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. Last Updated: 07/27/2016

Investment Set to Dive, Expert Says

Russia faces a sharp fall in investment this year because savings are falling as interest rates on deposits are failing to keep pace with monthly inflation, a top economist said Monday.


High-yielding treasury bills are also diverting funds from the private sector, RIA news agency quoted Andrei Illarionov, head of the Institute of Economic Analysis, as saying.


He said savings had been shrinking by 5 to 6 percent a month since October, when inflation rose from post-reform lows and "real" interest rates -- the difference between nominal rates and the level of inflation -- turned negative.


Monthly inflation surged to 17.8 percent in January from October's 15.1 percent after a 34-month low of 4.4 percent last August, when savings had started to grow again as inflationary pressures on them eased.


The Central Bank gradually raised its refinancing rate to cope with soaring inflation, bringing it up to an annual 200 percent in early January, its highest since April 1994.


Under Russian methods of calculation, the rate works out at around 16.7 percent a month.


Bankers agreed that interest rates on deposits lagged behind inflation but said commercial banks had little choice.


"It is true that interest rates are lagging ... But high reserve requirements and taxes do not allow banks to offer higher rates on deposits," said an official of UNEXIM bank.


"Also, if a bank raises its interest rates above the central bank's refinancing rate, it has to pay much more in tax."


Bankers said the Central Bank should not rush to raise the key rate as inflation was likely to drop in the near term.


"Higher inflation is typical of the first two months of the year and autumn months," said Dmitry Slobodnik from Alba-Alyans.


"Any hasty decisions of the Central Bank could cause a collapse in the monetary sphere, because inflation is likely to fall, starting in March."


Illarionov said the Finance Ministry was pushing up yields on treasury bills, tempting cash away from other markets and leaving little to be invested in a fast-growing private sector.


The latest issue of three-month T-bills yielded an average 285 percent at auction Feb. 15, compared with 320.9 percent at the previous sale. On the secondary market, the securities are fetching just under 250 percent annually.


Russia has issued 17.4 trillion rubles ($4 billion) in T-bills in the last year, according to Finance Ministry figures, and plans to nearly double issues of domestic debt this year.


Western economists say it has plenty of room to issue more domestic debt, especially if the Central Bank intends to introduce open-market operations, requiring a sizeable T-bill stock.


Illarionov said political instability and a worsening economic climate in Russia were discouraging foreign investors. "There are no grounds to count on an influx of foreign cash this year because there are no conditions for that," RIA quoted him as saying.


"The conditions are economic stability, including low inflation and the predictability of the government's policy, as well as a stable political situation and the absence of military conflicts in the country. None of them are present."