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. Last Updated: 07/27/2016

Deposit Your Savings ... And See Them Shrink

Every year, millions of customers deposit cash in local banks, knowing the chances are slim that they will be able to withdraw money of an equivalent value from their accounts a year later. That's because very few deposit interest rates beat inflation, which means the rubles withdrawn at the end of the year can't buy as much as the deposit could at the beginning of the year.

With inflation ending last year at more than 10.9 percent, only a handful of bank accounts have been keeping depositors' savings from slowly eroding. Meanwhile, borrowing rates in Russia can run as high as 40 percent or more for consumer loans available at shopping centers around the country. All this is great news for banks, which make their profits from the difference between deposit rates and lending rates, but it's horrible news for consumers, who usually end up losing no matter what.

"The system is not working properly yet," said Rustam Botashev, a banking analyst at Aton Capital, referring to the high -- and sometimes hidden -- interest rates that Russians pay on consumer loans.

As for deposits, Botashev points out that there are other countries, such as Canada, where bank deposit rates also do not keep up with inflation.

In Russia, money flows from oil and gas exporters keep many banks flush with cash so that they don't need to lure depositors with high interest rates. Foreign banks need cash even less, which is one of the reasons why Citibank and Raiffeisenbank have lower deposit rates than large Russian banks, Botashev said.

Also, Russian banks with less-established brand names may need to offer higher deposit rates in order to attract new business, said Vladlen Kuznetsov, a banking analyst at Moody's.

Peter Westin, chief economist at MDM Bank, said statistical data suggest that when the ruble strengthens against the dollar, Russian citizens tend to respond by converting dollar savings to ruble savings. Many of these rubles end up in bank accounts, since there's less of a tradition of keeping rubles in the mattress. The Central Bank said recently that foreign currency deposits had actually decreased in ruble terms from January to May, Interfax reported.

When it comes to attracting deposits, banks are increasingly facing competition from real estate investments and mutual funds: A recent report from Alfa Bank notes that mutual fund assets grew by 23 percent in the first four months of this year, cutting into the growth of bank deposits.

Twelve-month ruble deposits were earning about 8 percent on average in January, according to the Central Bank, but now the yield is closer to 7 percent. Savvy depositors can now do even better than that: Sberbank offers a rate of 9.75 percent for 12-month deposits of 100,000 rubles. Other banks have comparable deposit rates as high as 12 percent, but with that added reward comes added risk. Sberbank deposits are considered safe, and the bank has high investment grade credit ratings from Moody's and Fitch, reflecting the bank's stable financial situation and close ties to the state.

"To be attractive to the general population, deposit rates should be at least close to the inflation rate," said Dmitry Tarasov, head of strategic planning at Sberbank. More than 50 percent of retail deposits are held at Sberbank, he said.

Deposit Interest Rates*
Vneshtorgbank 2410%7%
* Highest interest rate on a one-year 100,000 ruble deposit or the equivalent in dollars. Restrictions may apply.

The government has also fought against the negative real returns of most bonds and bank accounts by grappling with inflation. In early September, the Central Bank let the ruble appreciate against its dollar/euro basket after government statistics showed inflation in the month of August -- a month that traditionally brings deflation, or lower prices.

The Central Bank has been raising short-term deposit rates for banks, but analysts have said this only has a limited effect on actual consumer interest rates.

With deposit rates trying to keep up with double-digit inflation, it's not surprising that interest rates on loans are often painfully high.

Interest rates for mortgages are typically 11 percent to 12 percent, and those high rates, combined with expensive housing in Moscow, put mortgages completely out of reach for the vast majority of would-be homeowners because the monthly payments exceed the income of all but the highest earners.

Even worse, consumer loans at department stores often have deceptively high interest rates since the advertised rate is low but the actual rate paid is high because of so-called application fees, Botashev said. Regulators in Kazakhstan have recently started requiring lenders to disclose the effective interest rate, and Botashev said he expected Russian regulators to pass similar rules in the future.

Currently, 89 banks and other credit organizations are voluntarily participating in the Federal Anti-Monopoly Service's program to disclose lending information.