High interest rates could trigger wave of bankruptcies, says think tank linked to defense minister

The Center for Macroeconomic Analysis and Short-Term Forecasting—which has deep connections to Defense Minister Andrei Belousov—has predicted a wave of bankruptcies if high interest rates stay in place. Alongside arms manufacturers and big businesses, the think tank is one of the main lobbyists calling for lower borrowing costs.

• The Russian economy is facing the threat of a large jump in corporate bankruptcies, the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF) has warned. The center is run by Dmitry Belousov, brother of Russia’s defense minister and was previously headed by Andrei Belousov himself before he moved into government in the mid-2000s. Its analysts point to high interest rates as the cause, with loan repayments becoming increasingly difficult as more and more companies struggle with securing payments from their counterparts—the result of firms moving money from operations into short-term deposit accounts to secure high rates of return. 
• In the manufacturing industry, more than 20% of businesses have a “risky” level of borrowing, the CMASF calculated—meaning they are paying two-thirds of their pre-tax profits on debt. The highest repayments-to-profit ratio was recorded in machine-building, woodwork, leather, automobile and metallurgical sectors. In some areas, like construction and coal-mining, the return on working capital (profits as a proportion of total assets) was lower than borrowing costs.
• This is not the first time that the center has warned about potential problems in the Russian economy due to high interest rates. In a previous report, it warned about an unprecedented convergence of the return on capital and the lending rate, and said that 2025 could set a new record for the debt burden in many industries.
• Since their first warning, various sets of data have backed them up. The government is even considering support measures to help avoid a wave of bankruptcy in the coal industry, which is particularly struggling, and among metal producers (we wrote about the troubles affecting that industry in our economic newsletter on Friday.)
• The central bank has faced repeated attacks for taking the key rate to 21%—the highest in more than two decades—not just by analysts but also by many entrepreneurs (we covered the pressure on the bank back in December). The next meeting of the bank’s rate-setting board will be held on February 14. What it decides will largely be determined by the as-yet unpublished figures for corporate lending in December.

Why the world should care

The unbalancing of the economy due to high inflation and interest rates is one of the key things to follow in Russia right now. The Belousov brothers’ think tank is certainly a bit biased in favoring big business and defence, but has historically been considered to be a good analyst of the state of Russian industry.