Russia: Financial distress signs at the time of the bankruptcy moratorium


The moratorium on bankruptcy expired on October 6, 2020 and was prolonged by the Russian Government until January 7, 2021. The restrictive measure has been protected 525 thousand companies and 1,6 million sole entrepreneurs from creditors' claims. The next 3 months the moratorium continues to cover companies from industries heavily affected by the pandemic (the criteria – specific industry codes set by the Government). From systemically important and strategic companies bankruptcy moratorium restrictions were lifted.


The number of arbitration cases in economic disputes increases significantly during the bankruptcy moratorium period. Other early warning sign is the decline in authorized capital. 



Reasons of the negative dynamics of the authorized capital 


The authorized capital is a guarantor of creditors’ interests and its decrease should raise questions from potential business partners.


If the net assets value becomes lower than the authorized capital, the company is obliged to reduce the capital to the net assets value level. The very fact of a decrease in the authorized capital for this reason may indicate an increase in liabilities. In addition, the decrease in the authorized capital occurs as a result of the payout of shareholder income in case of net loss, or as a result of the buyback of own shares from the market in order to keep their market value.


If the company keeps the minimum amount of the authorized capital prescribed by the law this indicates a small size of business or a short period of the company's activity.


Decline of the authorized capital is not widespread 


During the restrictive measures imposed by the Government from March to September 2020, 116 companies under the moratorium reduced their authorized capital by a total of EUR 175 million. Of these, 28% of companies are engaged in wholesale and retail trade, 18% - accommodation and food, 13% - transportation.


Crisis as a growth driver


The financial model of many companies under the moratorium does not imply high profitability. Companies are able to overcome the demand drop and activity restrictions due to the pandemic if they receive financial support including the authorized capital increase.


Despite the difficult economic situation, from March to September 2020, shareholders of over 3,000 companies under the bankruptcy moratorium increased the authorized capital of by EUR 3,7 billion.


Source: Information agency Credinform Rus

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