As corporate debts in Russia balloon under rising interest rates, a wave of bankruptcies could be on the horizon
Since the summer of 2023, Russia's key interest rate has been rising steadily, making loans more expensive and pushing up debt burdens. The rate now stands at 21 percent, and the Central Bank is expected to raise it again in December. Businesses have already begun reporting a rise in late payments from counterparties — a potential warning sign of looming defaults, as many companies find it nearly impossible to meet debt obligations with interest rates above 20 percent. Meduza explains whether these fears are justified, how soon a wave of bankruptcies might hit, and why the Central Bank seems unconcerned.
Imminent risk
Many companies in Russia now face a serious risk of bankruptcy, and it seems there’s little they can do to change the situation. The roots of this crisis go back to 2022, right after Moscow launched its full-scale invasion of Ukraine. At that time, Russia’s Central Bank raised the key interest rate to 20 percent per annum, effectively bringing all lending in the country to a halt. By April, however, the first major rate cut took place, followed by another in May, and within a few months, the rate had fallen back to 7.5 percent. Forecasts anticipated that this trend would continue and that loans would become more affordable.
During this period, businesses’ demand for funds surged as they needed capital to acquire companies leaving Russia and to support the push for import substitution. As a result, business owners increasingly took out loans with floating rates, tied to the Central Bank’s key rate. Historically, these loans accounted for no more than 20 percent of total borrowing, but by mid-2023, that share had risen to 44 percent, driven by expectations of lower rates and reduced debt burdens.
Then things took a turn. The ruble plummeted to 100 against the U.S. dollar, government spending soared, and business activity intensified, all of which fueled inflation. Contrary to predictions, the Central Bank began a cycle of rate hikes, pushing the key rate to an unprecedented 21 percent by late 2024. With added premiums from commercial banks, real interest rates for businesses climbed to 25 percent. By then, the total share of floating-rate loans had increased to 53 percent.
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Loan volumes also grew. The Central Bank noted that, as monetary conditions tightened, companies rushed to secure loans before stricter limits and reserve requirements took effect. By year’s end, corporate loan portfolios had expanded by 22 percent.
Economist Egor Susin explains that the risk of defaults is not just due to high rates but also the broader state of the economy. Businesses might be able to manage expensive loans if they could count on continued production growth and rising demand, but the Central Bank’s policies have made that all but impossible. Oleg Kuzmin, an economist at Renaissance Capital, adds that highly leveraged companies are especially at risk: they often rely on new loans to pay off old ones, but with current rates, that’s become unaffordable.
A coming storm
Officially, corporate bankruptcies in Russia have risen by 20 percent this year compared to 2023, according to the Unified Federal Registry of Bankruptcy Declarations (Fedresurs). However, most cases were concentrated in the first quarter and weren’t tied to expensive loans, as noted by the credit rating agency Expert RA. The pace of bankruptcies slowed in the second and third quarters, but early signs of a new wave of trouble are now emerging.
The Russian Union of Industrialists and Entrepreneurs, which conducts quarterly monitoring, has reported a sharp increase in complaints about late payments from business partners. Previously, 22 percent of business owners faced this issue, but that figure has now jumped to 37 percent — an unprecedented surge. The union attributes this to the lack of accessible working capital loans, forcing companies to delay servicing their debts.
Russia’s Union of Shopping Centers has already appealed to the government for support, Kommersant reports. Industry players are requesting subsidized interest rates of 7-10 percent, debt restructuring, and payment deferrals of 5-10 years. Without these measures, 200 shopping centers risk bankruptcy. Likewise, owners of office and warehouse spaces are trying to negotiate with creditors. Given current economic conditions, nearly any business could argue for subsidies and relief from rising interest rates, says Vasily Tanurkov, the corporate ratings director at ACRA.
Sergey Chemezov, the head of the state-owned defense conglomerate Rostec, has echoed these concerns. He points out that if a product’s manufacturing cycle takes a year, advance payments cover only 40 percent of production costs. The rest must be borrowed, but high interest rates wipe out all profits. “If we keep operating like this, most of our businesses will go bankrupt. Even arms sales don’t generate enough profit [to service debt at rates above 20 percent],” Chemezov warned.
The corporate bond market is also buzzing with concern. A key risk indicator is the net debt to EBITDA ratio, which measures a company’s debt burden relative to its earnings. Gazprombank estimates that for lower-tier companies, this ratio now exceeds 3. While this was once seen as a manageable level, at today’s rates, interest payments consume up to 75 percent of EBITDA. To pay off existing bonds, companies will need to offer yields of around 27 percent to attract investors, given the risk, according to Expert RA.
Several sectors likely to be hit hard include paper and wood processing, wholesale trade, and agriculture. The construction industry also faces significant risk, especially from delayed payments, notes Lyudmila Rokotyanskaya from BCS World of Investments. Dmitry Sergeev from Veles Capital warns that any company unable to pass on costs to consumers is in danger.
It's not just companies feeling the strain; individuals are struggling too. The United Credit Bureau reports that the average credit rating of Russians continues to drop. As of October 2024, the likelihood of default has increased by 12 percent since last year, and the share of borrowers with long-term overdue payments is growing. Analysts have also noted “an increase in the concentration of large credit risks among banks.
Market analysts point out that bankruptcies usually spike three to six months after interest rates rise. Bond defaults could happen even sooner: many outstanding corporate bonds are due for repayment in the fourth quarter of this year. Ingosstrakh-Investments has issued a stark warning: “The defaults we’ve seen so far are just the first signs of a much bigger storm.”
The potential fallout
Large companies are feeling less of an immediate credit risk but are raising concerns about a lack of funds for further growth. With new loans out of reach, available capital is being used to service existing debts. Alexey Mordashov, the founder of Severstal, put it this way: “At the current interest rate, it’s more profitable for companies to halt expansion or even downsize and put funds in the bank rather than continue operations and take on the associated risks.” He believes this will slow economic growth and drive up inflation.
Billionaire Oleg Deripaska is also an outspoken critic of Russia’s Central Bank. For years, he’s been calling for a return to a five percent interest rate. At the Financial Congress in July, organizers seated him next to Central Bank Head Elvira Nabiullina during a panel discussion so he could voice his concerns directly. He argued that businesses are stuck using outdated technologies because they can’t secure affordable financing to upgrade equipment. In his view, current monetary policies could halve the number of private businesses.
Rodion Latypov, the chief economist at VTB, believes this assessment is exaggerated. He notes that, according to Russia’s Federal Statistics Service (Rosstat), Russian companies finance most of their investments (56 percent) from their own resources, with state support covering another 20 percent and only eight percent coming from bank loans. This suggests that even with high interest rates, a sharp decline in investment is unlikely.
The outlook for small businesses with high debt levels is less optimistic. Economist Viktor Tunev predicts a “market shake-up” if not outright bankruptcies. Russian Central Bank Deputy Director Alexey Zabotkin described this as a potential redistribution of resources “from less efficient companies and owners to more efficient ones.” Elizaveta Danilova, the head of the Central Bank’s financial stability department, believes this could actually “benefit the economy.”
At the Central Bank’s September meeting, where the key rate was raised to 19 percent, Elvira Nabiullina said she didn’t foresee widespread bankruptcies. A month later, the rate climbed to 21 percent, and the bank will consider increasing it to 23 percent in December. Since that statement, Nabiullina hasn’t been asked about defaults. Lawyers have highlighted new regulations aimed at reducing bankruptcies: previously, companies could file for bankruptcy if they owed more than 300,000 rubles (about $3,000), but that threshold has now been raised to two million rubles ($20,400).
Meanwhile, President Vladimir Putin has taken steps to protect individual borrowers by signing a decree preventing creditors from seizing a person’s only home or any payments received for fighting in Russia’s war against Ukraine.
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