EMPLOYEES OF FAILING BUSINESSES SEEK

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 002230

SIPDIS

STATE FOR EUR/RUS, DRL
NSC FOR ELLISON
DOL FOR BRUMFIELD

E.O. 12958: DECL: 08/27/2019
TAGS: ELAB ECON EIND PGOV SOCI RS
SUBJECT: EMPLOYEES OF FAILING BUSINESSES SEEK
NATIONALIZATION

REF: STPETERSBURG 68

Classified By: A/ECON John Stepanchuk, Reasons 1.4 (b,d)

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SUMMARY
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1. (C) On August 6, AvtoVaz workers rallied to demand the
nationalization of their employer, which suspended production
in August and planned to reduce the workweek in September.
Demands for nationalization by workers and unions increased
in frequency, particularly in industrial areas, owing to the
inability of companies hardest hit by the crisis to meet
their financial obligations. Opinion polls indicated that a
growing portion of the population supported nationalization.
The inefficiency and slow pace of Russia's bankruptcy system
left workers little recourse but to turn to the government.
The GOR plans to pass new bankruptcy legislation by the end
of 2009. Unions lobbied for a new law on the nationalization
of poorly managed enterprises, but limited political support
and sharp criticism from experts diminished its chances of
success. Widespread nationalization would not only place an
additional fiscal burden on the administration, but also fail
to address the underlying issues inhibiting entrepreneurial
activity in Russia. End summary.

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DISGRUNTLED WORKERS DEMAND NATIONALIZATION
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2. (U) On August 6, participants in a rally in Tolyatti,
Samarskaya oblast, organized by the independent, AvtoVaz
union, "Edinstvo," denounced AvtoVaz leadership for its
incompetence and demanded the nationalization of the company,
transparent management, and an Audit Chamber investigation
into the company's use of funds. (Note: AvtoVaz has already
exhausted almost all of the 25 billion rubles in government
assistance it received in June. End Note) Over 500 AvtoVaz
employees, representatives of the company's suppliers, and
city residents took part in the event, protesting the August
suspension of production at the Tolyatti plant and the
reduction in the workweek planned for September. According
to a public letter from Andrei Lyapin, Tolyatti Coordinator
of the Interregional Union of Auto Manufacturing Workers,
Tolyatti residents believed that only the government could
solve such large-scale problems, not in the interests of
owners' profits, but in defense of citizens' interests.


3. (C) Workers' demands for nationalization have increased in
frequency as a growing number of companies fail to meet their
obligations to their employees owing to the financial crisis.
The question of nationalization immediately arose following
the highly publicized blockade of a highway outside St.
Petersburg by workers from the town of Pikalevo, see reftel.
Workers have also drawn authorities' attention to their
plight at the "Estar" metallurgical factory in Kemerovskaya
oblast, Alekseyeva Defense TsBK in Nizhegorodskaya oblast,
and Baikalsk Pulp and Paper Mill in Irkutskaya oblast.
(Note: The Baikalsk board of directors has already voted in
favor of transferring the company to public ownership, even
without government legislation. End Note) Elena Gerasimova,
Center for Social and Labour Rights Director, told us that
workers see nationalization as the only way out of the
difficult situations in which many companies now find
themselves.


4. (SBU) Russian citizens in general increasingly approve of
nationalization and government intervention as appropriate
measures to resolve the problems faced by companies severely
affected by the financial crisis. Forty percent of Russians
approved of the government's direct intervention to address
the situation in Pikalevo according to a June poll by the All
Russian Center for Public Opinion Research. Moreover, 44
percent of those surveyed thought that the ordered renewal of
production by Putin was only a temporary measure, and that
lasting success required the nationalization of the
enterprises involved.

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INEFFECTIVE BANKRUPTCY PROCESS LEAVES LITTLE CHOICE
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5. (SBU) In addition to the traditionally patriarchal
relationship between citizens and the state, the inefficiency

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of Russia's bankruptcy system leaves employees little
recourse but to turn to the government for nationalization.
In an August interview with Rossiskaya Gazeta, Mikhail
Shmakov, Chairman of the Federation of Independent Unions of
Russia (FNPR),contrasted the multi-year duration of the
Russian bankruptcy process with the relatively speedy U.S.
process, noting that the Russian process usually ended in the
destruction of the enterprise. Presidential economic adviser
Arkadiy Dvorkovich recently told the Financial Times that
less than 10 of 100 Russian companies that had recently gone
through bankruptcy procedures had survived. In addition, an
International Management Problems Institute study on the
protection of Russian employees' rights in insolvency noted
that employees could not initiate bankruptcy proceedings to
secure payment of debts owed them by their employer;
preferential creditors experienced difficulty exercising
their rights; local executive agencies inadequately
implemented bankruptcy regulations; and liquidated companies'
assets were often insufficient to settle arrears.


6. (U) The government is pushing for reforms that would
increase the efficiency and effectiveness of Russia's
bankruptcy system. Dvorkovich told the Financial Times that
the government would present new bankruptcy legislation to
the Duma, which would be passed into law by the end of 2009.
The government's top priority is the prevention of companies
from closing and leaving their workers unemployed.

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UNIONS LOBBY FOR NATIONALIZATION LAW
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7. (SBU) In the absence of other alternatives, unions are
lobbying for a law on the nationalization of troubled
enterprises. FNPR Chairman Shmakov told Rossiskaya Gazeta
that his organization hoped to initiate the development of a
bill in the Duma mandating the nationalization,
restructuring, and sale to more effective management of
poorly managed companies. Duma deputies already introduced a
similar, but case specific, bill in order to address the
situation in Pikalevo, which has not yet been passed by the
Duma. (Note: Commentators speculated that BaselCement owner
Oleg Deripaska actually favored nationalization in the case
of Pikalevo as a way to transfer the burden of a problematic
enterprise to the taxpayers. End Note)


8. (SBU) Efforts to promote nationalization as a standard
solution for financially strapped companies lack support from
both politicians and experts. Members of the Duma property
committee stated that nationalization should only take place
on a voluntary basis. Mikhail Tarasenko, author of the bill
to nationalize the enterprises involved in the events in
Pikalevo, told Gazeta.ru that each case had to be considered
individually. Evgeniy Gavrilenkov, Troika Dialog chief
economist, stated that nationalization, "chopped away at the
bases of the economy," and "indicated that we do not have any
working institutions." In addition, Igor Nikolaev, Director
of the Strategic Analyses Department of the FBK, argued that
"the authorities had already made enough mistakes," and that,
"it would not do to multiply them."

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COMMENT
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9. (C) Despite unions' ongoing efforts to induce the
government to nationalize Russia's troubled companies, the
lack of political will and financial implications for an
administration already facing significant budget deficits in
the coming years diminish the likelihood of their success.
Although nationalization and the implicit job security it
would provide offer a short-term solution for the potential
socioeconomic consequences of the failure of a company, it
would be unlikely to improve its efficiency, solve the
problem of decreased domestic demand, or address the
underlying administrative barriers inhibiting Russia's
entrepreneurial growth, which require less government
intervention, not more. End Comment.
Beyrle