A degrading economic environment, decreasing investment and consumer demand, inflation and rouble devaluation have put Russian businesses in very difficult conditions. In 2014, many companies had to leave the market (the number of bankruptcies among large and medium-sized industrial and agricultural companies increased by about 19% over 2013), and forecasts for 2015 are even more pessimistic.
Concerns related to companies’ future are paralyzing investment activity in Russia. Bankers and contractors, officials and economists now more than ever need a professional evaluation of a company’s financial stability.
Anastasia Mogilat, an expert at the Centre of Macroeconomic Analysis and Short-term Forecasting, tried to detect and analyze the key risk factors in large and medium-sized manufacturing and agricultural companies. She presented the results of her study in her report ‘Bankruptcies of Large and Medium-Size Companies in Russian Real Sector: Trends, Structural Features and Basic Factors’ at the XVI April International Academic Conference on Economic and Social Development.
Financial stability was analyzed using data on bankrupt companies in 2007-2014. The BIR-Analitik database (companies’ accounting records) and IT-Audit-Company Bankruptcy, which contains detailed data on bankrupt companies and the bankruptcy process, served as the basis for information in the study.
According to Mogilat, the number of bankruptcies in 2014 grew five times as compared with 2007 and 2008. After the crisis year of 2009 and up to the crisis year of 2014, 800 legal entities became bankrupt each year.
Most bankruptcies in Russia affect companies in the processing industry; their share is about 60% of all companies that go bankrupt in the real sector. Agriculture and forestry rank second (17%), and the power industry (15%) is in third place.
The worst situation in the processing industry is among food manufacturers; they account for about one third of all bankruptcy cases. The top four industries by number of bankruptcies in 2007-2014 also include manufacturers of cars, equipment, non-metal mineral commodities, and metallurgy companies.
Moscow is the absolute leader in the number of bankruptcy cases among Russian regions (7.6% of the total number of bankruptcies in Russia), followed by the Moscow Region (5.8%). Krasnodar Krai and Sverdlovksaya Oblast are the third and fourth; each of these regions accounts for about 3.7% of all bankruptcies in Russia.
In 2014, the number of bankruptcies in most large regions exceeded the ‘crisis peak’ of 2010, with the highest growth in Moscow and St. Petersburg (73% and 85%, respectively).
The study also revealed that companies under private ownership more frequently experience bankruptcy. Affiliation with the state clearly strengthens a company’s position on the market.
One of the most significant bankruptcy factors is decreasing profits from sales and the growing burden that interest payments are having on profit.
Significant factors in companies’ bankruptcy also include the growing level of debt load (8.5%), lower asset turnover (4.4%), and worse financial situation in the industry (about 25% in total). ‘The sharp rise in the number of bankruptcies in 2014 was a result of decreasing profitability accompanied by worse borrowing conditions for businesses’, Mogilat emphasized.
According to the researcher, lower demand and reduced turnover of companies increase the risks for even the most successful market participants.