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Х immediate measures - their practical implementation started in the end of 2008 or in Qof 2009 - such as external debt refinancing, additional capitalization, customs tariffs policy, decreasing tax burden on oil-and-gas sector, interest rate subsidies to exporters, subsidies to the RF regions to reimburse the interest rate on loans issued to agricultural and food processing enterprises, and some others;

Х УdelayedФ measures - their practical implementation started only in H2 2009 - partial interest rate subsidies to defense industry and forestry industry companies, provision of government guarantees, interest rate subsidies on consumer auto loans.

A number of comments need to be provided in relation with that:

- practically all the measures having turned out as УimmediateФ did nit require establishment of any new mechanism for their implementation. Only external debt refinancing was RF Government Resolution No.260 of March 30, Ref. Report by V. Khristenko, Minister of Industries and Trade at the Government Briefing in the state Duma on October 19, ( RF Government Resolution No.995 of December 10, Here and onwards - without accounting for Уgeneral systemicФ measures covering a very broad range of business entities (change of Corporate Profit Tax rate, etc.) Section Institutional Problems exceptional - this instrument was created Уfrom scratchФ and applied very quickly (during about one month);

- the measures falling into the УdelayedФ group are fully financial measures initiated in 2009. The delay in their practical implementation (provision of government guaranties, interest rate subsidies on consumer auto loans) had some pretty straightforward reasons:

imbedded shortcomings of the established norms and regulations, and other cases - the multiplicity of anti-crisis measures and their insufficient administration effected by lack of institutional capabilities;

- due to misalignment and mistiming of a number of anti-crisis measures, their potential synergy effect turned out to be limited.

Table Evaluating the timing for launching government support to strategic companies, and the scope of their application (coverage) Number of strategic compaStart of practical Sector Instrument nies having received implementation coverage** support* External corporate debt refinancing 2008 small medium Additional capitalization 2008 medium medium Amendments to procedure for export customs duties calcula- 2008 big medium tion and decrease of export customs duties Increase of import customs duties, reduced quotas 2008 big medium Decreasing tax burden on oil-and-gas sector Q1 2009 medium narrow Partial interest rate subsidies to exporters Q1 2009*** big**** broad Subsidies to the RF regions to reimburse the interest rate on Q1 2009*** NA narrow loans to agricultural and food processing companies Additional capitalization of OJSC RosAgroLeasing Q1 2009 small narrow Tax arrears restructuring Q1 2009 small narrow Renewal of automotive and specialized vehicles fleet of the Q2 2009 small narrow RF regions and municipalities Procuring automotive vehicles for federal executive authori- Q3 2009 small narrow ties Partial interest rate subsidies to defense industry companies Q3 2009 big**** narrow performing as contractors for government military procurement Provision of government guarantees Q3 2009 big**** broad Partial interest rate subsidies on consumer auto loans Q3 2009 small narrow Partial interest rate subsidies to forestry industry enterprises Q4 2009 small narrow * categories: small - <10 companies; medium - 10-30 companies; big - 30+ companies;

** categories: narrow - 1-2 sectors, medium - 3-5 sectors, broad - 5+ sectors;

*** implementation started in 2009 (instrument was used before);

**** taking into account strategic companies subsidiaries The majority of government support measures and instruments subject to our review here provided for support of a relatively small number of strategic companies (up to 10). Measures effecting the most strategic companies were such financial measures as partial interest rate subsidies to exporters; partial interest rate subsidies to defense industry companies, as well as provision of government guarantees. Two of these measures (government guarantees and interest rate subsidies to exporters) are also characterized by broad sector coverage, while as the majority of measures of government support to strategic companies covered only 1 or sectors.

RUSSIAN ECONOMY IN trends and outlooks Table Evaluation of importance of the key measures of government support to strategic companies by main sectors Assuring access to financial re- Creating incentives for Decreasing burden on sources demand business Oil-and-gas sector ++ +++ +++ Energy (power generation) + Coal mining Metallurgy +++ ++ ++ + Chemistry and petrochem + + + Construction materials manufacturing Automotive industry + ++ ++ + +++ ++ Agricultural machine engineering ++ ++ Transport machine engineering + Defense industry ++ + ++ Electronics, telecom ++ Agriculture and food processing + + ++ Construction + + Transport + ++ + moderately important;

++ important;

+++ very important.

The biggest number of various government support measures was applied to strategic automotive companies, and some instruments were purposefully developed specifically for this sector. Government support to oil-and-gas sector, metallurgy, defense industry, agriculture was also pretty diversified.

In general, support to strategic companies was primarily focused on assuring access to financial resources. At the same time, for certain sectors incentives for creating domestic demand (automotive industry) and decreasing the tax burden (oil-and-gas sector) were especially important.

* * * The following conclusions may be made to summarize the analysis of government support:

1. With all its drawbacks and shortcomings, the List of Strategic Companies has performed a pretty important stabilizing function during the most acute phase of the crisis. The very fact of being included into the List irrespective or receiving actual support provided for decreasing the level of risk assessment for the respective company in the view of both banks and suppliers.

2. During the crisis period the RF Government exercised a pretty broad variety of diversified measures targeted at supporting strategic companies in that or another way. At the same time, the only support measures targeted and designed specifically for strategic companies sectors Debt refinancing and reducing quotas Interest rate subsidies Additional capitalization Tax arrears restructuring ment procurement programs Creating incentives for demand New regional/municipal governGovernment guarantees on loans Increasing import customs duties Decreasing tax burden on certain Decreasing export customs duties Section Institutional Problems were provision of government guarantees and expanding the Lombard List of the Central Bank.

In addition, strategic companies were the key recipients of government support in such areas as external debt refinancing by Vnesheconombank, contributing additional assets into charter capital, interest rate subsidies to exporters. However, in such cases just like in many others strategic companies were becoming the recipients of this support Уon common termsФ (at least, there were no normative regulations on supporting strategic companies only).

3. The government support to strategic companies was mainly focused on assuring their access to financial resources. At the same time, measures targeted at creating incentives to promote domestic demand were especially important for some sectors (automotive), as well as measures targeted at decreasing the tax burden (oil-and-gas).

From the point of view of real funds disbursed among strategic companies, the most valuable measures were refinancing external debt, provision of government guarantees and changing the customs duties and quotas.

4. Practically all measures of government support to strategic companies were targeted (fully or to a great extent) at improving their financial stability and settling their debt problems. The government guarantees instrument was slightly different from all others in this regards, because certain limitations were set for using the borrowed funds only for certain purposes (core business operations or capital projects). However, settling earlier loans was included into the possible areas for using the newly raised money before even starting to grant the first guarantees.

5. Most of the financial support measures were exercised with significant backlog, sometimes - up to 6 months. The mechanisms which were applied almost immediately were the ones created and used before the crisis. Actually, the only new support mechanism which was created and used within the shortest possible time, was the mechanism for refinancing external debt of strategic companies.

6. Taking into account the scope of some anti-crisis measures and their УextensionФ into 2010, the task of evaluating their efficiency becomes extremely important. It requires setting the philosophy for such evaluation and creating the relevant infrastructure for monitoring and analyzing changes and progress of companies subject to applying support mechanisms, as well as for controlling their performance against obligations of their owners.

The task of defining the Уpro-activeФ monitoring approach also becomes relevant, because it will allow for short-term forecast any serious aggravations of companiesТ positions and for timely defining the respective preventive measures.

7. In our opinion, the transparency of the whole system for monitoring the strategic companies and the mechanisms for providing support need to be improved drastically. The principles and criteria of feasibility of support need to be clearly set and defined, they would need to be provided to monitoring commissions and work groups established within the ministries.

5.3. Historical and future trends and legal issues related to 2003Ц2009 bankruptcies The global economic crisis coupled with significant growth in foreign borrowings by Russian companies in recent years, shrinking market and industrial stagnation in several economic sectors in 2008-2009, as well as an increase in the number of inefficient investment projects and widespread breaches of contractual obligations starting from 2008, together raised the importance of both effective corporate management in general and of monitoring RUSSIAN ECONOMY IN trends and outlooks the financial condition of companies in particular. In equal measure this applies to companies undergoing bankruptcy1.

According to the Supreme Arbitration Court of Russia, the number of claims related to civil economic disputes filed in the second half of 2008 increased nearly by half compared to the respective number for the first half of the year, while the number of claims related to administrative disputes increased nearly twofold. The total number of civil claims filed with Russian arbitration courts in 2008 stood at 543,000, or 25% more than the respective number for 2007.

The 51% growth in the overall number of claims filed with arbitration courts in the first half of 2009 compared to the same period in the previous year2, to a point when this number reached nearly 660,000, as well as an increase by nearly 90% of claims related to complete or partial breach of obligations by the contract parties3, are indicative of the greater incidence of problems related to the breach of contractual obligations linked to payment for goods and services.

Late 2008 - early 2009 saw an increase of civil claim court filings related to creditor claims that, in the instance of executive writs remaining unpaid, are transformed into bankruptcy cases.

5.3.1. Bankruptcy trends under the third Law on Insolvency (2003 - 2009) The third Law on Insolvency (Bankruptcy) adopted in October 2002 is best known for considerably curtailing the opportunities for the misuse of insolvency proceedings as a corporate asset takeover tool. In addition to this, the Law granted equal rights to the state and to general creditors, stipulated special bankruptcy procedures for certain debtor>

The legal practice of applying the third Law on Bankruptcy in 2003-2009 has pointed to an excessive focus on certain issues that arose in the preceding period and to the persistence of the principal shortcomings both of the legislative framework that was in effect previously and of its practical application5.

Generally speaking, recent years have seen significant growth in the scope of application of insolvency procedures: whereas in 2003-2004 the courts received approximately 12,00013,000 bankruptcy filings for УsubstantiveФ debtors6, similarly to 1998-2000 levels of 11,000 See also Bankruptcies in the 2000s: from a raiderТs tool to a Уdouble standardФ policy, by E.A Apevalova, A.D: Radigin, published by Economic Policy magazine, issue No. 4 for 2009, pages 91-124.

The increase in the overall number of complaints filed with arbitration courts in 2008 amounted to 13% compared to the respective number for 2007. - Speech by A.A: Ivanov, Chairman of the Supreme Arbitration Court of Russia, at the Federation Council on September 21, 2009 - www.arbitr.ru Meanwhile, the increase in the number of complaints related to breached obligations under certain specific types of contracts is considerably higher, amounting to 300% for insurance contracts, 131% for supply contracts, and 97% for rental/lease contracts. - Speech by A.A: Ivanov, Chairman of the Supreme Arbitration Court of Russia, at the Federation Council on September 21, 2009 - www.arbitr.ru See also Bankruptcies in the 2000s: from a raiderТs tool to a Уdouble standardФ policy, by E.A Apevalova, A.D: Radigin, published by Economic Policy magazine, issue No. 4 for 2009, pages 91-124.

For a detailed analysis of bankruptcy statistics in 1994-2004, see A.D: Radigin. Yu.V. Simachev, R.M. Entov et al., The institution of bankruptcy: its establishment, shortcomings, and reform priorities, Moscow, IEPP, 2005.

Substantive debtors are all debtors except absentee ones.

Section Institutional Problems 15,500 filings per year, in 2005-2009 this number doubled to reach approximately 23,00026,000 filings annually1. (see Chart 1 for the trends in the number of debtor insolvency (bankruptcy) filings from 1998 to the first half of 2009).

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