The Ministry of Industry and Trade wants to subsidize defense industry enterprises even in a pre-bankrupt state

The needs of the military operation of the Russian Federation in Ukraine are forcing the authorities to expand support for enterprises of the military-industrial complex (DIC). Due to the risks of reducing output in the process of bankruptcy, the Ministry of Industry and Trade proposes to allow subsidizing defense industry companies even in a pre-bankruptcy state, assessing the continuity of the state defense order as higher than the risks of inefficient spending of budget funds. The ministry refers to the possibility of creditors abusing the bankruptcy of the military industry and is not ready to stop supporting it. The decision may provoke a wave of prosecutorial checks later, but, according to experts, it will stabilize output growth in the moment.

The Ministry of Industry and Trade wants to adjust the rules for subsidizing strategic defense industry enterprises to prevent their bankruptcy – a draft government decree has been published on regulation.gov.ru. Now a special commission of the government is engaged in the prevention of bankruptcy of such enterprises, and the rules for granting subsidies for these purposes are regulated by Decree No. Funds can be used to pay wages, taxes and other obligatory payments that are not subject to restructuring, or to pay obligations under court decisions.

The rules for the distribution of subsidies for “strategists” contain the condition that bankruptcy proceedings should not be initiated against them. The Ministry of Industry and Trade considers the norm to be excessive – it prevents the “strategists” from restoring the solvency and maintaining uninterrupted production. Individual creditor applicants “abuse their right to file a bankruptcy claim,” the ministry said, proposing to continue subsidizing enterprises in respect of which a bankruptcy case has been initiated, but a decision on it has not yet been made. The Ministry of Industry and Trade does not describe the scale of the problem, but adds that earlier one of the reasons for the deterioration in the state of “strategists” in the defense industry was a drop in workload, which now has increased for many organizations due to an increase in state defense orders.

The amendments will allow the uninterrupted provision of the needs of “defense and security” – in any case, the state has the right of priority to acquire “strategists” when they are sold. “In practice, the ransom is carried out by integrated structures directly or indirectly controlled by the Russian Federation,” the Ministry of Industry and Trade explains. The amendments themselves do not imply concessions for recipients of support: the provision of subsidies falls under the control of the ministry and treasury support, which “ensures the targeted nature of their use and the implementation by the recipient of the necessary measures to exit the pre-bankruptcy state,” the ministry explains.

Oleg Moskvitin, Deputy Director of the Institute for National and Comparative Law Studies at the Higher School of Economics, does not consider the bankruptcy of defense industry enterprises to be too common, including due to serious state funding and measures to avoid such bankruptcies. In his opinion, the amendments of the Ministry of Industry and Trade do not infringe on the interests of creditors. “In fact, the state, as the main creditor, voluntarily agrees to subsidize defense industry enterprises even in a possible pre-bankrupt state,” he believes. Aleksey Sharov, Managing Partner of AVERTA GROUP, notes that the main vector of legal regulation of such relations is bankruptcy prevention measures and the priority of rehabilitation procedures, and the amendments will increase the likelihood of maintaining the production activities of enterprises and will allow timely repayment of their most socially significant obligations. Forward Legal lawyer Oleg Sheikin draws attention to the growing demand for the products of defense industry enterprises and the expansion of their financial support from the state – but state funding is not always used for the intended purpose, and the active distribution of subsidies to enterprises in the pre-bankruptcy state may result in an increase in the number of prosecutorial inspections later.

Diana Galieva