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bne February 2021 Companies & Markets I 11
are worth 38 kopecks each, which, following the devaluation in 2014 means they are still worth exactly as much as they were worth in the IPO of $0.005 at current exchange rates.
Banks deposits fall out of fashion
The rapid growth in retail investments into stocks, as well as real estate, is being driven by the falling returns from depositing money with banks.
The CBR has cut its prime overnight rate to its lowest level in modern history, which has led to a mass exodus of bank depositors, reports the CBR, to the point where last week the central bank warned that these outflows carry risks for the financial system.
The falling prime rate has led to commercial banks cutting their deposit rates in parallel. At the most recent peak, the top ten commercial banks were offering a deposit rate of 7.72%
in March 2019, but that had dropped to 5.92% by the start
of 2020 and fell again to the current 4.53% as of October.
The current return from bank deposits only just covers inflation, which is expect to end this year at 4.2%-4.3%.
The rates on foreign currency deposits have decreased even further and are now close to zero. That has led to an exodus of those deposits, too, with RUB635bn ($8.4bn) of outflows this year.
The volume of ruble deposits is still growing and increased by RUB1.1 trillion ($14.5bn) in the first nine months of this year, but ordinary Russians are more and more energetically looking for alternative investments, the CBR says.
The bond market has been another beneficiary of the change. Since the beginning of 2019, investments by the Russian population in bonds have increased by RUB958bn ($12.6bn) of which 70% are bonds of Russian issuers, out of which RUB320bn was invested by the population into shares, according to the CBR. This is still significantly less than the amount deposited in ruble deposits over the same period (RUB3.34 trillion), but the order of magnitude has now become the same.
Moscow City Real Estate prices forecast RUB/1sqm
Safe as houses
Outside the domestic capital market the other big winner
from the retail investors' hunt for returns has been the housing market. Housing prices have begun to rise fast on both the primary and second market, fuelled by a generous government subsidy scheme, which was recently extended into 1H21.
The mortgage market took off in 2008 and recently demand has been stoked by the anti-crisis programme of preferential mortgages at 6.5%, and the average rental yield on the housing market in September of 5.5% per year, which exceeded the weighted average yield on deposits for up to
“The CBR has cut its prime overnight rate to its lowest level in modern history, which has led to a mass exodus of bank depositors”
a year by 2.25 percentage points, the CBR said in its Financial Stability Review. In short, an individual investor can make better money from buying an apartment to rent than they can from putting their cash on deposit in a bank.
CBR concerns
In its more recent Financial Stability Review, the CBR for the first time called the flow of retail funds into the stock market a risk for the Russian financial system. This is a natural stage in the development of the market, writes the Central Bank citing the example of the United States, where securities account for 51% of savings.
The Central Bank lists three associated risks. First, it is the danger of a boom mentality when hype about rising returns causes investors to be incautious when making investment decisions. Secondly, the growing popularity of foreign financial market instruments actually means an outflow
of funds from the Russian economy. Thirdly, the growth of citizen participation increases the systemic importance of the stock market: its conjuncture is becoming an important factor in the well-being of people, and their active participation can increase volatility, writes the Central Bank.
The Central Bank calls all these risks limited. Above all, the law on the categorisation of investors, which came into force in July 2020, should help to overcome them. It limits the access of unqualified investors who have not passed special tests to shares that are not included in the calculation base of the largest indices, bonds of issuers with a low rating and other high-risk instruments, as well as investments with leverage.
But the main consequence of the flow of money from Russians to the stock market is its growing importance for the economy and the growing role of decisions of small investors in the dynamics of the market.
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