By Anastasia Lyrchikova, Alexander Marrow and Darya Korsunskaya

High Interest Rates in Russia Impact Industrial Growth

MOSCOW (Reuters) – A growing chorus of Russian industrial companies and lobby groups is expressing concerns over prohibitively high interest rates. They warn that this could jeopardize infrastructure development goals, with the central bank facing significant criticism.

To combat persistent inflation amid increased government spending related to the conflict in Ukraine and the weakening rouble, the Bank of Russia is expected to raise its key interest rate by at least 100 basis points to 20% in its upcoming meeting. This poses a challenge for firms already grappling with exorbitant borrowing costs.

Major state companies and business lobby leaders assert that the current situation is critical, with future investment projects and economic growth at risk.

Russian billionaire Alexey Mordashov, the largest shareholder of steelmaker Severstal, articulated that inflation, currently around 8.5%, presents challenges that are easier to manage than high interest rates. He cautioned, "The need to raise rates to limit inflation is clear, but we are starting to go too far. We are coming to a situation where the medicine may become more dangerous than the disease."

Businesses are reportedly scaling back financing for investment projects in favor of high-rate deposits, which hinder development and economic growth, according to Mordashov.

High military spending has contributed to economic recovery following a 1.2% contraction in 2022. Russia's GDP grew by 3.6% last year, with an expected growth of 3.9% this year, per the economy ministry.

Sergei Chemezov, the head of the state industrial conglomerate Rostec, expressed that the central bank’s high rates are stifling industrial growth, rendering new loans nearly pointless.

The central bank has remained silent amid the criticisms but reiterated last week the necessity of maintaining stringent monetary policy due to persistent inflationary pressures.

Rising Electricity Prices

In the power sector, the ability to construct new plants and modernize existing ones is waning due to high inflation, which has significantly increased equipment costs. Western sanctions related to the Ukraine conflict have further limited Russia's access to essential technology.

Alexandra Panina, head of the Council of Energy Producers, pointed out that the key rate’s level makes interest payments a substantial part of loan repayments, constraining investment project costs. She warned that further rate hikes could escalate electricity prices in Russia.

Russia aims to install over 90 gigawatts of new electricity generation capacity between 2025 and 2042, with an estimated cost of around 40 trillion roubles ($414 billion), to meet rising energy demands.

Recent extreme weather and incidents at a nuclear plant led to power outages, stirring public protests in Krasnodar.

Economic Impact of High Rates

High interest rates are impacting sectors including construction, energy, and steel. Panina highlighted that expensive loans have caused some construction projects in Siberia and southern Russia to falter, with discussions ongoing among seven companies to abandon 17 projects totaling 2.13 gigawatts capacity.

The steelmaker MMK reported an 18.7% quarter-on-quarter sales drop due in part to high borrowing costs.

At a recent forum, Gazprom Energoholding noted that "money is too expensive."

Smaller firms also face difficulties, with Alexander Kalinin of the SME lobby Opora Rossii predicting interest rates for small and medium enterprises (SMEs) might reach 30% next year, negatively affecting investments and economic growth.

Additionally, high rates are straining Russian oil traders, raising the cost of trade financing for energy exports and forcing some firms out of the market due to slim profit margins.

Criticism predominantly targets the central bank. Despite challenges linked to economic repercussions from Russia's "special military operation" in Ukraine, openly blaming the Kremlin is politically sensitive in the current climate, as expressed by Yevgeny Nadorshin, chief economist at PF Capital.

"Everyone who has development difficulties and a lot of debt is in a lot of pain right now," Nadorshin noted, highlighting that the central bank remains a feasible target for criticism.

($1 = 96.5455 roubles)