Criticism of high interest rates
Russian arms chief warns of economic collapse
Updated 10/24/2024Reading time: 3 min.
Sergei Chemezov, head of the Rostec Group, warns of the fatal effects of interest rate policy in Russia. Rising interest rates threaten profitability.
One of the most powerful men in the Russian economy has warned of serious consequences of Russia’s interest rate policy. Sergei Chemezov is the head of the Rostec Group, a state-owned conglomerate that, among other things, also has a large share in the Russian defense industry. He has now painted a gloomy picture at a conference.
Because interest rates in Russia have risen so sharply, the business is no longer worthwhile for the manufacturing industry. The low profits are being eaten up by rising interest rates, the Russian financial website RBC and the “Moscow Times” report from a State Council event at which Chemezov spoke.
Putin’s confidant, whose companies are not only involved in armaments but also in industrial machinery and medical technology, sees the danger of stagflation. This occurs when both the production of goods and consumption decline while at the same time inflation rises dramatically.
According to the CEO, this could lead to mass bankruptcies of Russian factories. “Of course, when we conclude contracts for products whose production cycle is more than one year, we receive a maximum of 30 to 40 percent advance. We have to borrow the remaining funds for the production of these products. And at such an interest rate, the entire profit, which we expect to be eaten up by the interest we have to pay to the bank,” Chemezov said.
According to the report, the entrepreneur complained that the Russian State Bank’s interest rates were already at a record high of 19 percent. These have been increased seven times since last summer, and an increase to 20 percent is expected next Friday.
So far, at least Rostec can still produce: Official figures speak of an increase of 4.5 percent year-on-year in the months January to August. In next year’s budget, the Russian government is anticipating industrial growth of two percent.
However, there are risks, as the Moscow Times writes. Analysts from the state-owned company Gazprom have warned that half of the company’s interest rates are linked to the rate that the state bank issues. This increases the debt burden and the risk that companies will no longer be able to pay their debts.
There is no end in sight to the interest rate spiral. Alexander Kalinin of Opora Rossii, an organization of small and medium-sized Russian businesses, told Reuters that he expects loan interest rates for small and medium-sized businesses to rise to 30 percent by 2025.
The head of the Central Bank, Elvira Nabiullina, had pointed to overheating of the economy, which turned out to be the largest in 16 years, according to RBC. Salaries, consumption and gross domestic product have risen rapidly, and there is a risk of recession. Therefore, a long period of maintaining high interest rates is necessary to cool down demand. Based on economic data from September, the state agency Rosstat estimates annual inflation at 8.63 percent.
Since the war of aggression against Ukraine, Kremlin leader Vladimir Putin has, to a certain extent, switched to a war economy. At the economic forum in June, his deputy prime minister Denis Manturov announced that Putin had signed a whole list of instructions for the development of the defense sector in order to produce even more weapons and ammunition. Russia still exports its oil and gas and can thereby generate important income.