At Russian Companies,
Hard Numbers Often
Are Hard to Come By
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Many Accountants Still Use
Old Soviet Standards;
Profits Turn Into Losses
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'Reality Is Very Complicated'

MOSCOW -- The Bratsk Aluminum Plant trumpeted its good news: a hefty $37 million profit. Then, nudged by auditors from Arthur Andersen, it mumbled a melancholy coda: Well, actually, the plant had a $7.4 million loss.

Puzzled? Foreign investors certainly are. So, too, are some of Russia's most numerically nimble minds.

Moscow has the gloss of a modern economy: financial markets, shopping malls and a burgeoning demand for exotic pets and psychiatrists. At the foundations, though, lie some very soggy numbers. Profits dissolve into phantoms; losses metamorphose into earnings. It all depends on who is doing the counting. A year ago, the muddle hardly seemed to matter; Russia had the world's best-performing emerging stock market.

Today, Cinderella's coach is again a pumpkin. Russia's market is down 77% so far this year and among the world's worst performers. Now, the swings in the ruble's value make it all the more difficult for multinational companies to assess the books in Russia. And the muddle over numbers has never mattered more.

While baffled investors scratch their heads, arithmetic contortions that enable companies to make and lose money simultaneously are vexing some of Russia's premier computer programmers as they try to write software that can straddle the two systems. "Russian profits are different from Western-style profits. The same data can give different results," says Sergei Nuraliev, head of the accounting-software department of 1C, a Russian computer company. "It gets very complicated. . . . Translation is sometimes difficult."

In a rented annex of Goskomstat, or the State Statistics Committee, 1C designs software to help companies convert their raw financial data into two, often contradictory sets of accounts: one Russian and one Western. The proximity to Goskomstat, custodian of Russia's gross domestic product and other major economic indicators, is perhaps less than auspicious: Its chief statistician was arrested in June for allegedly doctoring production figures.

"It is absolutely incredible that after this number of years, the system of accounting is largely unreformed," says Trevor Link of the Arthur Andersen office in Moscow. "It fit the Soviet era very well, but was never designed to account for things like profit."

The Finance Ministry wants this changed. So does the International Monetary Fund, which last month put together a $22.6 billion assistance package for Russia in return for promises of reform, including changes in accounting. Another powerful impetus is individual Russian companies' hunger for foreign money. Investors, tired by being mauled in Moscow's markets, want to see books they can trust.

The dry arcana of accounting has become the unlikely battleground for a critical struggle over Russia's economic future. Most of Russia's major oil companies, its natural-gas monopoly, RAO Gazprom, and some other large corporations have begun producing Western-style financial statements, in addition to statutory Russian accounts. But the vast majority of enterprises in Russia -- and in other former Soviet republics -- stick to the old ways. For Russia to integrate into the global economy, beyond the borders of the former Soviet Union, they also must change.

More often than not, the task of counting the money still falls to people such as Nadezhda Belobrovkina, chief accountant at the Moscow Electrode Factory. She learned her trade more than 20 years ago and keeps punctilious records by hand in a big white ledger. The crumbling factory has trouble paying its staff of about 1,500, has fallen heavily into debt -- including millions of rubles in unpaid energy bills -- but, according to Ms. Belobrovkina's calculations, still turns a profit. How? "This is a commercial secret," says the plant's director, Nikolai Ovchinnikov.

Mrs. Belobrovkina has never bothered with International Accounting Standards nor heard of the even-stricter Generally Accepted Accounting Principles used in the U.S. But she fantasizes about what they might bring: "I hear that accountants in the West go to work only once or twice a week. If such a system were introduced here, we would be very happy."

Russia's Chart of Accounts, the framework for corporate bookkeeping, dates from November 1991, just weeks before the Soviet Union fell apart. Since then, it has been patched up with laws, decrees and instructions, cataloged in a twice-monthly journal. But the grip of a fundamental Soviet-era principle remains firm: The purpose of accounts is to help the state -- formerly the central planners and now the tax police -- stop people from stealing by keeping tabs on inventories, -- not to help managers develop their businesses.

Soviet accountants served as the state's quartermasters. In a system driven by production rather than profit, they tracked the flow of inputs and outputs, heedless of whether value had been added or subtracted, money made or lost. But instead of perishing with the Soviet Union, homo sovieticus, that species peculiar to the decrepit Communist system, still lingers on in offices cluttered with carbon paper, dog-eared files and clunky adding machines.

Some younger Russians are appalled. In March, Rusaudit, a Moscow-based Russian auditing firm, sent economist Aleksandr Voiskoboinikov to review the accounts of a paper company in Perm, on the western edge of Siberia. The records for an entire year had vanished, and those that remained were of little help. "The chief accountant started drinking at noon, so we tried to catch her before 11 o'clock," he says. After interviewing staffers about dimly remembered barter deals and offbook transactions, Mr. Voiskoboinikov produced a report. But he admits he had little idea what was really going on.

The rot in Russian numbers starts at the top. Figures have always been a negotiable and frequently friable commodity. In the Soviet era, the State Statistics Committee pumped out dubious data. The agency has since been reorganized and stripped of responsibility for former Soviet territory outside Russia, but its data remain dubious. Authorities allege that its former chief, Yuri Yurkov, arrested in June, skewed the numbers on factory production and the like to help companies avoid taxes and sold confidential information. Investigators say they found about $1 million in cash and a trove of jewelry in his home. Mr. Yurkov, who unsuccessfully appealed his arrest, now is awaiting trial on corruption charges.

Pervasive mistrust undermines what in the West are the basic building blocks of bookkeeping. Soviet central planners, wary of giving accountants freedoms they might abuse, banned them, in effect, from thinking for themselves. Instead of allowing accountants to set depreciation rates according to real wear-and-tear, for example, the state published a weighty tome dictating the lifespan of everything from wooden chairs to machine tools. The index has been simplified, but state-set formulas still inhibit accurate evaluation of fixed assets and discourage replacement of obsolete equipment and buildings. Western accountants set the useful life of most buildings at less than 30 years; in Russia, they are decreed to last up to 100.

One company struggling to straddle the two systems is Bratsk Aluminum, Russia's biggest aluminum smelter. The chasm between Western and Russian accounting measures, between what the company's Russian accountants say it earned in 1997 and what Arthur Andersen says it lost, exceeds $44 million. "This loss is purely artificial," says Arkady Gaukhman, the plant's chief accountant. "I don't know where he is coming from," replies Marcus Rhodes, head of Arthur Andersen's audit-advisory division in Moscow. "The loss recorded in the financial statement is the loss as audited."

Arthur Andersen estimated Bratsk's depreciation at $56.3 million; Bratsk put the figure at only $19.4 million. Bratsk said its buildings last 40 to 50 years; Arthur Andersen put their useful life at 15 to 30 years. The Western and Russian versions of Bratsk's performance also diverge on estimates of doubtful debt, inventory reserves and subsidiaries' earnings.

Similar muddles bedevil Russian banking. Just as factories here keep obsolete equipment on their books far longer than those in the West, Russian banks do the same with dodgy loans. The Central Bank is trying to change this and is pressuring the banks to disclose the true state of their finances. Among reforms endorsed by the IMF is a requirement that, starting next year, all financial institutions report consolidated results. The move is designed to stop them from playing shell games with their bad loans.

Barnacled by the past, Russian accounting impedes the way business works in a market-driven economy. The Soviet system never really bothered with advertising or to account for costs of employee training or business travel. Today, such costs are an important part of doing business here but require elaborate arithmetic gymnastics to satisfy the tax collectors. Instead of regarding them as normal business costs, authorities see them more as camouflage for possible tax fraud and put strict and bafflingly complex limits on deductions. The Finance Ministry says a new tax code will help correct this flaw.

The Soviet legacy also prevents a clear reckoning of the money many Russian enterprises still spend on staff housing, clinics, kindergartens and other services. Russian accountants usually bury such "social costs" in murky "special purpose" funds that can take Western auditors months to unravel.

The confusion underscores a sobering fact. Communism collapsed seven years ago in Russia, but the transition to capitalism remains a chaotic work-in-progresss. "Change the name of the country, change the flag, change the border. Yes, this was done overnight," says Bruce Bean, head of the American Chamber of Commerce in Moscow. "But build a market economy, introduce a meaningful tax system, create new accounting rules, accept the concept that companies which cannot compete should go bankrupt and the workers there lose their jobs? These things take time."