Russia (Russian Federation)

Overheating economy reaching its peak

As a result of surging military-related production, Russia recorded solid growth in 2023. Military-oriented manufacturing industries grew by double-digit rates. The rebound was also driven by household consumption. The latter has benefitted from the growth of real wages triggered by labour shortages, with unemployment reaching an all-time low (2.6% in April 2024). Those shortages result from declining demographics, partial military mobilisation and emigration, as well as manufacturing mobilised by sharply increased military procurements. Furthermore, increased payments and transfers to soldiers and their families led to higher consumer spending. Last, defense companies often win the competition for skilled workers over civilian enterprises. Both public and private investments increased as demand for Russian products grew and the development of new transport and logistics infrastructure directed towards the East became necessary.

At the beginning of 2024, the Russian economy still exhibited signs of solid economic activity. However, the latter is expected to cool in the remaining part of this year and 2025. Already, at the end of the first quarter, output was dropping in construction and services, as well as in mining and quarrying. Growth was slowing in manufacturing, although still strong in war-related industries. On that score, Russia’s focus on the war is confirmed by data. Over the past two years, output in military-related industries has surged significantly, whereas it has largely stayed the same in other manufacturing industries. In Q1 2024, the average output of war-related industries rose by more than 50% compared to the same period in 2021 and 2022 before Russia's invasion, while output in other manufacturing industries increased by only 0.5%.

The overheating economy, lower export revenues, increasing imports and capital outflows have resulted in the depreciation of the ruble and in growing inflation. The Russian central bank (CBR) managed to contain ruble depreciation, resulting in currency stabilisation in late 2023. However, inflation has been increasing since April 2023 and reached 8.0% year-over-year in May 2024. The CBR has hiked interest rates several times since mid-2023 by a total of 850 basis points to 16%. Tight financial conditions and capacity restrictions will drag on growth in 2024 and a slower pace of household consumption should be expected. Tight monetary conditions will weaken investment growth from 2025, although the key rate could average out at 10-12% in 2025 – still above the pre-invasion level – according to the latest CBR forecast at end-April 2024.

National Wealth Fund helps financing military spending

Increased spending mostly related to the war widened the budget deficit in 2023. Defence and national security take around 40% of the federal budget. Financing these two is hardly a problem for Russia. Last year, 90% of the deficit was covered by the sovereign National Wealth Fund (NWF). The NWF decreased by 10% in USD terms while its liquid part, which consists of foreign exchange and gold, declined by 36%. At the beginning of 2024, the NWF’s assets still amounted to the equivalent of USD 133 billion (8% of GDP), including its liquid part of USD 56 billion (3.3% of GDP). The latter is held in Chinese renminbi (60%) and gold (40%) as “Western” currencies were sold off in previous years. In terms of the federal budget, increased tax receipts reflected rising household consumption and companies' profitability amid strong economic activity. The deficit is expected to decrease in 2024 as the government enhances revenues through the planned introduction of progressive income taxation, with tax rates ranging from 13% to 20% as opposed to 13-15% currently, as well as a hike in the corporate tax rate from 20% to 25%. Furthermore, privatisation and measures such as implementing a price floor mechanism for calculating oil taxes to mitigate the impact of rising discounts on Russian oil compared to Brent will support revenues. Under the fiscal rule, excess oil and gas revenues have been set aside and converted into foreign currencies in the National Wealth Fund (NWF). The rule was suspended after the invasion in 2022 and reinstated in 2024 to restrict the government’s ability to finance the deficit from the NWF, as was the case in 2022 and 2023.

Western sanctions have especially hurt the energy sector. Oil and gas revenues contracted by 24% and accounted for 28% of total federal budget revenues in 2023 compared to 35% in 2022. However, oil production fell by only 1.2% to 11 million barrels per day as the sanctions’ impact has been partly offset over time by strong domestic consumption and the reorientation of trade flows to China and other countries that have not taken up sanctions against Russia. Furthermore, the “shadow fleet” has enabled Russia to circumvent Western sanctions, particularly the price cap mechanism, through vessels whose ownership structure is opaque and hard to identify. The share of oil and gas sector in GDP decreased moderately from above 17%, before the war, to 16%. However, the comparison is affected by the depreciation of Russian currency which lost 30% in the course of 2023. Nevertheless, the volume of exported petroleum products decreased in the first quarter of 2024 due to reduced refining capacity caused by Ukrainian drone strikes and a government ban on gasoline exports started in early March. However, this decline in petroleum product exports has been compensated by an increase in crude oil exports.

Russia’s current account is keeping to a surplus thanks to lower imports and reduced transfers from private persons to accounts abroad, and lower dividends repatriated by foreign investors. In both 2024 and 2025, exports will be less robust than imports as sales to Asia will not compensate losses recorded in the Western markets. At the same time, natural gas which remains one of Russia’s flagship export products is suffering from inadequate pipeline and LNG infrastructure to redirect exports. Conversely, solid growth of imports is expected thanks to weaker but still increasing household consumption.

The presidential pseudo-election awards another term to Putin

In the latest presidential elections of March 2024, Vladimir Putin secured another term of office after receiving 87.3% of the vote at a record 77.5% turnout. The result means Putin will be President until at least 2030, when he will turn 77. The law was changed in 2008 to extend presidential terms to six years and later constitutional changes removed limits on presidential terms, which potentially enables Putin to remain in power until 2036. The voting system in the latest presidential elections allowed for greater manipulation, including voting online, voting off-site or at home. State-owned media were also previously used to spread propaganda and disinformation. To eliminate any political alternative for voters, critics were repressed: of Mikhail Khodorkovsky was arrested and Alexei Navalny was poisoned, later arrested and then died in unexplained circumstances in a Siberian penal colony. Following his inauguration for another presidential term, Putin decided on the new composition of the Russian cabinet, with Prime Minister Mikhail Mishustin retaining his position. Among the 21 ministers, six were new appointees, while the most important change was appointing Andrei Belousov as the defence minister. The appointment of Belousov, who previously served as first deputy prime minister responsible for Russia’s socio-economic development, indicates that Putin’s ongoing focus is to maintain the economy on a war footing.

The objectives announced for Putin’s new term include those communicated previously, such as nationalist policies, increasing the birth rate and investing more in research and development. However, recently, a wider focus was placed on Russia’s economic self-sufficiency by targeting a reduction in the volume of imports to 17% of GDP, along with Russia achieving technological independence in various fields such as artificial intelligence, space technology, and energy technology.

Payment

Bank transfers in Russia are among the most popular instruments used for non-cash payments, for both international and domestic transactions. This is because they are fast, secure, and supported by a developed banking network. Despite this, cash is still one of the most widespread payment instruments used by individuals.

Debt Collection

Amicable phase

The amicable phase begins with the creditor contacting the debtor, either via written correspondence or phone calls. If an agreement is reached, a payment plan can be offered to the debtor. Charging interest is legally allowed but hard to enforce unless an agreement to pay said interest currently exists between the debtor and the creditor. Any such agreement must be additional to any standing agreement between the parties.

Legal proceedings

The Russian judicial system is comprised of three branches: the regular court system, the arbitration court system (headed by the Supreme Court), and the Constitutional Court (a single body with no courts under it; in Russian constitutional law this function is known as “constitutional control” or “constitutional supervision”, and deals with a certain number of disputes where it has original jurisdiction).

The regular courts have a four-tier hierarchy and are responsible for civil and criminal cases: the Supreme Court of Russia, regional courts, district courts, and magistrate courts.

Arbitration courts review cases dealing with a wide matter of contractual issues, such as rights of ownership, contract changes, performance of obligations, loans, bank accounts and bankruptcy.

The highest court of appeal is the Supreme Court of the Russian Federation.

Fast-track proceedings

Russian law provides for simplified proceedings for certain types of cases, in which the creditor seeks to recover no more than RUB 500,000 from a legal entity or RUB 250,000 from an individual entrepreneur. Under Russian law, judges are to consider cases through simplified proceedings within a maximum of two months form the day when the Arbitrazh (arbitrage) court receives the statement of claim or application. Once the deadline for submissions of evidence has passed, cases are reviewed on their merits by judges, without the parties being called to appear.

Ordinary proceedings

Proceedings are initiated when a creditor files a statement of claim with the competent Arbitrazh court. The court must decide within five working days whether to accept the statement, and subsequently schedule a preliminary hearing. Debtors are usually notified of claims when they are served with a copy of the statement of claim, which includes the data of the initial hearing. There is no specific time frame during which defendants must submit their defense, but it must generally be done before the hearing on the merits). The court can set a deadline for submitting a statement of defense – if this is not submitted, the court will consider the case on the basis of the available materials. The preliminary preparation period ensures that the case can be resolved on its own merits during one court hearing. Cases must generally be resolved on their merits within three months after the respective statement of claim is received by the court. More complex commercial disputes can take considerably longer. The courts will normally award remedies in the form of compensatory damages or injunctions but punitive damages are not available.

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Enforcement of a Legal Decision

A judgment is enforceable for three years provided that is has become final. If the debtor fails to satisfy the judgment, the creditor can request compulsory enforcement of the judgment from the court’s bailiff services. Foreign judgments must be recognized as a domestic decision by the Arbitrazh Court through the Russian exequatur procedure. Although Russia has signed a small number of reciprocal recognition and enforcement agreements with foreign countries, domestic courts are reluctant to recognize foreign jurisdiction clauses.

Insolvency Proceedings

SUPERVISION

Commercial Courts initiate the supervision process to evaluate the debtor’s financial situation and to secure the debtor’s property. After examining a filed insolvency claim, the court initiates the supervision process. The debtor can autonomously request a court to initiate supervision if settling some creditors’ claims would make it impossible for the debtor to fulfil other obligations, if execution on the debtor’s property means the debtor’s business has to cease, or if the debtor’s business is insolvent. A receiver is appointed, known as a temporary manager, who must approve certain transactions during the supervision, such buying or selling more than five percent of the accounting value of the debtor’s property.

FINANCIAL REHABILITATION

The aim is to carry out any necessary measures to restore debtors’ solvency and settle their debts. The court and the creditors control the process. The application must include a rehabilitation plan that ensures the debtor’s obligations will be met. The court appoints a receiver to be the administrative manager, who supervises and controls the debtor’s affairs during the period of the financial rehabilitation. The administrative manager examines the debt repayment schedule and monitors any financial restructuring plans.

At least one month before the period of financial rehabilitation expires, the debtor must provide the administrative manager with a report on the results of the financial rehabilitation. Once the report has been examined, the manager must prepare an opinion on the extent to which debts have been paid and the financial restructuring plan has been achieved. The opinion is submitted to the court, which examines the results and either ends the proceedings, orders external administrator to manage the company, or declares the debtor bankrupt.

EXTERNAL ADMINISTRATION

The objective is to restore the debtor’s solvency by applying special measures under an external administration plan, and to replace the debtor’s chief executive officer (CEO) with an independent external manager. Once the procedure begins, the court appoints a receiver known as the external manager, who must draft an external administration plan setting out the measures necessary to restore the debtor’s solvency within the period of the external administration procedure. At the end of the period, the manager prepares and submits a report to the creditor’s meeting, together with a proposal of one of the following four options: end judicial proceedings, if all creditors have been settled; extend the period; end external administrator, as the debtor is now solvent; enter administration and file for bankruptcy.

AMICABLE ARRANGEMENT

Debtors and creditors may make an amicable arrangement to adjust debtors’ liabilities on negotiated terms during any rescue procedures. Generally, an amicable arrangement ends the powers of court-appointed receivers. If a debtor fails to comply with terms of an amicable arrangement, creditors are entitled to ask for a bailiff to execute the agreement.

INSOLVENCY

The purpose of insolvency is to sell the debtor’s property and use the proceeds to pay creditors’ claim in proportionate amounts. The court may initiate the process during supervision, financial rehabilitation, or external administration. It appoints a receiver (insolvency manager) to replace the debtor’s CEO. The court and the creditors control the activity of the insolvency manager, who must provide progress reports. At the end of the proceedings, the court reviews the list of satisfied and unsatisfied claims. If they are fully satisfied, the court rules the proceedings complete and the debtor is liquidated. If they are not satisfied, proceedings are terminated, the debtor company is dissolved, and unsatisfied creditor’s claims are to be written off.

Last updated: June 2024