Interest Rate Trends in Post-Soviet Economies: Case of Russia Iakov Kuga Higher School of Economics in St. Petersburg Baku February 28, 2012

Some Features of Russian Economy High inflation (~ 10% p.a.) Total assets of banking system as GDP share doubled since 2005 (starting from 40% of GDP) Discretionary and eclectic monetary policy Highly concentrated banking sector State participates in the capital of biggest banks

Major findings (1) Real interest rates on deposit are negative Real rates on corporate loans are moderate (up to 3% before and after crisis and 6 to 7% during the crisis Consumer credit is very expensive Real rates are volatile in short run as nominal rates lags inflation, which is itself volatile  Note! Volatile interest rates lead to a higher margins of banks (risk premiums) (Saunders and Ho (1981)) Interest income to interest expenditure ratio is not unusual for East-European countries

Major findings (2) Risks on loans to households are higher, but it is not enough to explain spreads with loan rates to enterprises Market structure is important  Sberbank’s share is more than 30% and grows  Sberbank’s margin is higher than market average and the difference grows  Sberbank is net borrower at interbank money market, though it has better access to capital markets (safe haven?) Monetary policy is discretionary. CBR usually doesn’t meet its’ inflation targets. Inflation is rather unpredictable. CBR did well during the crisis providing banks with liquidity Inflation rates drop considerably during the crisis

Monetary policy framework Central bank targets inflation rate. Though it is not an inflation targeter officially. During the pre-crisis period CBR tightly pegged price of bi-currency basket (of $0.55 and €0.45). It provides liquidity mainly through fx interventions During the crisis price of basket became volatile (managed floating) and liquidity provided through “lombard auctions” and loans to banks of different kinds.

Poor targeting of inflation

Pegging the basket

Interest rates lag inflation

Selected interest rates by terms

Interest Income / Interest expenditures ratio

Interest rates during the crisis Financial conditions in Russian economy tightened for Summer of 2008 to Spring of 2010 Both nominal and real interest rates grows up  Real deposit rates reached zero level  Real rates on corporate loans grew up to 5-7 per cent  Interest rates on consumer credits rocketed up to per cent level Note! Inflation during the crisis went down  Higher real interest rates due to non-anticipated disinflation? Higher risks  Share of overdue loans increased rapidly during the crisis

Loans overdue

Concentration and participation of the state in capital Sberbank is the biggest Russian bank borrowing about 1/3 of loans and attracting even higher share of household deposits Government participates significantly in capital of top five banks in economy (Sber, VTB, VTB24, Gazprombank, Rossel’khozbank) CR5 ratio have grown from 50 to 62 per cent during the period Sberbank enjoys lower deposit rates  Selfselection? Active operations of the “State banks” may be dictated by political reasons  Note! Relatively small growth of corporate loan rates during the crisis Sberbank (and other “State banks”) have easier access to central bank loans  Did they borrow from central bank and lent at money market?  In 2010 Sberbank borrowed at money market more than lent there. Safe haven effect (as in case with T-Bonds)?

Conclusion Real interest rates on corporate loans and deposits are not high, but are unstable due to inflation rate movements Bank margin is reasonable. Nonetheless, lower inflation and more stable real rates are able to narrow it further. High market share of Sberbank is probably additional factor of widening the margin This share tends to grow as well as CR5

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