Page 42 - bne_Magazine_July_2018

42 I Eastern Europe bne July 2018
Falling interest rates have lead regular Russians to look for new investment opportunities
perspective we are at the point of reversal in consumer price inflation (CPI) trends and it will increase to 4%, but the most affluent customers of Russian investment banks think in real terms and are look- ing for higher returns. The same is true of the international investors that were attracted to the bond market in particular by the very high real interest rates in Rus- sia,” says Smolyaninov.
Although inflation currently has been at a record low of 2.2%-2.3%, economists and the Central Bank of Russia (CBR) expect it to rise again over the rest of this year to around the central bank’s target rate of 4%. However, polls have found that the population are even more pessimistic and expect inflation to go even higher.
That makes the low deposit rates at banks a problem. Commercial deposit rates are somewhere between 5% and 8% at the leading commercial banks, which means deposits are still earning real returns, but with the CBR surveys suggesting some Russians are expect- ing inflation to rise above these rates, consumers are on the look out for better returning investments.
Financial literacy remains low in Russia and due to the string of crises Russia has been through, investments into stocks and bonds have never been very popu- lar. President Boris Yeltsin tried to get the ball rolling in 1997 by setting up the so-called PIFs, Russia’s answer to mutual funds, which coaxed legendary investor Mark Mobius into the Russian market for the first time. But the financial system went into meltdown a little over a year later. Likewise, the “people’s IPO,” which raised over $1bn for the listing of state- owned VTB Bank’s IPO in 2007 was equally ill starred and investors were mashed in another financial crisis again a little over a year later. But despite the serial car crashes, BCS has launched a string of products targeting retail inves- tors which have been growing fast.
“We have a number of products offered by BCS and structure notes are very popular or specific strategy like the dividend basket,” says Smolyaninov. “We track how the investment base is doing on the stock market – increasing loans or increasing
Russians get the investment bug
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Ben Aris in Berlin
More than two and a half decades on from the collapse of the USSR and Russia’s economy is starting to look “normal”: inflation is at an all time low and interest rates have fallen into single figures and will keep falling. That is making a fundamental change to the way ordinary Russians think about their life savings. Traditionally they simply plunked their nest egg in a bank deposit account for the high interest rates, but now the returns are dropping, people are starting to look around for alternatives that have a juicier return.
“It's a process rather than a one time structural shift. We have been in dis- inflation for quiet a while. Inflation is lower than in the US and the ongoing decline in bank deposit rates along with the bond yield rates shrinking, so people are starting to ask where can they get more yield. But it's a process that will take time. There is a lot of built in con- servatism in the Russian market and the economy because of several emerging market crises. It’s been a boom and bust so people are much less willing to take risks to get a couple of extra percentage points. But the average Russian retail investor’s behaviour is changing even
if we are far away from the western
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investors’ attitudes,” says Vyacheslav Smolyaninov, chief strategist and deputy head of research at BSC Global Markets, the biggest brokerage in Russia.
Russia has reached a tipping point where thanks to falling inflation inter- est rates have become real for the first time in almost two and a half decades. Having lost their life savings in the 90s, when savings were hyper-inflated away in a matter of months, most Russians have become very sensitive to both interest rates and inflation. Unlike in the west, the point of their investments was not to make money, but to protect the value of their savings from the ravages of inflation. Even when real interest rates were negative the game was to find the highest bank deposit rate possible
to keep the losses to a minimum. Being able to make a real return on an invest- ment is a whole new way of thinking.
“This is the line of thinking for interna- tional investors and institutional inves- tors. But the babushkas are less inclined to think in real terms. Recently the oil prices were very high and gasoline prices are increasing so the average person is feeling less sure that inflation will con- tinue to fall. We believe from the macro