A close ally of Vladimir Putin has warned of a looming crisis in Russia’s industrial sector, citing soaring interest rates as the primary threat pushing many companies toward potential bankruptcy. As Russia grapples with inflation at 9.1 percent, the Central Bank of Russia (CBR) raised the key interest rate to 21% in October 2024, its highest level since Russia’s full-scale invasion of Ukraine.
The rate hike, intended to curb inflation, has had significant ripple effects throughout the Russian economy, pushing companies to the brink of unsustainable debt levels, according to a report by the *Daily Express UK*.
Sergey Chemezov, head of Russia’s defense conglomerate Rostec and a long-time ally of Putin from their days in the KGB, has raised alarms about the potential collapse of numerous firms. Speaking with RBK, a Russian publication, Chemezov outlined the challenges posed by high borrowing costs.
He explained that companies like Rostec, which require lengthy production cycles, are especially vulnerable. “When we engage in contracts with production cycles longer than a year, we typically receive an advance payment of 30-40%,” Chemezov stated. “The remaining funds necessary for production have to be borrowed.” However, with interest rates now at 21%, the cost of borrowing has become prohibitive, effectively erasing any profits these companies might generate.
Chemezov warned that should this high-interest environment continue, most Russian enterprises will face insolvency. Russian businesses, which took out variable-rate loans when the interest rate was 7% in April 2022, are now buckling under the increased cost of debt. Consequently, bankruptcy rates have surged by 20% in 2024 compared to the previous year, and analysts predict further closures if rates remain high.
The crisis is also affecting large corporations. Magnitogorsk Iron and Steel Works, Russia's largest steel producer, has reported reserves that might only last another six months, projecting a bleak outlook for 2025.
With little relief in sight, Alexei Zabotkin, deputy chairman of the CBR, hinted that further rate hikes might be necessary to achieve the target inflation rate of 4% by 2025 or 2026. Zabotkin noted on state television that the CBR’s current policy is driven by the need to rein in inflation, signaling that additional increases to the key rate may be forthcoming.
The economic strain resulting from these high rates poses serious threats to Russia’s industrial base, with firms facing increasingly dire financial challenges in the months ahead.
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