Vol 2 (2005) - Issue 1

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Russian Bankruptcy Law: Reforms and Intervention by the Russian Government

Russian insolvency law - after a series of reforms in 1992, 1998 and 2002 - is now entering a period when its integrity and effectiveness will be tested.
Russian companies are becoming increasingly globalized. Inevitably, insolvencies will follow, introducing Russian courts to the intricacies of transnational insolvencies and global reorganizations.
Moreover, notwithstanding that the Russian economy is currently buoyed by petrodollars, history shows ‘systemic’ insolvencies accelerate following peaks in commodities prices.
The Yukos matter will further test Russia’s bankruptcy regime. Russia’s tax authorities have seized the assets of Yukos, the Russian oil giant, to pay USD 25 billion in back taxes. Yukos successfully obtained from a US Bankruptcy Court in Houston a temporary restraining order (TRO) in mid December 2004. The TRO sought to prevent banks from providing acquisition finance to bidders for Yuganskneftegaz, Yukos’ crown jewel, then scheduled for auction. Nonetheless, Yuganskneftegaz was auctioned off (as this paper has gone to press) for USD 9.36 billion to an unknown company called Baikal Finans Group. Yukos ultimately may resort to a bankruptcy filing in Russia to buy time and shield assets.
Current Russian insolvency legislation is relatively modern, adopting an Anglo-European approach. If Russian history is any guide, however, the role of the state will continue to guide many aspects of insolvency administration. This paper focuses on current Russian insolvency law, and the role reserved for the state. The Russian state (in all its forms) will be referred to in this paper, for the sake of clarity, as the Russian Government.

1.Clues from tsarist Russia and Soviet Russia

Tsarist Russia was no stranger to complex insolvency statutes. The cornerstone of bankruptcy legislation was the Bankruptcy Charter adopted by the Russian Senate in 1740. Further developments occurred in 1800 (Charter on Bankrupt Entities), 1832 (Trade Bankruptcy Charter), and 1891 (Regulation on Criminal and Penitentiary Punishment).
The pre-Revolutionary origins of Russian insolvency law were drawn from its European neighbors and their civil code systems. Russian insolvency law, like neighboring systems, contained a punitive dimension.
Of the three types of bankruptcy recognized in tsarist Russia, two were considered moral deviations deserving of punishment: negligent bankruptcy carrying an 8-16-month prison term, and fictitious bankruptcy carrying a multi-year sentence. Only in the case of bankruptcy based on misfortune was the bankrupt absolved of moral culpability; interestingly, such debtors were called padschi or ‘the fallen’.
Soviet Russia’s experience with insolvency was curiously simple. In the main, insolvent and obsolete companies were closed, their employees transferred elsewhere, and creditors were instructed to write off the relevant debt. In some cases, Soviet central planners even anticipated protracted insolvency for zavedomo ubytochnye or ‘expected loss leaders.’

2. The modern era

Whether in practice the Russian Government and its courts will gravitate to a harsh view of bankruptcy (following their Tsarist predecessors) or a pragmatic view (following that of Soviet planners) remains to be seen.
The early results have been problematic at best. Russia’s first insolvency law since the de-federation of the USSR, the 1992 Russian Bankruptcy Law, was cautious. Insolvency was extremely difficult to prove in legal proceedings, and hence impeded the compelling of any company through bankruptcy. Procedures were widely viewed in any event as overly complicated.
As a result of the failure of the 1992 Russian Bankruptcy Law to serve its purpose, the adoption of the 1998 Russian Bankruptcy Law was more operational, perhaps too much so.