INSUBCONTINENT EXCLUSIVE:
Russian businesses are bracing themselves for a financial crunch that could put many of them out of business
The Central Bank's interest rate has reached a crushing 21%, with expectations for a further hike in December, and over the last two years,
companies have built up significant commercial debt with floating-rate interest payments.The Central Bank has progressively raised rates
since the second quarter of 2023 in a bid to control persistent inflation and support the faltering ruble
However, the soaring cost of borrowing is now pushing many companies toward a dangerous debt spiral, with interest payments consuming one
out of every four rubles they earn.Late payments from customers and partners have been climbing, signaling distress in the corporate sector
as firms struggle to service debt under such high rates
With real interest rates once bank premiums are factored in effectively reaching 25% for businesses, the likelihood of defaults and
Many firms, driven by the need for capital to support import substitution after the imposition of sanctions and to acquire assets as foreign
Heavy government spending overheated the economy and sent inflation soaring
The Central Bank began an aggressive rate-hike tightening cycle that has not ended yet.By late 2024, floating-rate loans constituted 53% of
This surge, combined with the weakened ruble and heightened government spending, drove up inflation, fueling further rate hikes.The demand
for loans has also soared as businesses race to lock in capital ahead of anticipated new restrictions
Tightened reserve requirements and stricter lending standards are expected to come into force by year-end, leading companies to expand their
loan portfolios by 22% in the past year alone.The situation will only get worse
The prospects for the Central Bank to switch to easing monetary policy remain remote as long as the war in Ukraine continues.Corporate
bankruptcies in Russia have jumped by 20% this year as soaring interest rates and liquidity shortages push firms closer to financial ruin,
though initially concentrated in the first quarter, is poised to accelerate as tighter monetary conditions make debt servicing increasingly
unsustainable.Signs of distress have intensified in recent months, with the Russian Union of Industrialists and Entrepreneurs (RSPP)
reporting a substantial rise in complaints over late payments."Previously, 22% of business owners faced this issue, but that figure has now
The RSPP attributes the escalation to the difficulty of assessing working capital loans, a situation forcing many companies to delay
payments to suppliers and other creditors.The retail sector is especially vulnerable
Without such interventions, the union warns, 200 shopping centers could face bankruptcy within the coming months
Similarly, office and warehouse owners are attempting to renegotiate terms with creditors.Officials are increasingly sounding the alarm bell
Sergei Chemezov, CEO of the state-owned defense conglomerate Rostec, warned that the current lending environment is untenable for
manufacturers whose production cycles exceed a year."If we keep operating like this, most of our businesses will go bankrupt," Chemezov said
manufacturing cycle takes a year, advance payments cover only 40% of production costs
market, where high rates are making bonds unaffordable as a source of capital
A key risk measure, the net debt-to-EBITDA ratio, has surged among lower-tier firms, with Gazprombank estimating this metric now exceeds
companies to spend three out of four rules they earn to service debt.The high rates have also made rolling maturing bonds over untenable,
putting even more pressure on corporate reserves as management had not planned to retire their debt at this stage and assumed that bonds
To refinance maturing bonds, companies are now forced to offer yields around 27% to attract investors wary of default risks, according to
The construction sector, particularly vulnerable to delayed payments, has been hit by a double whammy after a generous mortgage subsidy
similar to the subprime model used in the U.S
that caused the 2008 global financial crisis
rise to match the prime rate after the honeymoon period is over
cool the economy and bring inflation down
The United Credit Bureau has reported a notable decline in average credit scores across Russia
By October 2024, the likelihood of default among consumers had risen by 12% compared to the previous year, and long-term overdue payments
are becoming more prevalent
That is worrying the regulator, which reports a build-up in the concentrations of debt that could precipitate a financial
that could manifest before year-end as companies face imminent bond repayments
Many corporate bonds mature in the fourth quarter of this year, and with investor sentiment fragile, refinancing options remain costly and
for companies to halt expansion or even downsize and put funds in the bank rather than continue operations and take on the associated
