Rostec boss warns of collapse of Russian industry

Rostec Group CEO Sergei Chemezov warned of the fatal impact of Russia's interest rate policy. Rising interest rates threaten profitability.

Thomas Vanhove/t-online

One of the most powerful figures in the Russian economy has warned of serious consequences for Russia's interest rate policy. Sergei Chemezov is the head of Rostec Group, a state-owned conglomerate that also has a large share of the Russian defense industry. He now paints a bleak picture at a conference. Since interest rates in Russia have risen sharply, this business is no longer valuable to manufacturing. Low profits are being eaten up by rising interest rates, Russian financial website Royal Bank of Canada and The Moscow Times reported as Chemezov spoke at a State Department event.

Putin, whose confidant companies are involved not only in armaments but also in industrial machinery and medical technology, sees the danger of stagflation. This occurs when both production and consumption of goods decline, while inflation rises sharply.

Interest rates hit record highs

The CEO said this could lead to mass bankruptcies of Russian factories. «If we sign a contract for a product with a production cycle of more than one year, we will of course receive an advance payment of up to 30% to 40%. We have to borrow the remaining funds to produce these products. At such interest rates, all the profits we expect will be eaten up by the interest we have to pay to the banks,” Chemezov said.

According to the report, the entrepreneur complained that the National Bank of Russia’s interest rate had reached a record high of 19%. That number has increased sevenfold since last summer and is expected to rise to 20% next Friday.

Much corporate debt is tied to government interest rates

So far, at least Rostec can still produce: official data shows a year-on-year growth of 4.5% from January to August. In next year's budget, the Russian government projects industrial growth of two percent.

However, as the Moscow Times writes, there are risks. Analysts at state-owned Gazprom have warned that half of the company’s interest rates are tied to those issued by state banks. This increases the debt burden and the risk that the company will no longer be able to pay its debts.

There's no end in sight for the interest rate spiral. Alexander Kalinin of Opora Rossii, a Russian small and medium-sized enterprise organization, told Reuters that he expected loan interest rates for small and medium-sized enterprises to rise to 30% by 2025.

Central bank hopes to cool overheating economy

According to the Royal Bank of Canada, central bank governor Elvira Nabiullina had pointed to the overheating of the economy, and the result was the worst economic overheating in 16 years. Wages, consumption and GDP are growing rapidly, and there is a risk of recession. Therefore, high interest rates are needed for a long period of time to cool demand. Based on economic data for September, state agency Rosstat estimated annual inflation at 8.63%.

Since the war of aggression against Ukraine, Kremlin leader Vladimir Putin has turned somewhat to a wartime economy. At an economic forum in June, Russian Deputy Prime Minister Denis Manturov announced that Putin had signed a full list of instructions to develop the defense sector to produce more weapons and ammunition. Russia still exports oil and gas, which can generate important revenue.

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