Nabiullina made her remarks in response to a reporter's question about the best currency for Russian savings. She is correct regarding the profitability of deposits (deposit yield) held in rubles versus ones in foreign currencies that many Russians have opted for.
Let’s look at the numbers. In January 2016 when Russia’s annual inflation rate was 9.8 percent, the average one-year fixed deposit return at 15 of Russia’s largest banks (based on volume of private holdings) was also 9.8 percent. In other words, Russians who put savings into such accounts at that time would not have lost money, but wouldn’t have made any either as inflation would have wiped out any gains.
But by December 2016 yearly inflation in Russia had slowed to 5.8 percent, while the average yield on the same deposits at the same 15 banks was 7.8 percent – a difference of two percentage points in favor of the deposit holder. This is what Nabiullina is likely referring to when saying rates in Russia are now “positive.”
And in January, they could be even better as annual inflation slowed to 5.4 percent – the lowest level in modern Russian history.
The Russian Central Bank has set a goal of reducing inflation to 4 percent by the end of 2017. However, Nabiullina has admitted that even if this is achieved, Russia would only rank between 124 and 128 in the world in inflation and that is due to the country’s problem with rising consumer prices.
Given the current return on ruble accounts at Russian banks, foreign currency deposits due in fact appear less attractive. For example, in January 2016 the average return on a one-year U.S. dollar account would have been 2.1 percent; a euro account 1.5 percent. And by the end of 2016 the return on such deposits fell sharply. In the case of the U.S. dollar to 1.1 percent; in the case of the euro to 0.4 percent.
Moreover, during the past year the ruble has strengthened noticeably. After hitting record lows just a year earlier, the ruble was up 27 percent against the U.S. dollar and 30 percent against the euro. At the same time, the percentage of foreign currency accounts is down in favor of ruble accounts. In January 2016, 30.1 of Russian savings were held in foreign currency accounts. By the start of July 2016, that number was down to 25.7 percent. But that figure remained largely unchanged for the rest of the year, registering 25.8 percent in November. It’s worth pointing out that the percentage of accounts held in foreign currencies skyrocketed 1.5 times during the current economic crisis. By comparison in January 2014 foreign currency accounts held by Russians at the country’s banks accounted for only 17.4 percent of overall holdings.
After years of crippling inflation, Russians have become accustomed to viewing foreign currency (either held in bank accounts, or in cash, stashed away somewhere at home) more as a means of preserving their savings, not as an investment with the aim of making a return, according to experts. This is all the more true during times of crisis. And the three crises to hit the Russian economy over the past quarter of a century (1998, 2008-2009 and the current downturn that began in 2014) were the direct result of a steep fall in the price of oil, Russia’s main expert and source of foreign currency.
At the start of December 2014, remarking on the latest drop in the value of the ruble, the Russian Central Bank noted that each ruble depreciation of 10 percent adds 1 percentage point to the annual inflation rate.
According to the Russian Ministry of Economic Development, more than half of the general rise in consumer prices in Russia in 2015 was “thanks” to the twofold devaluation of the ruble – on the heels of a twofold drop in the price of oil.
And with the ruble so susceptible to fluctuations in global oil prices, it’s doubtful average Russians will drop interest in holding savings in foreign currencies. That would even be true, even if foreign currency accounts had lower returns than their ruble counterparts. That’s because any profits earned in a ruble account can be easily wiped out should the price of oil again drop dramatically. After all, a dollar remains a dollar, the world’s reserve currency.
The respected British magazine The Banker on January 4 named Elvira Nabiullina Europe’s top central banker of the year. Explaining its decision, the journal’s editors noted Nabiullina’s efforts at the Russian Central Bank to bring inflation in Russia to record lows. But the ultimate arbiter of the value of the ruble and thus the rate of inflation in Russia -- as long as its economy remains undiversified -- is overwhelmingly the global price of oil. And not even the shrewdest decisions by the country's central bank can change that.