Russians Flock to High-Yielding Bank Deposits Amid Soaring Inflation and Economic Uncertainty

Introduction: The Resurgence of Bank Deposits as a Safe Haven

After years of exploring alternative investment avenues, Russian citizens are once again turning to high-yielding bank deposits as their preferred method of safeguarding their savings against the relentless onslaught of high inflation. With the Central Bank of Russia maintaining historically high interest rates of 21% and offering an impressive real interest rate spread of 11%, depositors can earn a significant 10% annual return on their term deposits. This has led to a remarkable 70% increase in total deposits in 2024, reaching a record-breaking 53.9 trillion rubles ($594 billion) by December, according to the Kommersant Review.

The shift back to traditional banking products reflects a broader trend of risk aversion among Russian retail investors, who have been burned repeatedly by stock market volatility and economic instability. With inflation hovering around 10%, the real returns on deposits have become too attractive to ignore, making them the go-to choice for both individuals and corporations.

Historical Context: Russia’s Rocky Relationship with Inflation and Savings

Russia’s battle with high inflation dates back to the early 1990s, with the country experiencing only brief periods of single-digit inflation, notably in 2007. To combat this, Russian banks have historically offered high interest rates on deposits, which have served as a key source of funding for their operations. However, this changed in July 2020 when the Central Bank’s key rate plummeted to an all-time low of 4.25%, coinciding with a low inflation rate of 3.7% in 2017. The subsequent period saw deposit returns dwindle, prompting retail investors to seek higher yields in alternative investments, particularly the stock market.

This aligns with the Kremlin’s broader strategy to develop the domestic capital market and diversify funding sources for economic growth. During the 2024 VTB Russia Calling! Investment Forum, President Vladimir Putin expressed his ambition to double the size of the Russian stock market by the end of the decade, envisioning it to represent two-thirds of GDP, up from the current 23.4%. However, the stock market’s volatile history has left retail investors wary, as evidenced by repeated crashes in 1998, 2008, and most recently in 2022 following Russia’s invasion of Ukraine.

Why Russians Are Ditching Stocks for Deposits

Despite state efforts to promote equity investments, Russian retail investors have had a tumultuous relationship with the stock market. Past attempts to engage ordinary citizens in stock market investing, such as the launch of mutual funds in 1996 and the “People’s IPO” of state-owned VTB bank in 2007, ended in disaster. The 1998 financial crisis wiped out millions of dollars in retail investments, while the 2008 global economic downturn left VTB shares underwater for years. More recently, the invasion of Ukraine in February 2022 triggered another market collapse, with the ruble-denominated MOEX index stagnating as the currency itself depreciated sharply.

This repeated trauma has left Russian investors skeptical of the stock market, pushing them back toward the perceived safety of bank deposits. Moreover, the state-run deposit insurance scheme, which guarantees up to 2.8 million rubles ($28,000) per depositor, has bolstered confidence in the banking system. Even during the 2018 banking crisis, some savers actively sought out high-interest rates from smaller, riskier banks, secure in the knowledge that their deposits were insured.

The Role of Monetary Policy in Fueling the Deposit Boom

The Central Bank’s aggressive monetary tightening since mid-2023 has been a key driver of the deposit surge. With interest rates at 21%, the highest in years, the real returns on deposits have become irresistible for savers seeking to protect their purchasing power. The expectation that interest rates have peaked has further entrenched deposits as the most attractive investment option, with savers pouring approximately 10 trillion rubles ($110 billion) into term deposits and money market funds in 2024. This inflow has pushed the total volume of such investments to over 50 trillion rubles ($550 billion).

Analysts predict that high interest rates will remain in place for the foreseeable future, as Central Bank Governor Elvira Nabiullina has emphasized the need to control sticky inflation. While the Bank signaled that rates may have peaked, it remains cautious about easing monetary policy too quickly, balancing the need to support economic growth with the imperative of taming inflation. This high-rate environment is expected to keep deposits and money market funds in high demand well into 2025.

The Rise of Alternative Investments: Money Market Funds and Gold

While deposits dominate the investment landscape, other assets are also gaining traction. Money market funds, traditionally a niche product in Russia, have seen a historic surge in popularity, with investments growing more than threefold to 777 billion rubles ($8.5 billion) in 2024. This represents the largest annual inflow into money market funds in the 28-year history of Russia’s retail mutual fund industry.

Physical gold has also emerged as a safe-haven asset of choice, with Russian savers investing over 700 billion rubles ($7.7 billion) in the precious metal. Gold prices have surged by 50% over the past year, driven by global uncertainty and the weakening ruble. Despite the strong demand for deposits and money market funds, gold’s appeal as a hedge against inflation and currency volatility continues to endure.

Conclusion: The Broader Implications for Russia’s Economy

The rush to deposits and alternative investments reflects a broader risk-averse mindset among Russian savers, shaped by decades of economic instability and repeated financial crises. While this trend provides a much-needed lifeline for the banking sector, it also poses challenges for the Kremlin’s long-term economic agenda, which hinges on fostering a vibrant domestic capital market.

As the Central Bank maintains its tight monetary policy stance, high-yielding deposits are likely to remain the investment of choice for Russian savers. However, the government’s ability to encourage greater participation in the stock market and diversify the economy will depend on rebuilding trust and stability—a task that will require more than just high interest rates. For now, Russians are playing it safe, betting on the tried and true rather than risking their hard-earned savings on volatile markets.