Wave of Insolvencies Threatens Russian Economy Amid Rising Inflation
The Russian economy faces significant challenges as it approaches the new year. Despite efforts by President Vladimir Putin to tackle high inflation, the situation appears to be worsening, particularly in sectors crucial to the country's financial stability. Recent warnings indicate a potential wave of insolvencies, particularly in industries vital to Russia's economic framework and its ongoing conflict in Ukraine.
Currently, inflation in Russia stands at a concerning 9.3 percent, a figure highlighted by Putin during a recent press conference where he described it as an alarming signal. Compounding this issue is the depreciation of the ruble, which has further exacerbated inflationary pressures. In response, the Central Bank of Russia has implemented a series of interest rate hikes, which have now brought the benchmark rate to 21 percent. This strategy aims to curb consumer and business borrowing, thereby reducing demand and alleviating inflationary stress.
Analysts predict that the Central Bank may announce additional rate increases before the end of 2024, although it has opted to maintain the current rate for now. Nevertheless, the high-interest environment is creating considerable financing challenges for many businesses across the country.
A report from the Russian news agency Interfax has indicated a troubling trend: payment defaults are spreading throughout the economy. Between July and September, approximately 19 percent of large and medium-sized enterprises experienced payment delays, while the rate was even higher--25 percent--for smaller businesses.
Even leading economists within Putin's circle are expressing concern over the prevailing economic conditions. Igor Setschin, the CEO of Rosneft, criticized the Central Bank's financial policies in a recent quarterly report, arguing that the interest rate hikes have negatively impacted both financing costs for his company and for its suppliers, leading to reduced profits.
One of the sectors under the most pressure is retail. The Russian Association of Shopping Centers has raised alarms, claiming that over 200 shopping centers are at risk of insolvency due to soaring financing costs. Reports suggest that nearly a quarter of all shopping centers in the country face closure in 2025. Furthermore, the rise of online retail platforms in Russia is intensifying competition, adding additional strain to brick-and-mortar stores.
Another critical area affected by the economic downturn is the defense industry. Payment defaults and escalating financing costs are disrupting supply chains for many defense contractors. Western sanctions have also restricted access to essential components necessary for the production of high-quality military equipment. Additionally, a shortage of skilled labor is further complicating matters.
According to data submitted by the Russian Ministry of Economic Development to parliament, the growth of the sector categorized as 'other transport systems and equipment' is projected to plummet from 30.2 percent in 2023 to a mere five percent in the upcoming year.
In a stark warning issued in late October, Sergei Chemezov, a close ally of Putin and head of the state-owned defense corporation Rostec, indicated that if prices continue to remain at current levels, a significant number of companies could face bankruptcy. This scenario could force Russia to limit its arms exports.
The defense industry is increasingly critical for the Russian government, which is investing heavily in military capabilities. Reports suggest that defense spending in Russia could reach its highest levels since the Cold War by 2025. However, doubts remain about the sustainability of such extensive military expenditures in the context of Russia's broader economic challenges.
