Russia's Boom In Bogus Bankruptcies
The case looked suspicious from the start. In January, a company called Beta-Eko filed suit against a troubled Russian oil giant named Sidanko for unspecified debts. On Beta-Eko's behalf, a Moscow court started bankruptcy proceedings. Sidanko said it had never heard of Beta-Eko. But other creditors--including BP Amoco PLC, which owns 10% of Sidanko--have a vital stake in the outcome. They suspect that Sidanko's principal owner, the once powerful Uneximbank group, created Beta-Eko to get its hands on Sidanko assets.
Welcome to the newest dance in the great Russian asset shuffle. In a well-intentioned effort to streamline its bankruptcy system, Russia has unleashed a flood of dubious filings against corporations and banks. Unscrupulous business owners and managers are hijacking the process, installing cronies as administrators and grabbing company assets as compensation for nonexistent debts. The scams work because corrupt judges award claims to the bogus creditors. By the time genuine creditors realize what's happening, there's often nothing left but a worthless shell. "One in three bankruptcy cases filed against a major company in Russia is phony," says Georgy Tal, who heads the Federal Bankruptcy Service.
BLACK MARKS. It's not clear whether the Sidanko bankruptcy is bogus. But BP and other outside creditors are owed nearly $400 million, and they are worried. At a tense meeting in Moscow two weeks after the case was filed, nearly all the creditors voted to nominate an Arthur Andersen executive as bankruptcy manager. Instead, the Moscow Arbitration Court judge handling the case picked another candidate not backed by the outside creditors. Now, the case is in recess until July 23. That's plenty of time, creditors fret, to loot the company. Sidanko and Uneximbank deny any links to Beta-Eko.
More blows to confidence in the bankruptcy system are the last thing Russia needs. Some 68% of its companies are insolvent. Restructuring them would reduce the unpaid debts that drag down the economy. A law passed last year makes it easier for creditors to initiate bankruptcy proceedings, but also for rapacious managers to exploit them. Filings have soared from 120 a month to nearly 600. The European Bank for Reconstruction & Development warns that bankruptcy scams are further blackening Russia's reputation with investors. The EBRD itself lost a $35 million investment in Russia's Tokobank when creditors seized control of bankruptcy proceedings last year.
Under the new law, creditors are supposed to vote on major decisions affecting bankrupt companies. But the well-connected can easily subvert the process. When pipe manufacturer Volzhsky Tube Co. was hauled into court last summer, $48 million in assets disappeared from its books within weeks. The Federal Bankruptcy Service later discovered that the assets were shifted to a company controlled by Volzhsky executives.
There are other problems. While the law is supposed to protect creditors, it gives bankruptcy administrators broad authority to ignore creditors' wishes. The court-appointed manager of the Svyavsky lumber company in the Nizhny Novgorod region has refused to follow creditors' instructions to sell the company's assets to investors led by Sweden's Ikea, which wants to put $7 million into the plant. The bankruptcy manager, Nina Okuneva, says she doesn't trust foreign businesspeople and wants to work with a local company that has offered to invest less than $1 million.
"BIG MONEY." Meanwhile, the bankruptcy boom is fueling its own cottage industry. Training courses run by the Bankruptcy Service, which issues licenses to bankruptcy administrators, are booked solid. "It is possible to make big money if you are a receiver or the person behind the receiver," says Gregor Muller, a Moscow lawyer who represents creditors in several bankruptcy cases.
There are a few heartening signs. The government is drafting amendments to the bankruptcy law that would tighten controls on asset disposal and make administrators more accountable to creditors. At Sidanko, federal prosecutors recently opened an investigation to determine whether Uneximbank, headed by the once powerful tycoon Vladimir S. Potanin, deliberately bankrupted the oil company. But more businesses are going on the bankruptcy block every day. If the government doesn't crack down soon, the grabfest could spin out of control.
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