Russia's Severstal expects steel demand to drop 5-7% as high rates hurt customers

MOSCOW, Oct 29 (Reuters) - Russian steelmaker Severstal expects steel demand to drop by 5% to 7% in 2024 as the high cost of borrowing raises the strain on its customers' investment plans, company head Alexander Shevelev said on Tuesday.

A growing number of Russian industrial companies and lobby groups are complaining of prohibitively high interest rates and warning that goals for infrastructure development may be missed, with the central bank bearing the brunt of the criticism.

The Bank of Russia hiked on Friday its key interest rate by 200 basis points to 21%, the highest level since the early years of President Vladimir Putin's rule, when Russia was recovering from the chaos that followed the collapse of the Soviet Union.

"We see from industry, from our clients, that the situation for them is very tense," Shevelev said during a metals forum in Moscow. "Now, with such growth in the key rate, we are seeing that our clients, especially in small and medium-sized business, are simply experiencing financial difficulties.

"And we see how demand is starting to decline."

Controlled by billionaire Alexey Mordashov, Severstal realigned to focus domestically after falling under Western sanctions in response to Russia's actions in Ukraine. Russia now accounts for 80% of its sales.

Shevelev said the main consumers of steel are the construction and mechanical engineering sectors, backbone industries of the Russian economy. High rates are reducing activity, lowering demand and curtailing investment projects, he said.

Demand for steel dropped 9% in the third quarter of this year, Shevelev said. (Reporting by Anastasia Lyrchikova; Writing by Alexander Marrow; Editing by Emelia Sithole-Matarise)