Deposit Rates and the Prospect of Ruble Depreciation

Russia Deposit Rates
Russia Deposit Rates
The merit of a managed depreciation of the Russian Ruble has become a pertinent topic of the day for the Russian government as it struggles to prevent the economy from sliding into recession. Real Gross Domestic Product growth slid to 1.76% year on year as of the quarter ended March 2013, its lowest performance since the 2010 recovery when GDP growth hovered around 3%-5% before abruptly sliding to 1.98% during the quarter ended December 2012. Some government officials assert that a weaker ruble is imperative in reviving the economy during critical times. However, the impact of depreciation, influenced by the Central Banks monetary policy might harm the economy in the long run by spurring inflation, devaluing bank deposits and diminishing the purchasing power of the population as higher import prices erode disposable income. There might only be a temporary short-term boost to budget revenues via increased tax collection in rubles from exports. Expectation on deposit rates, inflation trends and foreign exchange rates stability are key factors driving saving decisions. High ruble deposit rates in the case of Russia are usually the mark of an upcoming trend featuring unstable currency coupled with high inflation. A higher ruble deposit rate is the reward for risks connected with the rubles devaluation, inflation and unstable economic situation that deposit holders might face in the future. Russia Deposit Rates Given the rise of oil prices prior to the financial crisis, the Russian economy grew for almost a decade prior to 2009. The interest rates on long-term ruble deposit accounts fell from 19.5% pa in January 2001 to as low as 4.8% pa by December 2010, consistent with decreasing inflation during the same decade. The ruble deposit rates converged with the USD deposit rates (of 4.7% pa) and Euro deposit rates (4.2% pa) in December 2010, supported by the stable oil price recovery, which spurred the strength of the ruble during the same period. The long term deposit rates usually reflect the rubles value and the prospects for the economy in the long run. It should be noted that the long-term ruble deposit rates remained higher than inflation from November 2011 until April 2013, which was never the case in the preceding years. At an average long-term ruble deposit rate of 8.2% pa in April 2013, the ruble deposits thus remained attractive for savings, despite being more risky than dollar and euro deposits in the long run due to the fact that the ruble tends to fall sharply during periods of market uncertainty, as demonstrated in February 2009 when it lost 45% of its value to the USD compared to the same month of the previous year. Contributed by Alexander Dembitski, CEIC Analyst
9th July 2013 Deposit Rates and the Prospect of Ruble Depreciation

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