Time to focus on savings

The need for greater levels of national savings is coming into focus, with experts saying low income levels, an undeveloped financial system, and long term cultural issues remain key issues to be addressed.

Savings through the economic downturn: Savings are up, while savers are down

Data from the National Agency for Financial Studies shows that over the last two years of economic downturn Russians have slightly increased their propensity to save, with Olga Naidyonova, banking analyst at Otkrytie FC, saying retail bank deposits were rising the fastest.

“If we look at the statistics on retail deposits of Russian households, we’ll see that the number was up 39% to 8.2 billion roubles in May 2010 from 5.9 billion at the peak of the crisis at the end of September 2008.”

Dilyara Ibragimova, research director at the National Agency for Financial Studies, says that this reflects Russians saving more through fear of a possible economic worsening and both the Government and Russian banks making deposits more attractive.

“Savings in money terms were even up during the crisis, with bank deposits growing the most. This was partially due to the Governmental policy of increasing the insured sum to 700 thousand Roubles and Russian banks increasing their deposit rates to around 20% in the middle of the crisis from about 12% before the turmoil , which was coupled by a so called factor of expectations, or savings for a rainy day.”

But Ibragimova notes that although volumes being saved increased during the downturn, the actual percentage of the population who were saving remained relatively static, with a minor increase during the downturn, which has since fallen back to the historical average.

“About 25% of people in the street gave a positive answer, when asked whether they have savings. And this number of about 25-30% has remained flat since the beginning of 2000, which means that even when Russia’s economy was booming, the number of people saving money wasn’t going up. Today, when we passed the bottom of the crisis, the number of people in Russia who have savings is down back to 25% from 33% in 2009.”

History of savings in post Soviet Russia

The savings capacity of Russians since the end of the Soviet Union has fallen sharply, with generally high inflation rates eating into the propensity to save and society diving increasingly into a small few with capacity to save, and a large majority who have lost that capacity.

From the mid 1990s an emerging, but small, middle class increased its consumption, but has also generally shown an inclination to save in cash rather than in the banking system, with the crisis of 1998 also seeing savings halt as people focused on immediate needs.

A turnaround followed, with the boom period from 2000-2008 with rising incomes enabling more people to save with bank deposits, consumer credits and the Russian Rouble, gaining popularity for savers.

But the unfolding economic recession from mid 2008 though until late 2009 saw the numbers of people with capacity to save fall, while those who could do so push the volume of savings initially higher before returning to long term averages in 2010.

Factors behind low levels of savings

Experts say the major factor behind low savings rates is income. It is still insufficient for an average Russian to save substantially, which is coupled by the fact that its level varies too much among different social groups. Ibragimova explains that all this leads to a situation, where despite a slightly falling number of households making savings, the amount of money put away in Russia’s economy remains almost the same, as the rich take save while the rest try to address immediate issues with whatever surplus they can generate.

“During the crisis the rich added to their wealth, while the poor saw their income going down. So, now fewer people save, but at a larger scale. And as for the latter, today with the average income recovering, people try to decide their housing problems first instead of putting their money away.”

Director at the National Agency for Financial Studies, Olga Kuzina, adds that a lack of income, coupled with a lack of confidence in the system also drive people’s management timeframes shorter.

¨The situation where people with their income growing don´t increase their savings, says that they have a really short horizon of planning.¨

This, in turn, according to Olga Naidyonova, banking analyst at Otkrytie FC, is worsened by inflationary expectations, and also becomes a deciding factor for people choosing whether to save and for how long.

“I think, high inflation is the main obstacle on the way to the efficient saving process in Russia, as a depreciating money makes people spend rather than save. Here in Russia the talk is not only of a monetary inflation, but also of a structural one, I mean, that, caused by such reasons as low economic competitiveness and high monopolization in particular markets. This also causes the lack of ‘long money’, because given the high uncertainty that inflation creates, households in Russia tend to deposit short term, mostly for a year.”

Experts also note that in Europe there is a large range of savings vehicles, whereas here in Russia the notion of savings is almost entirely associated with a bank deposit. Ibragimova and Kuzina from the National Agency for Financial Studies say that the introduction of the system of deposit insurance in 2003 still generates more confidence about bank deposits.

“Now the banking system in Russia really works, and people with deposits under 700 thousand roubles can be absolutely relaxed about the safety of their savings. They are sure that in case of the bank’s collapse they’ll get their money back within 2 weeks, which made deposits, even during the crisis, go up in Russia.”

Victoria Belozerova, Senior Analyst, at RusRating, agrees that the support for the deposit system was a key factor in its strength throughout the economic downturn.

Courtesy of Expert RA (click to enlarge)

Indeed, deposits are the most popular and reliable ways to save money for Russian people today. A whole number of factors contributed to the bank deposit boom of 2000-2008, from a significant increase in people's incomes to the fact that most employers transferred their salary payments to banks to the fundamental factor of the banking system’s development – growth of public confidence in the banking system in general. That confidence didn’t come out of the blue, it was the result of significant image-enhancing efforts on the part of both the banks (e.g. the owners' support of the Alfa Bank amid the 'accidental" bank run in 2004) and regulators (e.g. introduction of mandatory deposit insurance).

Some outflow of deposits could be observed during the financial crisis that had a serious effect on Russia's economy in late 2008 and most of 2009. It is important to note, though, that the outflow rarely exceeded 15% in 2008, while the deposit rate stabilized in 2009 and even went up in the case of some banks. Since the beginning of 2010, the number of deposits has been growing clearly in almost all banks. While the volume of private deposits in Russia's banks was around RUR7.4 trillion in early 2010, it grew to over 8 trillion in just four months. Thus, the outflow of deposits amid expectations of negative effects on Russia's economy was very insignificant and far less than what the banks had expected.”

Kuzina and Ibragimova note that pensions are becoming a significantly bigger issue when addressing savings. They note that in more developed economies, such as the US and EU, the pension system provides massive investment sums – often coupled with a culture of compulsory pensions savings and superannuation schemes – while in Russia both lack of confidence in the institutions and low transparency of the system hinders the development of similar savings.

They distinguish between savings as a flow and savings as a stock, which includes money in pension funds, bank deposits, etc. meaning that average savings rates in the United States can support an individual for 2 or 3 years without working, while in Russia the figure is 6 months at the most. This signals a real danger for the economy and is again the consequence of people lacking confidence in Russia’s financial institutions.

According to the research conducted by the National Agency for Financial Studies, almost 40% of Russian households save money “under their pillows”, with just 23% choosing a fixed deposit and some 19% keeping their money in a current account.

This means Russia’s households savings performance remains very poor compared to the developed world, with Ibragimova and Kuzina saying the way people in this country are used to thinking about their personal finance creates another problem for Russian economy, which is entirely specific.

“In fact, there are 2 major problems for households in Russia: a low income level and the level of financial literacy in Russia. People in this country just aren’t used to saving at least a small bit of the money they get for the future”

Financial literacy and awareness of Russian households, with just 30% keeping an eye on dollar dynamics, is also a big issue, Kuzina and Ibragimova say, adding that it’s necessary to start providing a general understanding of the financial system in schools.

“It’s necessary to explain to schoolchildren the basics of finance, clearly showing possible risks and consequences of being illiterate. We should develop financial literacy in people, which is almost the same as financial responsibility and go to the point, where they can understand all pros and cons of a particular decision and choose the right financial strategy.”

Why boosting savings is important

Experts note that sufficient households savings could provide Russia’s economy with much needed ‘long money’, with Yaroslav Lissovolik, chief economist at Deutsche Bank, also adding that the habit to keep cash really hinders the process.

“Households in Russia keep huge sums of money under the pillow, which hinders the process of its efficient transformation into investment.”

According to Olga Kuzina, in January 2010 households in Russia had about $25 billion “under their pillows”, which almost equals the sum at the peak of the crisis in 1998. Now the figure is down to about $10 billion and is likely to go down further, but Russians keeping much of their savings in cash remains one of the country’s real economic problems.

Plans for the future

The process of boosting savings will certainly take time, as changing both the system and the culture of savings is very complicated, with Olga Naidyonova, banking analyst at Otkrytie FC, saying “a more competitive and investment attractive economy is necessary to make saving processes more efficient in Russia.”

Yaroslav Lissovolik adds that only a complex set of measures can help.

“Actually, it’s about the effort of many. The Central Bank should keep inflation and refinancing rate under control, financial institutions should diversify their instruments, the banking system needs more stability and, of course, the pension reform should be properly conducted.”

Dilyara Ibragimova says that the long road starts with a simple step, and Russian households should begin developing a simple habit of tracking down their income and expenses, to record their personal budget.

“So far people in Russia don’t have the simpliest financial discipline. The most unexpected spending items can come out if a person starts to simply fix what he spends his money on.”

Russians can’t always justify almost everything by their immediate needs, but Ibragimova says over time people and institutions will change.

“The factor of suggestions is certainly there, but these will change, if we work to change the economic environment.”

Business RT: Anastasia Kostomarova