Wage arrears rise and payment discipline crumbles as Russian companies struggle

By bne IntelliNews September 25, 2014

bne -



Russia's economic squeeze, which just caused the World Bank to downgrade  growth to 0.5% for this year and warn of impending "stagnation”, is now clearly  visible  in the real economy. A third of Russia's companies are currently making losses, wage arrears are rising and payment discipline is crumbling. The share of loss-making companies in Russia was up 0.2 percentage points on the year to 31.9% between January and September, the state statistics service Rosstat said this week.

Worst hit are mines, where the number of mineral extractors losing money grew to 41.3%, up from 39.1% in the same period a year previously, as they have been hard hit by falling commodity prices. 

Energy producers were also badly affected: the number of loss making fuel and energy companies sector rose to 40.3% from 38.5% over the same period. Russian utilities have been especially hurt by a government decision last year to cap tariff increases as part of an effort to contain Russia's soaring inflation, a return to the policies of the 1990s  that smacks of mild desperation. Now 52.2% of power companies are making loses, according to Rosstat.

Maybe most worrying is the rise in the  number of companies losing money in wholesale trade and retail -  previously the main driver for economic growth in Russia - up to 21.8% from 21.2% over the same period. 

Earlier this week the World Bank lowered Russia's economic forecast for this year to 0.5% from a 1.1% prediction at the start of the year.  The development bank warned that growth for 2015 and 2016 would also be very low, at 0.3% and 0.4% respectively. The World Bank blamed geopolitical tensions around Ukraine and the lack of investment and structural reforms at home for the slow growth.  

In the bank’s pessimistic scenario, growth will be maintained at 0.5% this year but Russia could have a contraction of 0.9% in 2015 and 0.4% in 2016.  Even the optimistic scenario is not particularly optimistic:  again growth this year will be 0.5% and accelerating to 0.9% in 2015 and 1.3% in 2016, but only if geopolitical tensions end and all sanctions on Russia are cancelled this year. The official forecast from Russia's Economic Development Ministry are for GDP growth of 0.5% in 2014, 1.2% in 2015 and 2.3% in 2016.

Thanks to the economic malaise,  companies’ profits are being continuously squeezed.  With little economic growth, company revenues are barely increasing, while  at the same time nominal wages are continuing to rise.  Recently wage increases have slowed to the point where real wages have actually started to shrink,  which is now starting to impact on retail sales.

But in a new development, payment discipline amongst large companies is deteriorating as cash become scarce.  Workers are on the front line of companies' cashflow problems. Wage arrears in Russia were RUB2.6bn ($71m) as of September 1 2014, up by RUB273m (11.9%) during the month, Rosstat reports. Of these overdue pay packets 95% (RUB2.5bn) stems from the lack of own resources at companies, while the rest is because of  delayed payments from state budgets at all levels of government. 

The liquidity problems that companies  face are directly connected to the problems of the banking sector.   

Cut off from tapping international capital markets, while growth in deposits from both companies and individuals is stagnant, banks are facing a liquidity squeeze.  Currently the entire sector has become extremely dependent on the central bank for funds: the share of state funding in the banking sector is up to 9% of total assets, but still slightly less than the 12% record set during the 2008 financial crisis. Banks are using money from the central bank’s role as the lender of last resort to keep their liability base stable amid a falling inflow of retail deposits. Banks owed RUB5.6 trillion to the CBR as of August 1 2014, up from RUB4.4 trillion in early 2014. 

As it gets more and more difficult for banks to raise cheap financing, they are passing on the problem to companies, which are finding it more and  more difficult to fund operations.  Traditionally Russian companies have made most of their investment out of their retained earnings, but with the economic slowdown, falling revenues are putting them into a more difficult situation.  The decision by the central bank recently to hike rates and make the cost of borrowing even more expensive (overnight rates are now 8%) is only  exacerbating the problems.

Most of the central bank support for the banking sector has gone to the few dominant state-owned banks and these in turn are lending on to the large state-owned enterprises.   Big business will be largely exempt from the liquidity squeeze, as they still can tap big state-owned banks for cash, but pretty much all the other companies in the private sector – and especially small and medium-sized enterprises --  find themselves in the firing line and some are going bust. 

For example, at least 15 Russian travel agencies have gone bust in recent months — including the country's biggest tour agent, Labyrinth, and its oldest, Neva — depriving thousands of people of their already paid for holidays and leaving thousands more stranded overseas, the Moscow Times recently reported. 

Related Articles

Austria's Erste rides CEE recovery to swing to profit in Jan-Sep

bne IntelliNews - Erste Group Bank saw the continuing economic recovery across Central and Eastern Europe push its January-September financial results back into net profit of €764.2mn, the ... more

EU, US partly suspend Belarus sanctions for four months

bne IntelliNews - The Council of the European Union (EU) has suspended for four months the asset ... more

bne:Chart - CEE/CIS countries perform particularly well in World Bank's "Doing Business 2016" survey

Henry Kirby in London - Central and Eastern Europe and the Commonwealth of Independent States’ (CEE/CIS) countries performed particularly well in the World ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at sales@intellinews.com

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at sales@intellinews.com

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.