The Russian economy is facing a potential surge in corporate bankruptcies due to the record-high key interest rate implemented by the Central Bank. The CMASF, a government-linked research center, warns that 20% of manufacturing firms are dedicating two-thirds of their pre-tax profits to debt servicing.
The Russian economy is facing a potential surge in corporate bankruptcies as businesses struggle under the weight of a record-high key interest rate. The Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF), an institution closely aligned with the Russian government, revealed that a staggering 20 percent of manufacturing enterprises are dedicating two-thirds of their pre-tax profits solely to debt servicing.
This alarming statistic underscores the far-reaching impact of Russia's Central Bank (CBR)'s 21 percent key interest rate, implemented to curb inflation. Vasily Astrov, a senior economist at the Vienna Institute for International Economic Studies, expressed to Newsweek a 'realistic danger' that Russia could witness a significant rise in bankruptcies. He highlighted the vulnerability of approximately half of Russian businesses with floating interest rate debt, as refinancing needs have surged in tandem with the escalating interest rates. Astrov further emphasized the precariousness of the situation, stating that with a real policy rate standing at 10.5 percent, it is unclear how many businesses can sustain growth under such stringent monetary conditions.The CMASF report paints a stark picture of Russia's economy, revealing the profound strain inflicted by sanctions and the relentless costs of the war in Ukraine. Businesses are grappling with soaring borrowing costs stemming from the high base interest rate, intended to alleviate inflation, which currently sits at 9.5 percent, more than double the CBR's target. The report also unveiled a concerning surge in firms facing non-payments from their counterparts for supplied goods and services, escalating from 20 percent to 37 percent. This trend suggests that firms are prioritizing secure cash deposits at banks offering lucrative interest rates or risk-free bond investments over fulfilling their financial obligations to suppliers.New loans to crucial sectors of the economy have plummeted by as much as 50 percent in the final two months of 2024, and accessing credit in the debt market has become increasingly challenging for businesses. The CMASF report concludes with a dire warning: the Russian economy is susceptible to a widespread wave of corporate bankruptcies.Multiple sectors of the Russian economy are experiencing difficulties. Coal industry companies are facing plummeting exports and revenue due to sanctions and a decline in global prices. Elevated borrowing costs have also taken a toll on shopping centers, road builders, airlines, and IT businesses. The CMASF report itself acknowledges the 'imposing' GDP growth of up to 4 percent, but cautions that this figure masks a reality where actual production activity has nearly stagnated. Astrov suggests that the looming threat of widespread bankruptcies could compel the CBR to reconsider its inflation target and potentially lower the key interest rate. The economic turbulence caused by the ongoing war will undoubtedly continue to cast a long shadow over the Russian economy, raising serious concerns about the ability of businesses to endure further strain
RUSSIA ECONOMY BANKRUPTCIES INTEREST RATE INFLATION SANCTIONS WAR BUSINESSES
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