The legal firm "S&K Vertical" acted as a partner of the RBC conference “Problematic debts in the economy of Russia. Civilised approach. Efficient solutions”

25 December 2009

“Banks or borrowers: whose interests are more important?” The title of report made by Oleg Zherebtsov, the founder of “Lenta” retail chain at conference “Problem debts in the Russian economy” illustrates the situation typical of 2009. Debt management developed by the logic of "you can't have it both ways" — should the creditor win, the borrower shall be doomed to lose, and vice versa. The conference held in St.-Petersburg by the RBC media holding with the assistance of the Office of the Presidential Plenipotentiary Envoy to the Northwestern Federal District, for the first time used the approach of “both the wolves have eaten much and the sheep have not been touched”, i. e. how to solve the debt problem while achieving cooperation between banks, businesses and the state? Participants have suggested scores of answers to this question that enables one to draw an optimistic conclusion: it was a well-spent year. Their willingness to conduct a dialogue was formed in tough conditions.

The amount of "bad" debts in Russian economy may be assessed at 10—15 %, and even at 40 %. Statistics are deceitful things. Should one be guided by bank reserve level, then a share of 10 % "most problematic" assets (those subject to write-downs) of receivables shall be realistic. That said, according to Dmitry Istyufeev, the Deputy Chairman of the Board of BPA “the amount of a bank’s reserves is indicative of their willingness to create these reserves, rather than of the real amount of problem loans”. “Reserves of the Alpha bank attained 19 % commercial receivables, while reserves of the bank "Sankt-Peterburg" reached 4 % commercial receivables, — he continued. — does it mean that people in "Sankt-Peterburg" are managing credits five times more professionally than in Alpha bank?”

According to Dmitry Istyufeev’s estimate, "bad" debts in Russia amount to 35—40 % of loan indebtedness. Probably, a significant part of these debts shall be redeemed, however, no one knows when. “There were no second wave of crisis, because the banks have simply prolonged problematic credits, they plainly left sensitive issues for the future, said Vadim Zhegalov, Deputy Director General of “Deposit Insurance Agency” (DIA), —and we may resume our discussion of dramatic forecasts in 2010-2011. I hope and believe that economy will recover by then and people will be able to repay loans. But it would be better for us to elaborate efficient solutions now, while a long stagnation still lingers”.

The solution sounded by Vadim Zhegalov, involved establishment of problematic asset management funds, similar to “toxic” banks, based on DIA. It has been announced that DIA transfers problematic assets out of balance of “Petrovsky” and takes these assets under their management. However, the agency is so far “clearing” only banks which undergo sanitation. Vadim Zhegalov proposed to extend competence of DIA to “normal” banks. “DIA is willing to introduce the mechanism of the problem debt repayment by means of outsourcing,” said he, “we could engage some management companies experienced in establishing closed unit investment funds. Should such model be approved, DIA shall advertise contest aimed at selecting authorised companies, which will receive orders for repayment of problematic debts via our agency or via the Central Bank of Russian Federation”. Mr. Zhegalov emphasized that the new funds will be formed with money of private investors, and out of public resources and will help to “actually repay debts owed to banks, instead of just stripe bad assets from balances.”

However, an immediate inference of the state in debt management is fraught with voluntarism and corruption. The alternative is to increase efficiency of debt relations by making amendments to legislation. At least, it is advisable to prevent debtors from making transactions aimed at stripping of assets and to protect viable companies, able to repay debts in the long term, from aggressive moves of external creditors. Aleksandr Bukhvalov, Professor of Finance at the PricewaterhouseCoopers Graduate School of Management, St. Petersburg State University, warned the audience that “legislation is an extremely severe instrument”. The Sarbanes–Oxley act, enacted as a reaction to a number of defaults related to criminal cases, affecting Enron, etc. which scandalised American society. “This act prohibits everything, including economically sound principles of corporate governance, and there are continuing discussions regarding level of damage to markets caused by this act”. Still, the best norms of western laws can be applied by the Russian business as methodical approaches to re-structuring of debts. For instance, legislation of some countries contain articles, which make minority creditors (in terms of amount of debts) to obey major creditor’s decision concerning the destiny of the borrower. Russian creditors usually show complete inability to agree, therefore it is worth while introducing such approaches into practice, without waiting for resolutions of domestic legislators.

“During crisis situations, creditors and borrowers activate their primitive instincts,” noted Mikhail Turetsky, the Moscow associate at Baker and McKenzie LLP, “to the detriment of both.” Protocols, developed by western branch associations are meant to protect the parties against their own destructive instincts. Such protocols will translate principles of business ethics in the language of formalised rules. Guided by these rules, the parties will safely undergo situation of default. “Actually, an agreement is made, stipulating that all the parties undertake not to take one-sided actions,” continued Mr. Turetsky, “in particular, not to strip the assets within several months, necessary to complete negotiations on re-structuring.”

Russian judicial system is poor at protecting participants of amicable agreements. “Speaking of a complex situation, judicial contests do not allow to come to a lawful and guaranteed amicable agreement, even to perceived benefit of both parties,” stated Andrey Mikonin, the layer at the legal firm “S&K Vertikal” . The problem might be solved by development of institute of intermediaries between creditors and borrowers, “but such intermediary institutes are somewhat discredited by imposing “dependent” intermediaries,” added Mikonin. That is why, while talking over mechanisms of amicable agreement, participants of the conference resumed discussion dedicated to the role of state in solving the problem of debts.

“In terms of economic logic and civil turnover, the state should act as an intermediary,” concluded Maksim Sterin, the Head of Corporate and M&A Practice at the law company Hannes Snellman in Russia. “In western countries the state protects the parties from opportunist creditors or borrowers trying to wreck amicable re-structurization.”

In 2009, despite imperfect conditions in Russia, creditors and borrowers came to amicable agreements in a number of cases, based on the western protocols. Multiple growth of such examples in 2010 will depend on business first of all. “It is time to abandon obsolete models and to start applying new approaches,” the phrase which sounded at the conference may be considered as its summary.

The RBC conference “Problematic debts in the economy of Russia” aimed not only at revealing best practices and solutions, but also at making them focus of attention of broader business world. That is why the RBC media holding joined “Synergy”, an international acknowledgement program meant to acknowledge the best experience, and implemented by International Academy for Leadership in Business and Administration (USA). In the final part of conference the following international prizes were awarded by Academy: the International Synergy Award — for a sustainable development during crisis and International Solon Award — for contribution in solving of debt problem (the award is named after Solon, an Athenian reformator who has abated debts, freed those who had been sold into slavery to pay off debts, and abolished loans secured by the pledge of personal liberty). The Academy operates in the context of the United Nations Global Compact and unifies more than 3000 leading businessmen, leaders of regional administrations and government agencies from many countries of the world. The acknowledgement program is being implemented during 15 years, the awarding ceremony takes place in the territory of Russia for the first time.

The international prizes International Synergy Award and International Solon Award were awarded to bank “VTB Severo-Zapad”, the corporation “Silovye mashiny”, the group LSR, the company “Olenegorsky GOK”, the G. I. Turner Institute, to the Northwestern association “Baltvod”, Vyacheslav Pozgalev, the governor of the Vologda Region, Vyacheslav Gayzer the first vice-governor of the Republic Komi, Sergey Pernikov, the first vice-governor of the Pskov Region, Dmitry Pletnev, the deputy head of administration of the Arkhangelsk region, Valery Katkalo, the Dean of the Graduate School of Management, St. Petersburg State University, Vyacheslav Semenenko, the head of St. Petersburg Committee for construction and urban planning, Evgeny Lotvinov, the president of BFA group, Yury Voropayev, the director general of MKD holding, Mark Lerner, the director general of the company “Petropol”, Vladimir Kekhman, the director of Mikhailovsky theatre.

The Academy will spread information on awarding ceremony over western business and political communities, and also among leaders of international associations, chambers of commerce and business unions. Thus, awarding ceremony will promote successful international activity of the Russian leaders, their cooperation with western colleagues and will increase investment potential of the Russian regions.

RBC daily

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