along as zombies. It expires in October.

“It’s like a life-support machine for companies -- if there isn’t treatment, they will just die when it’s switched off,” said Yuriy Khalimovsky, a director at Deloitte’s legal service in St. Petersburg. “When the moratorium is lifted there will be a big wave of bankruptcies.”

The surge in corporate failures threatens to compound an already painful year for Russia’s economy, which is heading for its worst slump in more than a decade. President Vladimir Putin, who is trying to encourage citizens to vote next week for constitutional changes that would allow him to extend his rule, ended lockdown measures early to try to stem the financial pain.

About a third of companies said at the end of April that they are at risk of bankruptcy, according to a survey conducted by the Center for Strategic Research in Moscow.

“As soon as the moratorium ends, a domino effect will begin,” said Alexander Sinitsyn, who heads the research center. “Companies will go one after the other.”

A businessman named Alexander, who runs a chain of kids’ play centers at shopping malls in Moscow and Yekaterinburg, said his bills and debts are mounting up as he waits to be allowed to go bankrupt.

“The government is telling me that I can’t go bankrupt now, that I shouldn’t lay people off and need to pay them,” he said, preferring not to give his last name because the bankruptcy isn’t public yet. “We have no money and nowhere to get if from.”

Big companies are already starting to review contracts to protect themselves against subcontractors going bust, according to Deloitte’s Khalimovsky. One of Russia’s biggest chains has even created a database to track the financial health of its counter-parties, and other firms are following suit, he said.

The Economy Ministry didn’t respond to an emailed request for comment about whether the government will take measures to prevent a large number of corporate failures.

When companies are allowed to go under, they will still have to face Russia’s grueling bankruptcy procedures, which often leave entrepreneurs with a bad reputation and unable to start up again.

“Russia needs to develop effective measures for restructuring debt before cases go to court,” Galina Ivanova, a partner at the Moscow-based law firm Sokolov, Taryusov and Partners. “Otherwise bankruptcy just becomes a way to grab the remaining assets.”

Companies in the consumer sector were hit hardest during two months of lockdown and many firms are still suffering from a slump in consumer demand even as restrictions are lifted.

Employees have been left stranded by regulations that prevent companies from laying off staff even if they have no money to pay them, and small enterprises have complained that handouts were barely enough to cover even basic payments.

Boris Katz, who co-owns a chain of arts and craft stores across Russia which employs 4,000 people, has managed to stay afloat. But he says many of his subcontractors are rapidly running out of funds to pay staff.

“This is the first time in 25 years of working in the retail sector where everyone I talk to seems to be having bankruptcy discussions with a lawyer,” Katz said. “I think the government is underestimating the scale of the problem.”

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