Soaring interest rates, a plunging currency and labour shortages are biting harder.
For more than two years most Russian businesses carried on unscathed by the war in Ukraine. A surge in defence spending and subsidised loans for consumers and firms propped up spending at home, even as sanctions curtailed access to foreign markets and inflation jumped. Western companies from Volkswagen, a German carmaker, to Shell, a Dutch oil giant, sold their Russian operations to local enterprises. After an initial tumble, the MOEX, an index of Russian stocks, steadily recovered (see chart).
Lately, however, things have taken a turn for the worse. The MOEX has fallen by almost a third over the past six months. Corporate bankruptcies are up. To combat inflation, Russia’s central bank has raised its main interest rate to 21%, sending borrowing costs rocketing. Fresh American sanctions have tanked the rouble and raised the cost of imports. Labour shortages are worsening.
A difficult winter lies ahead.
Borrowing costs are the most pressing concern for bosses. Around two-fifths of the debt held by Russian companies at the beginning of 2022 was on a floating-rate basis, a share that has since risen above half, according to figures from Russia’s central bank. That has left many firms crippled by soaring rates. Russian Railways, a state-owned enterprise that is the country’s largest employer, is among the companies that are planning to cut their investments next year as a result.
The Union of Shopping Centres, a business association, is said to have asked the government for support in the form of cheaper loans as well as help with payment deferrals and debt restructuring. Without these measures, it has warned that 200 shopping centres risk bankruptcy.
As Sergei Chemezov, the chief executive of Rostec, a state-owned arms-maker, warned in October, “If we continue to work like this, then almost the majority of our enterprises will go bankrupt.” Mr Chemezov, a former KGB colleague of Vladimir Putin, Russia’s president, noted that advance payments for goods typically cover only 40% of their cost, which means that companies like his either need to borrow to make up the difference or delay payment to their suppliers for months.
A growing number are choosing the latter. The Russian Union of Industrialists and Entrepreneurs, another business association, has noted an increase in complaints about late payments in its quarterly survey of companies, which it attributes to the cost of working-capital loans.
Russian businesses are grappling with rising prices too, particularly of imports. A survey of manufacturers conducted by S&P Global, a data provider, indicated that the rate of inflation for inputs accelerated for the third consecutive month in November. Manufacturers also complained of lengthening lead times for components and difficulties finding workers. The unemployment rate is just 2.3%, as the military and defence industry gobble up labour.
The squeeze will worsen in the months ahead. “In 2022 and 2023 the Kremlin had enough roubles to continue financing the war and subsidising businesses,” says Andrei Yakovlev of the Davis Centre for Russian and Eurasian studies at Harvard University. But since the summer, he says, it has been clear that the Kremlin can no longer do both. The government is now looking to raise taxes. Next year it will increase the levy on company profits from 20% to 25%. With the economy expected to weaken, Janis Kluge of the German Institute for International and Security Affairs, a think-tank in Berlin, predicts a wave of corporate bankruptcies.
The war is also damaging business in other ways. Venture-capital investment has dropped and tech companies have struggled as talented workers have fled. Russian firms have found it difficult to keep up with advances in artificial intelligence (AI) because they cannot get hold of the semiconductors developed by Nvidia, America’s AI chip champion. Innovation will slow as a result.
All the president’s businessmen.
Alexandra Prokopenko of the Carnegie Russia Eurasia Centre, another think-tank in Berlin, says that the nature of doing business in Russia is changing too. She likens it to the chaos that followed the collapse of the Soviet Union. Property rights are being eroded, and the approval of Mr Putin and his allies has become paramount. Even if they are suffering, few bosses may be brave enough to speak out against the war. ■
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Chart: The Economist
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