A longtime ally of Russian President Vladimir Putin has predicted that the majority of Russian companies could go bankrupt due to the increasingly high interest rate.
Sergey Chemezov, CEO of the state-owned Rostec, which produces much of Russia’s arms and military equipment, issued the warning while addressing the Federation Council earlier this week, according to Russian outlet Business Gazeta.
Chemezov criticized the Russian central bank’s elevated key interest rate, which, following his comments, was raised by an additional two percentage points on Friday to a record 21 percent.
“There is no 20 percent profitability anywhere. Maybe in the drug trade, but even the sale of weapons does not bring such a profit,” he said.
Chemezov said that the high key interest rate drives up borrowing costs for businesses, which hurts their profitability, including Rostec’s.
“It is simply not profitable for enterprises to use borrowed funds, as I have already said many times. It is just that if we continue to work like this, then practically the majority of enterprises will go bankrupt,” he said.
He added that high-tech companies with longer production cycles are particularly impacted, as they only receive advance payments of 30 to 40 percent from customers and have to cover the rest with a loan.
Russian President Vladimir Putin (L) meets with Rostec CEO Sergei Chemezov at the Kremlin on August 7, 2023. Chemezov has issued a warning amid increases in Russia’s key interest rate.
Russian President Vladimir Putin (L) meets with Rostec CEO Sergei Chemezov at the Kremlin on August 7, 2023. Chemezov has issued a warning amid increases in Russia’s key interest rate.
Gavriil Grigorov/AFP via Getty Images
However, he noted that the high borrowing costs ultimately eat into their profit margins.
He warned that this situation could lead to “stagflation,” referring to economic conditions of slow growth, high unemployment, and rising prices.
Chemezov’s concerns echo those made recently by other Russian businessmen, who warn that the high borrowing costs could hamper economic growth.
Russian billionaire Alexey Mordashov, the largest shareholder of steelmaker Severstal, said earlier this month that the situation was precarious.
“The need to raise rates to limit inflation is clear, but we are starting to go too far,” Mordashov said, per Reuters. “We are coming to a situation where the medicine may become more dangerous than the disease.”
The already-high interest rate could rise further amid ongoing inflation pressures on the country.
On Friday, Russia’s central bank said that it had further raised its key interest rate to counter rising inflation, which is currently at 8.4 percent, driven by heightened military spending amid the ongoing war in Ukraine.
“Inflation expectations continue to increase,” a statement from the central bank said. “Growth in domestic demand is significantly outstripping the capabilities to expand the supply of goods and services.”
“Further tightening of monetary policy is required to ensure the return of inflation to the target and reduce inflation expectations.”
The bank noted that a further rate hike at the next meeting is possible to help bring inflation back to target levels.