Russian banks are requesting that the Central Bank authorize negative interest rates on foreign-currency deposits, which is currently prohibited by Russian law.
The request from major banking actors is due to the fact that Russian financial organizations have to deposit respective funds in foreign bank accounts at their own expense.
Interest rates on foreign currency deposits are already nominal, around 0.01% per annum for EUR and 0.8% per annum for USD deposits.
“Global trends have reached Russia. Negative interest is a new reality which we have to accept and search for new savings options instead of foreign-currency deposits,” believes Konstantin Ordov, professor of financial management at the Plekhanov Russian University of Economics.
However, economists argue that the negative interest rate system does not work for many countries and may be a result of the economic crisis.
“It is not yet feasible in our country, for many reasons. One of them is that it is necessary to amend the Civil Code which clearly states that a deposit is an initial amount plus interest. Also, our people are simply not ready for this and we can expect massive outflow of deposits, growing cash assets and, as a consequence, decisions to restrict these cash assets and even a monetary reform,” comments Olga Lebedinskaya, Ph.D. (Economics).
She adds that this will lead to an increase in the number of borrowers with bad credit scores and some banks will shut down their investment programs.
“Many questions arise with regard to consumer loans. For example, in Japan, where the interest rate on deposits is -0.069%, consumer loans are given out at 0.5%. Bank fees and service terms will also change because banks will be tempted to compensate their losses with higher commissions,” says Olga Lebedinskaya.
If the Central Bank decides to legalize negative interest rates, it will lead to a higher risk of real estate bubbles as an alternative to deposits. Then low interest rates will trigger speculative real property acquisition. Most likely, we will see a spot gold deficit due to spot gold being used as an alternative investment.
“Currently, banks have nowhere to invest foreign currency. Therefore, paying interest on foreign-currency deposits means operating at a loss,” comments Lazar Badalov, Associated Professor of the Department of World Economy and Global Finances at the Financial University of the Russian Government. “If negative interest becomes legal, most assets will be transferred into the national currency. People will be getting rid of foreign-currency deposits, partly by converting them into RUR and partly cashing them out.