Corporate Bankruptcy Threat in Russia

MOSCOW (Reuters) – Russia may experience a surge of corporate bankruptcies this year due to risky debt levels rising in 2024, according to a leading government think tank’s research note.

The warning highlights the impact of high inflation and slowing growth, causing President Vladimir Putin concern over distortions within the wartime economy. TsMAKP researchers stated, “The Russian economy is facing the threat of a large-scale surge in corporate bankruptcies.”

By the end of 2024, they projected that 20% of companies would have interest payments at a risky level of two-thirds of adjusted earnings, a significant increase.

The Russian central bank raised its benchmark interest rate to 21% last year, the highest since the early 2000s, to combat inflation, which reached 9.5% in 2024, exceeding previous forecasts.

High interest rates have led to increased borrowing costs for firms. For example, MTS, Russia’s largest mobile operator, attributed an 88.8% decline in third-quarter net profit to heightened interest expenses, while Russian Railways anticipates a $4 billion rise in interest payments this year.

The researchers noted a rise in firms facing non-payments from counterparties for provided goods and services, climbing to 37% of total revenue in the third quarter of 2024, compared to about 20% in 2021-2023.

Many companies are opting to deposit cash in banks or purchase risk-free bonds with attractive interest rates instead of paying suppliers. This has led to a doubling of the share of companies with working capital profitability lower than the risk-free interest rate to 66% of total corporate revenues, hindering investment.

Researchers warned that this trend could reduce investments in production facilities and economic growth potential, projecting a decline in investments to 1.7-2.0% this year, down from 7% in 2024.