Enterprise Arrears in Russia: Causes and Policy Options


Enterprise Arrears in Russia: Causes and Policy Options
by David Bigman and Sérgio Pereira Leite

A rapid buildup of interenterprise arrears took place in Russia in
the first half of 1992 and continued unabated through the second half of
the year. Together with an accumulation of tax arrears and mounting
enterprise debt to commercial banks, this buildup exerted severe pressure
on the payments system and vastly complicated both the management of the
economy and privatization efforts. This paper not only analyzes the
causes of these developments and evaluates alternative policy options to
deal with them but also briefly reviews the experience of East European
countries that faced similar problems, drawing lessons where relevant.

Measures designed to settle the existing debts of state enterprises
to other enterprises, the Treasury, and banks are distinguished from
those aimed at preventing the accumulation of new payment arrears.
In the absence of proper preventive measures, the complex operation of
netting out and settling the outstanding arrears undertaken in Russia in
the second half of 1992 was rapidly frustrated by an accumulation of new
arrears due in part to the moral hazard created by the original operation.
The analysis emphasizes that neither technical measures to streamline the
clearing process nor credit operations to eliminate arrears can, by
themselves, succeed in solving the problem unless accompanied by measures
aimed at instilling financial discipline in the system and accelerating
needed structural changes in state enterprises.

The paper's perspective is that measures to instill financial
discipline in the payments system and prevent the accumulation of new
arrears must take precedence over measures to settle existing debts.
In particular, the practice of repeatedly extending credit to bail out
indebted enterprises and clear up arrears should be avoided. Although
some credit extension may be necessary to prevent massive unemployment
due to a widespread collapse of state enterprises, new credit should be
made conditional on the ability of individual enterprises to create
detailed plans for restructuring their operations, as well as on their
performance in carrying out these plans and meeting their payment
obligations. The success of such measures will depend on well-conceived
preparatory work that includes a clear and binding timetable for their
implementation, a comprehensive legal framework, and the establishment of
the institutions necessary to supervise the process. Otherwise, efforts
to solve the problem through credit expansion will only exacerbate
inflationary pressures and allow enterprises to delay indefinitely the
necessary adjustments in production and employment.