The Russian economy is facing the prospect of a huge rise in corporate bankruptcies as firms are driven to the edge by a record key interest rate.
The Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF), which is close to the Russian government, said that one in five manufacturing enterprises must pay two-thirds of pretax profits to service debt. This shows that the key interest rate of 21 percent imposed by Russia's Central Bank (CBR) to cool the economy is taking its toll.
Vasily Astrov, senior economist at the Vienna Institute for International Economic Studies, told Newsweek that there was "realistic danger" Russia faces a big rise in bankruptcies.
Newsweek has contacted Russia's Finance Ministry and CBR for comment by email.
Why It Matters
The report is by a center closely linked to the government and gives a stark view of how Russia's sanctions-hit economy is being buffeted by the costs of the war President Vladimir Putin started in Ukraine.
It shows firms are struggling with increased borrowing costs caused by a high base interest rate aimed at easing inflation and raises questions about the financial sustainability of record military spending.
What To Know
The CBR hiked its benchmark interest rate to 21 percent last year—the highest for two decades—to fight inflation, which, at 9.5 percent, was over double its goal.
However, the CMASF report showed the knock-on effects of this rate, which has caused many firms to complain about rocketing borrowing costs.
The research showed that, by the end of 2024, 20 percent of firms had interest payments at two-thirds of adjusted earnings, which is a "risky" level.
Astrov, an expert on Russia's economy, said that around a half of Russian businesses have debt liabilities with a floating interest rate, so refinancing needs must have risen sharply in line with the rising interest rates.
He told Newsweek that, with the real policy rate at 10.5 percent based on December inflation, it was uncertain how many economies can grow "under such draconian monetary conditions."
"A lot will depend on how long the very high interest rates persist—the longer this is the case, the greater the impact in terms of credit defaults will be," Astrov said. "I can well imagine that the central bank might start lowering the policy rate at some point in the near-future—even if inflation remains high."
CMASF researchers also found that there has been a sharp increase from 20 percent to 37 percent in firms facing non-payments from their counterparties for supplied goods and services.
Instead of paying suppliers, firms found it was more attractive to deposit cash at banks offering high interest rates or buy risk-free bonds, the CMASF report added.
New loans to key sectors of the economy slumped by up to 50 percent in the last two months of 2024, and it is becoming more difficult for businesses to borrow money in the debt market, the report said.
It concluded that the Russian economy is facing the threat of a large-scale jump in corporate bankruptcies.
Various sectors of the Russian economy are struggling, with coal industry companies facing plummeting exports and revenues due to sanctions and a drop in global prices. Higher borrowing costs have also hit shopping centers, road builders, airlines and IT businesses.
What People Are Saying
The CMASF report said: "The Russian economy is facing the threat of a large-scale jump in corporate bankruptcies."
Vasily Astrov, senior economist at the Vienna Institute for International Economic Studies, told Newsweek: "A lot will depend on how long the very high interest rates persist—the longer this is the case, the greater the impact in terms of credit defaults will be."
What Happens Next
The CMASF report may have described "impressive" GDP growth of up to 4 percent, but it said this number hides how real production activity has almost stopped growing. There will be concern over whether companies can weather continued economic turbulence as the war rages on.
Astrov said that the prospect of a wave of bankruptcies could prompt the CBR to forego its inflation target and lower the key interest rate.
Newsweek