The Russian economy is now shrinking, and businesses are having more trouble keeping up with debt payments, representing a potentially systemic threat to the country’s bond market.
According to data from the central bank this week, GDP contracted 0.5% year over year in the first quarter, far below projections for 1.6% growth, due in part to an increase in the value-added tax the Kremlin imposed to pay for its war on Ukraine.
That’s despite a series of rate cuts from the central bank, which has kept borrowing costs relatively high to fight war-related inflation.
Sources told the Russian newspaper that nearly 25% of the bond market is now at risk of default as businesses that borrowed at low rates must refinance at much higher ones.
The volume of debt that needs to be rolled over this year is about double from last year, adding pressure on cash flows and raising competition for liquidity, according to the report, which cited a source that called the default problem a systemic trend.
At the same time, the U.S.-Israeli war on Iran has increased logistics costs for Russian companies and stoked more inflation, reducing the central bank’s scope to lower rates further.
The Center for Macroeconomic Analysis and Short-Term Forecasting, a state-backed Russian think tank, said in December the country could face a banking crisis by October if loan troubles worsen and depositors pull out their funds.
The Kremlin’s internet blackouts, which have raised howls among ordinary Russians, are due in part to Putin’s security concerns and anti-drone measures.
“Putin spends 70% of his time running the war and the other 30% meeting [someone like] the president of Indonesia or dealing with the economy,” one person who knows him told the FT, adding that the only way to get more access is by “doing more war.”
With Western military aid and innovations from Ukraine’s now-thriving domestic defense industry, Kyiv has weakened Russia’s economy and military. Long-range drone strikes deep into Russian territory have damaged key oil-export hubs and “shadow fleet” tankers transporting sanctioned crude.
