Russian businesses are still actively taking out floating rate loans, despite the sky-high cost of borrowing, in the hope that rates will come down, but pushing rates up as a result, The Bell reported on December 3.

Businesses still have a strong appetite for loans despite a prime interest rate of 21% that is widely expected to go up another two percentage points in the coming months.

Retail borrowing has fallen, but Central Bank of Russia (CBR) data show that lending to enterprises rose 2.3% in October, surpassing September's 2% increase and 1.9% gain in August, and contributing to a 16.4% surge in borrowing over the first ten months of 2024. This trend has led the Central Bank to revise its annual growth forecast for corporate loan demand to 17-20%, up from an earlier projection of 10-15%.

The Central Bank's strategy hinges on the assumption that higher rates will temper borrowing and bolster household savings, ultimately reducing consumption and so inflation. While retail lending has slowed as anticipated, businesses is the exception and borrowing aggressively to address immediate needs and long-term investments.

Loans are predominantly channelled into sectors such as wholesale and retail trade, transportation, construction, real estate and manufacturing. Analysts attribute this trend to the dual pressures of sustaining operations and adapting to Western sanctions. Companies have been forced to retool to replace hard-to-get western technology and are financing this investment with credits.

"Due to sanctions, demand for loans may react weakly to the growth of rates," Natalia Milchakova, a leading analyst at Freedom Finance Global, told The Bell. Small and medium-sized enterprises (SMEs), she added, have limited access to capital markets, leaving banks as their only viable option despite the high costs.

Debt strains and floating rates

High borrowing costs are raising concerns over debt sustainability. Some analysts have warned of a wave of bankruptcies hitting the economy early in 2025. Others have said the Russian economy is more robust than first appears and the chance of a crisis remains low.

The Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF) noted that in the manufacturing sector, one in four rubles of profit is already allocated to servicing debt. This burden is most acute in industries such as mechanical engineering, woodworking and metallurgy, while others, including construction and coal mining, report returns on working capital that fall below the interest rate.

"The state will buy everything, but there are two problems at the moment: there are no people and no cheap money," a senior manager at a defence contractor told The Bell.

As businesses seek relief, many are turning to floating-rate loans, which now outpace fixed-rate lending for the first time ever. By April 2024, 90% of floating-rate loans were tied to the central bank’s key rate in anticipation of a rate cut in early 2025. But the rising borrowing poses risks to monetary policy effectiveness. Economist Yegor Susin warned of a borrowing/rates hike spiral: "If the rate is not fixed, enterprises continue to increase borrowing in the hope of lower rates, but this forces the CBR to hike rates in an effort to slow borrowing.”

2025 could set a new record for debt burden in many industries, The Bell reports citing the Centre for Macroeconomic Analysis and Short-Term Forecasting (CMASF). Currently, the average interest-to-profit ratio is projected to be 24%, just below the previous record of 26% set in 2017.

Payment delays

In a conversation with bne IntelliNews, a Russian business owner in the services sector explained that the cost of borrowing problem was causing increasing delays in payments that are a headache, but not yet a problem.

“Everyone is hanging onto their cash as long as they can, so they can avoid borrowing more to fund operations,” the businessman told bne IntelliNews. “It’s not a huge problem yet, but it causes cashflow problems and it is slowly getting worse.”

The businessman told bne IntelliNews that he is owed about half a million dollars by clients, and they are in constant contact with clients have keep coming up with excuses, delaying payments. Nevertheless, thanks to the economic military Keynesianism driven boom of the last two years, companies made strong profits and have deep wells of liquidity to tap into unlike the crisis of 2008, when large companies ran out of cash and had to turn to the Kremlin for bailouts.

“In 2023, military government spending and the mass departure of foreign competitors led to the fact that the profits of Russian companies grew by 35%. But according to the results of eight months of 2024, it is already 6% lower than last year. However, this has not yet led to an increase in overdue loans: the share of overdue corporate loans in September was at its lowest level for the year – 2.7%. Over the eight months of 2024, overdue debt decreased by 18.9%,” The Bell reports.

Government pushes for investments over deposits

Another factor reducing the cash in circulation is that companies can make more money from deposits than they can from investing into expanding their businesses as the rates are so high.

Reminiscent on the 1990s play of speculating against hyperinflation, in those days companies and banks took ruble receipts, converted them into dollars, and delayed payments as long as possible. In the meantime, hyperinflation, which reached 1,400%, ate away at the value of the ruble loans, so when the bank was finally forced to settle its ruble debt, it had accumulated a large surplus of dollars. This scheme was a money-making machine and the source of most of the original oligarchs’ wealth.

While the equivalent interest rates today are not as extreme as the conditions in the 1990s, nevertheless, it remains very profitable to speculate against inflation and hold cash on deposit as long as possible, delaying payments as long as possible.

Amid rising corporate deposits, the government is concerned that company money is not entering the economy and sitting idle in bank accounts. The CBR is exploring administrative measures to redirect funds into productive investments and has introduced a deposit tax to discourage corporates from parking their spare cash in a bank account.

"It is difficult to come up with a business that would compete with a deposit in Sberbank," Dmitry Alekseev, co-owner of electronics retailer DNS told The Bell.

Businesses has already deposited RUB57.2 trillion ($534.5bn) in bank accounts as of late 2024. The CBR is expected to tighten banking regulations further to discourage deposits and encourage more investment. However, balancing these measures with the economic strain on businesses remains a delicate task.