In 2022, more than a third of Russians (36%) preferred keeping their savings in cash over bank deposits, as was evident from a Bank of Russia survey. However, June 2023 saw household funds in bank accounts grow significantly. Invest Foresight asked financial ombudsman Pavel Medvedev why Russians were changing their saving habits.
— In 2022, more than a third of Russians (36%) preferred keeping their savings in cash over bank deposits. Today, the volume of household deposits is growing again. Is this because people’s trust in the banking system increased, or they just ran out of options?
— They are definitely out of options. Another possible explanation might be that their anxiety has subsided. The general anxiety level was actually much higher a year ago – I can infer as much from conversations with people connected with the banking system.
They aren’t a very good sample of course, because these people can be too immersed in the negative part of the processes that I oversee as financial ombudsman, but their mood can reflect the general dynamics nonetheless.
Anxiety was definitely much higher in the middle of last year than it is today. Apparently, people have just become tired of it. It’s not that the situation has changed for the better and they don’t need to worry anymore; but it’s equally impossible to remain in this state for too long.
Another factor here is that most bank deposits belong to quite well-to-do Russians. This hypothesis needs to be verified of course, which is very difficult to do. Still, about 90% of deposits are insured, which means each of them is less than RUR 1.4 mio ($14.2K). In reality, they are much smaller than that; in fact, the vast majority of deposits is at best RUR 500K ($5K) each, or even less. At the same time, 10% of the number of deposits account for 90% of their total value.
The opportunities to buy expensive things such as cars have become limited; property prices are surging, and again, buying property might not be a good idea in the face of economic uncertainty. So I suspect that wealthier Russians account for part of the growth in bank deposits.
— Is it economically efficient to keep money in banks today?
— It’s not a matter of efficiency when there is no alternative. Pretending we have a financial market where one can invest in stocks and bonds is “equitable fraud.” Moreover, the vast majority of Russians, unfortunately, are financially illiterate. People have no idea of the conservation of mass rule. For some people, the financial market becomes actual fraud. Because, unlike scammers and dodgers, most people can only make money on the stock and bond market when the economy grows.
With regard to the economy, conservation of mass means you can only consume what has been produced. If the economy has not grown compared to last year or has grown by a very small margin, you won’t find anything to consume this year. Last year’s “mass” has been eaten up, and the same amount will be eaten up this year by the same consumers, and there will be nothing left for you as a new player.
Naive people believe they can find experts who will teach them good timing to sell and to buy, and they will be able to make money. But I ask them: what if you sold [your stock] at the wrong time? It would mean that someone else bought it at the wrong time. And vice versa.
Any new legislation on investors, qualified or unqualified, is instantly all over national television, making naive Russians think it is their chance to get rich. Unfortunately, no.
It’s a good idea to use banks if you have money to save. But the prospects for less wealthy people aren’t bright, if we think in terms of the conservation of mass I mentioned. True, they will get some interest on their deposits. Most likely, at the level of inflation, or a little more.
Where do resources come from? They come from the following: if it turns out that the deposit insurance system does not work properly, then, according to law, the Central Bank must lend money to the system – and at a very low interest rate. Essentially, it means that the tax is charged on the entire population because the issued money does not correspond to the amount of released products. Yes, they do it subtly, but they still do it.
— Speaking about money storing strategies, what kind of deposits are most profitable?
— There can be only one criterion: a higher interest rate. In many cases it is true because sometimes you get better luck with a higher interest. For a higher rate, you are willing to deposit your money for three years instead of one, for example. The downside is that over these three years, the dollar may increase in value, or the economic situation may change dramatically. And you face a dilemma: either you withdraw your money and deposit it at an even higher interest rate or you don’t.
In December 2014, the difference between old and new interest rates prompted investors to withdraw their money without any profit and deposit it at a higher rate.
— Apart from deposits, what financial instrument is currently most profitable in terms of holding money?
— Neither one. All the other instruments are flawed in a way that their creators do not quite understand the conservation law. The other instruments are not protected by the insurance law – a law that is basically a measure taken out of necessity. Insurance allows people who are ready to save money to save it while dealing with one more job: it disciplines and prevents scams. And yet, when times are uncertain, people still run to banks and take out their money. Earlier we noted that last year, 36% of people held their money at home and perhaps this is exactly why. But it is detrimental to banks and companies that depend on them. Of course, there is also money that is stored in non-government pension funds, for example, but their calculations are very complicated and confusing. I would not recommend these funds as an alternative to bank deposits. Why? Because they offer investing money in the same economy that is not growing or growing very slowly.