US restrictions imposed in June to undermine the Kremlin have put local banks in countries that trade with Russia at higher risk of so-called secondary sanctions, increasingly delaying or disrupting payments to and from places like China and Turkey.
This makes it difficult, and sometimes impossible, to execute transactions, particularly with China, Russia’s most important economic partner since the start of the 2022 war.
On the other hand, increased defense spending and subsidized loans for consumers and businesses supported spending at home, even as sanctions restricted access to foreign markets and inflation soared.
Western companies from Volkswagen to Shell sold their Russian operations to local players. After an initial decline, the Russian stock index, MOEX, has recovered steadily.
Borrowing costs are skyrocketing
The MOEX index has fallen by almost a third in the past six months, while corporate bankruptcies have risen, showing the true state of business in Russia.
To combat inflation, Russia’s central bank raised its key interest rate to 21%, sending borrowing costs soaring. New US sanctions have pushed down the ruble and raised the cost of imports, and labor shortages are worsening.
Borrowing costs are the most pressing concern for businesspeople. About two-fifths of the debt held by Russian companies at the start of 2022 was at floating rates, a proportion that has since risen by more than half, according to data from the Russian central bank. This has left many businesses crippled by soaring interest rates. Russian Railways, a state-owned company that is the country’s largest employer, is among the companies planning to reduce investment next year as a result.
The Association of Shopping Centers has reportedly asked the government for support in the form of cheaper loans, as well as help with payment moratoriums and debt restructuring. Without these measures, it has warned that 200 shopping centers are at risk of bankruptcy.
The Russian Union of Industrialists and Entrepreneurs, another business association, saw a rise in complaints about late payments in its quarterly survey of companies, which it attributes to the cost of working capital loans.
Business problems are constantly increasing
Russian businesses are also grappling with rising prices, especially for imports. A survey of manufacturers by S&P Global showed that input inflation accelerated for a third straight month in November. Manufacturers also complained of longer lead times for components and difficulties finding workers. The unemployment rate is just 2.3%, as the military and defense industry gobble up the workforce.
The squeeze will worsen in the coming months.
The government is now looking to raise taxes. Next year, it will raise the corporate tax on profits from 20% to 25%. With the economy expected to weaken, a wave of corporate bankruptcies is expected.
The war is hurting businesses in other ways too. Venture capital investment has declined and tech companies are seeing talented workers leave the country. As a result, Russian businesses are struggling to keep up with advances in artificial intelligence (AI) because they can’t get the semiconductors that Nvidia is developing.
