Pavel Romanov the Regional Elite in the Epoch of Bankruptcy BASEES Conference Cambridge

The Regional Elite in the Epoch of Bankruptcy

Pavel Romanov

Sociology Laboratory

Samara State Pegagogical University

Samara

Russia

Samara Branch, Institute for Comparative Labour Relations Research, Moscow.

and Centre for Comparative Labour Studies, Department of Sociology, University of Warwick

Paper for BASEES Annual Conference, Fitzwilliam College, Cambridge, 26 March 1995.

The data presented here do not claim to constitute any kind of deep analysis of the contemporary economic and political situation. What we would like to do here is to describe the actual processes at a regional level, to raise questions about the new elements in the relationship between political power and economic subjects. Many facts support the supposition that events in Samara, apart from regionally specific features, also incorporate certain general features which are important to the understanding of the current stage of economic life in Russia.[1]

1. A Political Turning Point

Samara oblast is one of the top ten regions in Russia, measured by their contribution to the gross national product. Situated in the Middle Volga region, a significant industrial potential — large aerospace, engineering and metallurgical enterprises — is concentrated in Samara. A substantial part of this potential always had a marked military-industrial orientation and, in addition to the general problems of the current period, they are enduring the consequences of a sharp reduction in military orders.

But it is not only the reduction in military orders which acutely poses the question of the efficiency of this or that enterprise, but also the low levels of productivity, ageing machinery and the fall in industrial production (in the factories of Samara oblast over the past five years it has amounted to up to 70 per cent). Government economists have been arguing for a long time that it is necessary to bring order into industry, having taken active steps to restore the most unprofitable enterprises to health. During the autumn of 1993 there was already widespread discussion about plans to bring several enterprises into what was called ‘indicative bankruptcy’. However nothing had come of any of these plans in reality. The reason for this was the absence of a properly worked out normative basis for the application of the law on insolvency.

By August 1994 industry in the Samara region found itself in an extremely difficult situation. During discussion in the oblast Duma of the results of economic developments in the oblast in the first half of 1994, the deepening crisis in the local economy was plain for all to see. The pace of the decline in the volume of production had been even greater than anticipated (28 per cent, instead of the 18 per cent forecast). Production in the military-industrial complex and in light industry had fallen by almost half. Agricultural production had fallen by 15.9 per cent. Only ten per cent of enterprises had not reported a fall in production. Fifteen per cent of enterprises face a real threat of bankruptcy, since they are unprofitable. Production has stopped at 162 enterprises, 397 enterprises are in arrears in the payment of wages, the total sum of which in the oblast amounted to 98.6 billion roubles (Samarskie izvestiya, 26.08.1994).

Such a situation was not specific to Samara, so nobody was surprised at the revival of experiments in the sphere of bankruptcy by the central authorities.[2] The first signs of the strengthening of policy was the visit of the general director of the Federal Bankruptcy Administration, Sergei Belyaev, to Samara. He defined the main technical task of his department: ‘bankruptcy as a factor in the reorganisation of enterprises’. In Samara the bankruptcy chief participated in regional meetings with leaders and representatives of trade union committees from chemical industry enterprises in the oblast and then in the oblast administration he met with representatives of the Union of Industrialists and Entrepreneurs. At a press conference reporting on the results of his visit Belyaev said that according to the records of the State Property Committee, thousands of people were working in factories in various branches, but in fact only a handful were working there. That is to say, the enterprises in practice had been liquidated, but their debts continued to grow. This tendency to ‘soft liquidation’ was very dangerous, and the government was going to force the process of bankruptcy ahead.

The director of the Samara territorial bankruptcy agency (one of 83 such agencies established throughout Russia), A. Bakhmurov, announced that 16,000 enterprises in the region had been inspected, including all forms of property, and that documents had been signed recognising 21 of them as insolvent:

These are enterprises with an unsatisfactory (negative) balance structure, whose liquidity is below the average for the oblast. However one could count on one’s fingers the number of creditors who have submitted cases for the collection of debts to the arbitration court, which is slowing down the process of bankruptcy. In the near future the Samara agency will finish the formation of a databank concerning the financial condition of enterprises, so as to decide what to do with them — whether to take into consideration the complaints of the enterprise administration about objective difficulties, or to refer the matter to arbitration (Samarskie izvestiya, 25.08.94).

2. Do factories want to be bankrupt?

To be declared bankrupt is a heavy, unusual and, for the administration of the enterprise, humiliating process. However, in a number of cases the management team itself declares its bankruptcy and takes the initiative in presenting the case to the arbitration court. One case of such an initiative is that of the large Samara factory Gidroavtomatika. There was no way in which this enterprise was going to be able to rectify its economic position following the collapse of military orders. In the first half of 1994 it stopped repeatedly. In July, according to official data, 85 percent of the Gidroavtomatika workers were on compulsory leave.

But what forced the administration of the factory to request recognition of its insolvency? The answer to the question is contained in the Law on Insolvency. According to the law, once an enterprise has been declared insolvent, all its debts are frozen, and the money coming into its bank accounts is allocated not to the payment of its debts to its suppliers or banks— of its creditors — but to its reorganisation. This period can last as long as eighteen months, during which time attempts are made to correct the situation. Where such attempts are unsuccessful, it is anticipated that the enterprise will be sold. However, the possibility of this occurring is purely hypothetical, taking into account a whole series of circumstances, some of which we will discuss below.

It seems to us that many managers in present conditions would choose insolvency as the way out of a permanent crisis.[3] In doing so they would possibly have to sacrifice their own comfortable position — since the administration of the enterprise is for this period put into the hands of external management nominated by the creditors. One can anticipate that for some this would be a form of self-sacrifice, but for others a certain informal arrangement with the banks and local administration would guarantee the stability of the position of the factory bosses.

In the case of Gidroavtomatika the arbitration court, having considered the case, refused to declare the enterprise insolvent. Despite the existence of debts to its creditors, official sources revealed that the enterprise was sufficiently liquid and could not, according to the law, be considered bankrupt. According to various sources, this was a purely formal reason for refusal, because the bureaucratic organs responsible for this decision did not display the appropriate interest in bankrupting this factory and would not meet its management halfway.

Reference to the arbitration court may not necessarily be made by the senior managers responsible for the state of affairs. It is quite obvious that for many of them such an exit would imply the loss of their job and nothing more. In the course of events over the summer and autumn of 1994 one can see cases of conflict within industrial teams which are brought to a logical conclusion by the opposition referring to the arbitration court a plea to declare the enterprise bankrupt. The episode at Syzransel’mash is indicative in this respect.

Syzran’ is a city in Samara oblast. In 1997 the enterprise Syzransel’mash will celebrate its centenary. But the enterprise has never in its entire history found itself in such a difficult position. Its trade union committee appealed to the oblast administration in a letter in which it pleaded for the enterprise to be declared bankrupt (Samarskie izvestiya, 9.09.94). There was a serious reason for this plea. The 2,500 workers had been on compulsory leave for several months, more than 1,000 workers had left the enterprise in the previous year because of the lack of prospects, the banks had refused it credit. The examination of the solvency of the enterprise, conducted by employees of the regional tax and financial services in April 1994, showed that the net indebtedness of the enterprise amounted to 3.5 billion roubles, a figure which will have increased by the end of the year. And it transpired that the production cost of one agricultural machine in 1993 was 1167 thousand roubles, while it sold for only 1157 thousand.

According to a trade union representative, ‘the factory management is in complete disarray - the loss of material assets in April amounted to 316 million roubles, on top of the losses made by the factory’.[4] Another, no less important argument in his opinion, was that ‘the bulk of the shares are concentrated in the hands of various legal persons and the factory administration, while the labour collective has only seven ordinary (voting) shares’.[5] The trade union activists are also angered by the fact that in conditions of ‘economic failure the administration has bought an armoured car for the enterprise, to transport cash, for 35 million roubles and seven automobiles’.

3. Banks are included in the game

As one can see, up to a certain point the initiative in the matter of bankruptcy belongs, basically, to the enterprises themselves. Their main creditors, the banks, including commercial banks, which have lent them huge sums of money for the purchase of raw materials and payment of wages, have up to now remained passive. This can probably be explained by the fact that both sides — banks and factories — are playing a waiting game. Both sides have been waiting for the government to take the actions promised to unravel the crisis of mutual non-payment which has already paralysed Russian industry. There have been broad announcements of a number of different ways of resolving this problem: in the form of the centralised covering of debts or through a system of mutual accounting, or maybe through the issue of bills. The latter method would appear to be preferable to the banks, which could operate with bills instead of suffering the losses that would arise in the event of widespread bankruptcies.

The government’s solution appears to have been for its representatives to hold behind the scenes negotiations with leaders of the regions and local banks (as with the visit of Sergei Belyaev to Samara), which have activated the creditors of industrial enterprises. It has become clear that neither the new financial institutions, nor state bodies on their own can find an effective solution to the looming problems.

The main bank operating in the industrial sphere in the Samara region is the Middle Volga Commercial Bank (SVKB).[6] Its representatives are included on the boards of the largest privatised enterprises in the oblast (the largest producer of rolled aluminium AO SAMEKO, the aircraft building factory AO AVI.S and many others). Some commentators connect the decision of SVKB to refer cases of debtors to the court with the appointment of a new manager to the bank, Danya Vagapova, who officially took up his post on 29 August 1994. They also comment on the significant influence which several bureaucrats of the regional administration exert on its progress. Among the first steps taken by Vagapovoi in his new post were to refer insolvency cases to the arbitration court concerning the individual private enterprise Garant (declared bankrupt) and the state enterprises ZiM (Zavod imeni Maslennikov) and AO AVI.S (so covering a private enterprise, a state enterprise and a privatised enterprise) (Volzhskaya kommuna, 7.9.94).

The hearing of the ZiM case was postponed on a petition from the oblast bankruptcy committee. According to representatives of the oblast administration, the government was expected to take a decision in the very near future about so-called ‘enterprises of state importance’, which would include all military factories. Since in ZiM military production takes place side by side with shops which produce consumer goods (electronic equipment for motor vehicles, watches, sewing machines) the division of the enterprise had been proposed (Volzhskaya zarya, 19.08.94). In the future, in place of one factory, there would be two — a ‘state’ enterprise producing military equipment, and a peaceful enterprise, which would be sold at auction immediately the decision was implemented.[7]

However, it should be noted that no such division has taken place, and nobody knows when and whether it will happen, but the decision about insolvency is blocked. One can see in this a tactic of the regional administration and industrialists who do not want to see the property of a factory, which is quite competitive in market conditions and with huge potential, going under the hammer. The results of privatisation in such circumstances would be quite unpredictable. The more usual variant of privatisation, with the participation of the labour collective, as that normally works out, transfers the ownership and management of the enterprise to completely predictable people, with whom the local authorities already have well developed relationships, the existing management of the factory.[8]

The banks, as if wakened by the change in state policy, seemed ready to follow the new course. In this respect the autumn agricultural fair was indicative. Its programme included an auction, sponsored by the oblast administration and the state property fund. Shares of 19 privatised enterprises were put on sale, but there was also a phenomenon which was new to Samara, the sale of the liabilities and mortgaged property of enterprises. The latter comprised primarily agricultural machinery and equipment and building materials required by peasant owners and farmers. Here the oblast administration was expressing its approval of the new types of relationship between agriculture, banks and industrial enterprises, such as were established through this fair. Only in July there had been a trial auction for the compulsory sale of mortgaged property of enterprises indebted to SVKB. The experiment was considered a success and according to the management of the bank will be repeated in future. For example, at this auction property to the value of 9.5 billion roubles was put up for sale. The Krest’yanskii bank also took part in the sale, putting up for auction a small cheese factory in Orlovka, a village in the Koshkinskii district (Volzhskaya zarya, 19.08.94).

4. Chronicle of the crisis of the aircraft factory

As has already been said, the Samara aircraft factory (AO AVI.S) is one of the enterprises which falls into the category of completely hopeless industrial enterprises, against which SVKB decided to submit an insolvency case to the arbitration court. The local mass media reports on the case are rather inconsistent. Some sources (such as Samarskie izvestiya, 27.08.94), for example, reported that the management of AVI.S itself decided not to wait for a decision of the regional bankruptcy agency and, seeing no possibility of restoring its solvency, declared itself bankrupt, having asked the chief of the federal bankruptcy administration, S. Belyaev, to speed up the procedure. Whatever may have been the case, until the end of August the situation was still rather uncertain. AO AVI.S should have started work on 1 September, following a one and a half month shut-down, when all the workers were sent on compulsory leave (some shops had not worked since April). However, when the workers came in to work they found an order of the administration posted at the entrance extending the compulsory leave with minimal pay (in practice with no pay at all) until at least 19 September. The factory had already experienced enormous difficulty with the sale of planes over a long period (almost a full year’s programme of finished planes remains unsold), and as a result of huge indebtedness production has been practically paralysed (Samarskie izvestiya, 2.9.94).

4.1 Economics, politics and the unprofessionalism of management

The speed of the collapse of an enterprise, which was in the past one of the leaders in domestic aircraft construction, should not cause any surprise. Even in 1992 and 1993 work at the aircraft factory was considered prestigious among the inhabitants of the city. The reduction of military orders could not overturn it, as was the case in the majority of enterprises in the region. The production of civilian aircraft appeared at first to be quite a profitable sphere of activity. Everybody spoke about the extraordinarily high wages of the workers, compared to other industrial enterprises, the strong system of social welfare — kindergartens, rest homes, Sports Palace and so on. Non-monetary means of payment of labour were especially valued, the distribution of barter goods which were provided at much lower prices than they could be obtained outside the enterprise. Most of these goods (clothes, toys, domestic appliances) were produced in China, arriving in payment for planes delivered to China.