The efficiency of enterprise exit process in Russia - compared to Central Europe, other transition economies, or Western market economies - can be evaluated using criteria grouped into three major dimensions of the process: legal framework, institutions/information, and incentives.

1. LEGAL FRAMEWORK

With Russian Enterprise Bankruptcy Law (REBL) in place, first foundations for the legal framework have been laid, though further improvement is required. Based on the experience of other transition economies (Central Europe, the Baltics, and Ukraine), the judicial and other administrative capacities for exit processes (ie. bankruptcy) are still far below the present needs. There is a shortage of qualified judges, administrators, liquidators or arbitration courts. Russia, therefore, needs to improve the design and functioning of its bankruptcy procedures. Russian bankruptcy laws need to be designed differently than those already existent in developed market economies, or even those in some of the more advanced transition economies. Furthermore, many problems in transition economies, such as Russia's, lie in the overall framework for bankruptcies, which are rather external to bankruptcy laws per se, and often contradict them in some way. In Russia, the most acute problems have to do with inadequate accounting laws, Civil Code, etc. The legal
framework, therefore, requires further development.

Recommendations:

• Russian law should be flexible enough to adjust to the changing needs of a post-Soviet transition economy. Russia's 90-day trigger, for example, should not be reduced, because the debt clearing system is still slow and
  not always reliable in that country.


• Russia needs to emphasize the reorganization procedure to give enterprises a chance to "shed" the legacy of the former system, since the present financial distress is often not the incumbent managements' fault.


• Path intersection between reorganization and liquidation should be allowed in order to minimize counterproductive prolongation of the unviable enterprises. Changes at these intersections should be subject to enhanced judicial supervision.


• Since there are not enough qualified judges/administrators, enterprise bankruptcy laws should allow extrajudicial, decentralized, case-by-case debtor-creditor solutions (subject to judicial approval).


• In the course of further legislative work in Russia, external laws should be reconciled with bankruptcy laws (eg. Russia's Civil Code, accounting laws) to avoid confusion.


• Since fraudulent bankruptcies (to be prosecuted by Russia's public prosecutors) are difficult to prove, more attention should be paid to this problem in the process of REBL novelization.

2. INSTITUTIONS/INFORMATION

In general, it is not so much the legal framework for bankruptcies which needs essential improvements in Russia, but the implementation of the law, especially in the institutional context. Not only does Russia need to improve its already existent arbitration courts, but it also needs
to develop central and regional bureaus of inventorization. Acute financing and organizational problems could be potentially solved in many cases using domestic or international debt for equity swaps (DES). The precedent for such swaps was set by the Russian Government, which used its equity (shares) in the Norilsk Nickel and other enterprises as a collateral for its debts. Likewise, Western "vulture funds" and other investment funds could also help avert bankruptcies, or "utilize" some assets of Russian bankrupt enterprises. These internationally operating funds have accumulated the necessary "know-how" and connections.

Russia's bankruptcy institutions need reorganization. The Federal Bankruptcy Agency, for example, has a seemingly dual status. One the one hand, it is a "federal" agency (equal to other federal agencies), but on the other, it is placed at the State Property Committee (suggesting
subordination to the latter agency). Furthermore, its mandate- calling for prevention of bankruptcies as its main task- contradicts the day-to-day business of handling bankruptcies. Such inconsistencies and contradictions do not contribute to making the enterprise exit process transparent, and sends mixed signals to the public.

Moreover, Russia demonstrates a need to radically improve the information and educational base for bankruptcies. Since this exit process is a result of the market's failure to restructure the enterprise prior to a financial distress, information deficiencies play a key role in
contributing to that failure. After all, bankruptcy processes should operate only on the outskirts of, and complement, more developed financial markets, which in turn should create synergies helping to smoothly reallocate resources towards more efficient uses.

Recommendations

• The development of institutions serving the adjudication, informational, educational needs of bankruptcy processes should be made a priority. Russia needs to develop central and regional bureaus of inventorization (registries), state land cadastre, and other institutions foreseen by the mortgage laws


• There is a need to develop more imaginative institutional solutions to some of the financing and organizational problems (eg. implementation of domestic or international debt for equity swaps, DES, or "vulture funds")


• Inconsistencies and contradictions in the Federal Bankruptcy Agency's mandate and its function should be removed, and its status should be upgraded to a full-fledged federal agency.


• The public should be re-educated about exit processes, in order to strengthen the legitimacy of the bankruptcy process. This in turn will decrease the very important psychological barrier, and reverse communist indoctrination of anti-bankruptcy attitudes.

3. INCENTIVES

The toughest problems and challenges facing Russian exit processes are in the area of incentives. After decades of communist indoctrination, the behaviour of public and some private creditors was passive, often resulting in postponements of debt payments to the budget/extra-budgetary
funds. This communist indoctrination combined with present emphasis on tax collection may also hinder future development of private firms. Tax authorities are more likely to pursue tax liabilities of small- and medium- sized private firms, as oppose to those of larger, politically more powerful enterprises, eg. financial-industrial groups (FIGs). As experience in other post-Soviet countries (eg. Ukraine) indicates, this trend my degenerate to a struggle against "speculators".

Furthermore, Russia faces serious incentive problems on the part of owners and managers/administrators. Although the emergence of investment funds/FIGs may produce increasingly more active strategic owners (even if this proceeds at rates below the needs), Russian large scale voucher privatization has created problematic diffusion of ownership, and dilution of owners' interest in the long term enterprise affairs. A lack of long term enterprise vision tempt many post-Soviet nomenklatura managers and
new, small proprietorships to claim fraudulent bankruptcies as way of escaping debt.

Once the bankruptcy process is underway, however, the enterprise is placed in an administrator's hands, who is then expected to bring the proceedings to a successful close. Despite good intentions and mild interest in the enterprises' affairs, these individuals usually become
deterred by legal inconsistencies, unstable or contradictory expectations, and organized crime.

Recommendations:

• The Federal Bankruptcy Agency should educate the public that bankruptcy is a normal process in a market economy


• The REBL must continue to be more creditor-oriented than in capital-rich market economies (although it is already more creditor-oriented than the US Bankruptcy Code)


• The Russian Government should maintain an arm's-length relationship with FIGs, or try to separate politically/strategically motivated decisions from those based on the role of law (REBL). This is advisable since close relations between the government and FIGs could result in establishment of a corporatist system


• The radical voucher privatization should be seen as only a vehicle to transfer an enterprise into private hands for the purpose of an efficient reorganization


• Managers' interest in the long-term maximization of the enterprise's market value should be raised to avoid "prikhvatizatsiya" (this requires the development of new incentive schemes like stock options)


• Administrators, overseeing an enterprise's bankruptcy process, should be highly educated, perceive their position as prestigious, and be warned against abuse of power.

CONCLUSIONS

The exit process, especially in its intensity and forms, is shaped by the legal framework, institutions/information, and the incentives of the actors involved. From several perspectives, the worst kind of exit is that which occurs quietly, in the shadow, without transparency, guided by
the principles of corruption. The present insider-oriented privatization produced opportunities for great robbery of Russian's assets.

If done right, bankruptcy provides an important mechanism, which helps the exit processes be conducted in a transparent/legitimate manner, and thus serves as a tool for enterprise restructuring and governance development. Not unlike in the known passage of biological history, this
will help many "dinosaurs" turn into "birds", which then can fly in the new market economy of Russia.