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. Last Updated: 07/27/2016

Banking on Rubles: 40 Percent Returns

They might not have the flavor of adventure of the high-rolling equities market or match the feverish rates that can be found in the trade with promissory notes, but deposit accounts at Russian banks still offer real yields that will make any Western bank client envious.


One Moscow market leader Most-Bank, for example, offers 20.75 percent on a 12-month deposit of $10,000. Another major, Inkombank, will give you 51 percent on a ruble deposit of 100 million rubles ($18,000), yielding an annualized rate of more than 25 percent in real terms.


In this fiercely competitive market, where commercial banks have state savings giant Sberbank breathing down their neck, returns remain high despite the general decrease in interest rates throughout the economy.


"Competition is very tough and market rates are really high," said Andrei Krasnov, head of retail operations with Inkombank. "Actually some banks offer rates so high it is hard to see how they could themselves place the money at a profit," he said.


A typical 12-month certificate of deposit in the United States or Great Britain, for example, would earn around 5 percent, with some continental European rates even lower.


Russian bankers predict that rates on ruble accounts -- now higher than the yields on state treasury bills of 30 to 35 percent -- will continue to come down over the next several months in line with interest rates and inflation.


The Central Bank has cut its benchmark refinancing rate from 160 percent to 48 percent over the last year, with further cuts expected. Inflation -- which erodes the real value of bank deposits -- fell from 131 percent in 1995 to 21.8 percent last year, with a 1 percent monthly rate projected for this year.


"Ruble rates may drop to some 20 percent during 1997," Igor Lipanov, a vice president of Most-Bank, said in a telephone interview.


"There is no tendency to an increase in interest rates," Inkombank's Krasnov said. "Most large banks are cutting back on the interest they offer."


But rates on currency-denominated deposits are likely to prove more stable, the bankers said.


"Currency deposits will become more and more attractive," Lipanov said.


Earnings and interest on deposits with Russian banks -- which foreigners generally are eligible to open -- are still tax-exempt, while a 15 percent tax is soon to be imposed on earnings from T-bills, a Western tax expert said.


The deposits also are uninsured, however. An insurance scheme that would reduce the risks for private depositors with commercial banks has been bogged down in the State Duma for more than a year because of disagreement among government agencies and the country's banks about its implementation.


In the main market trend of last year private customers, wary of problems in the banking sector, returned to Sberbank in droves, even though its rates are typically below those offered by commercial banks (see box). Sberbank deposits are not guaranteed by the government either, but as the holder of the bulk of Russians' personal savings and with the Central Bank holding a controlling stake, it is seen as too big to fail.


"Sberbank is not like MMM or [bankrupt] Tveruniversalbank -- with Sberbank you will always get your money back," said Tatyana, a client with a Sberbank branch near the Akademicheskaya metro in southwestern Moscow.


A year ago, before a string of highly publicized failings among the country's banks, she would have placed her money with a commercial bank, but has instead opted for the security offered by the government-backed savings bank, she said.


Sberbank currently offers 43 percent interest on one-year deposits of more than 10 million rubles and 48 percent on deposits exceeding 50 million rubles.


By the end of last year total ruble savings in Russian banks stood at around 120 trillion rubles, according to official figures. More than 70 percent of this was with Sberbank.


Overall, Sberbank ruble deposits grew 64 percent over the first 10 months of last year, far more quickly than the 27 percent rise posted by commercial banks, a pace only slightly faster than inflation.


Still, some commercial banks, including the Stolichny Savings Bank and Most-Bank that both target Russia's emerging middle class, posted sound gains in their retail operations last year.


Most-Bank saw the number of its private account holders increase to 70,000, a growth of 40 percent, Lipanov said.


At Stolichny the number of private deposit accounts increased from some 56,000 in January 1996 to more than 102,000 by year-end, according to the bank's figures.


Total individual deposits at Stolichny more than doubled to reach 1.5 trillion rubles by the end of 1996.


After winning a tender for a controlling stake in the ailing Agroprombank, Russia's second largest retail institution with some 1.3 million clients and more than 1,200 branches, Stolichny has in effect become Russia's first private savings bank with a nationwide branch network.


In a first step toward integrating the two bank's retail operations Stolichny said Tuesday that the rates at Agroprombank will be put into line with those offered by Stolichny.


Despite the increase in deposits, the Central Bank estimates that Russians still have some $20 billion in cash currency stashed away. In an effort to draw some of this money into the banking system, the Central Bank has signalled it will bring its reserve requirements for ruble deposits into line with those for currency accounts.


Commercial banks must place 16 percent of ruble deposits of up to one month and 10 percent of deposits over three months on reserve with the Central Bank. On foreign currency accounts the banks must deposit only 5 percent.