Russian Risk Climate: Will COVID-19 Be an Accelerator for the Anticipated Wave of Bankruptcies?

The Russian government has suspended the initiation of insolvency proceedings on April 3, 2020 for six months in order to avoid mass liquidations of companies from industries heavily affected by the pandemic (about 2 million active companies), as well as systemically important strategic enterprises. The moratorium will end at the beginning of October 2020 and it is expected that an avalanche of bankruptcies will follow.

In conjunction with the moratorium, restrictions were introduced such as: a ban on selling assets and property, changes in ownership, distributing profits and paying dividends. This restriction has put illiquid companies in a difficult situation because they are required to maintain unprofitable assets, cannot cut expenses resulting in debt accumulation. Nevertheless, his measure will prevent unscrupulous debtors from withdrawing assets and selling property prior to liquidation.

The Federal Bankruptcy Law stipulates the duration of the moratorium. The moratorium can be extended by a decision of the Government if deemed necessary. According to the Ministry of Health and the Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing, the second wave of Covid-19 may start in autumn. The extension of restrictive measures should be expected not only for the population, but also for businesses: the first lockdown has been too expensive for companies, and not every business will survive in the second lockdown.

This raises the question whether Covid-19 is the cause for the expected mass insolvencies?

The answer is probably not. Given the fact that statistics indicated that prior to COVID-19 appearing, many companies have already showed signs of financial instability and liquidity problems.

According to the Information and Analytical System Globas, there are 3.6 million active legal entities in Russia. Two million companies have filed financial statements for 2019, of which 30% showed problems with solvency and financial stability. It is estimated that companies capable of withstanding a short-term economic crisis or recession, and without significant losses, does not exceed 15%.

At the onset of the crisis SMEs suffered: travel industry and hospitality, public catering, consumer services and beauty industry, leisure and entertainment are on the verge of ruin. Small businesses with one or two cafes or beauty salons are in the most dangerous position.

According to a survey of micro-, small- and medium-sized enterprises conducted by the National Agency for Financial Research (NAFI) in June 2020, many entrepreneurs noted the negative impact of the pandemic: 76% reported a decrease in revenue, 66% – declining demand for goods or services, 36% – a decrease in the number of suppliers, 24% – cut of branches / sale offices. Every third company (34%) put the staff on unpaid enforced leave, and every fifth (18%) had to lay off employees. Most businesses do not expect a return to the pre-crisis level in the short term.

In summary, Covid-19 was not the cause for the expected mass insolvencies. Financial instability was already prevalent in the business community caused by other factors such as: Obsolete strategy, lack of high-technology facilities and insufficient financial reserves. Thus, the arrival of Covid-19 became the trigger, which would have expedited the natural process of elimination. The intervention of the government by imposing a moratorium and other restrictions, while well intended, is now exacerbating the situation. When government intervention ends, it may lead to a sudden mass extinction of businesses.