Russia makes bid for international cash deposits

Nigel Morris-Cotterill

Russia has a problem: with so many (mostly) men having been removed from the workforce to bolster the military, it's running out of people. Incredibly, the unemployment rate is now so low that it has passed the economists' definition of "full employment." This, coupled with the effect of sanctions, has led to a fascinating policy that is going to open up a new front in the financial war with Russia and financial crime risk and compliance officers are going to be on the front line.

Russia's economy is in difficulty. We are not going to claim that it's in terminal collapse but the situation is serious.

Last Friday, The Central Bank of the Russian Federation aka The Bank of Russia raised its base interest rate to 13%. That means that much of its medium to long term lending is going to be at well over 15%. Such rates are often imposed by central banks to control inflation by suppressing demand and to encourage saving. The Russian Overnight Interest Rate or RUONIA is 12.41. That's the rate at which banks lend their deposits to each other. The collapse of inter-bank overnight lending - which nominally circulates deposits between banks each of which pay and earn interest as the money cycles - was the last straw that led to the global financial crisis. It's not exactly The Secured Overnight Financing Rate (the replacement for LIBOR with increased supervision) but it's similar. SOFR is 5.3%

The bank says that the rate of inflation for August 2023 is 5.25% a dramatic increase from 4.3% in July and 3.3% in June. The Bank is predicting that it will reach 6.2% before the end of the year and then begin to fall. However, independent research published in says that the real rate, using real consumer purchases as data, has touched 47% across a basket of 500 products.

According to Statista, the unemployment rate fell from 6.2% in September 2020, seven months after the invasion of Ukraine, to 3.3% in June 2023. The general view is that it is now below 2%, the rate at which economists say there are too few people to allow effective mobility of labour which stifles economic growth.

In July, Reuters reported that Russia's revenue from oil and gas had almost halved in the first six months of 2023 - and that's from a level seriously depressed from before the invasion of Ukraine in February, 2022.

All of these things mean an increase in demand for capital for investment.

In June, 2023 Reuters reported that Sberbank, a large Russian bank, plans to issue bonds in yuan, saying ""So far there is good demand for deposits in yuan, especially from private clients, who are transferring their savings from dollars and euros to deposits in Chinese currency, " according to Taras Skvortsov, the bank's head of finance, who went on to say "it is possible that a window of opportunity will appear before the end of this year, then we will issue yuan bonds."

It won't be plain sailing unless the Chinese government allow some wiggle-room in its exchange control regulations but with Xi cosying up to Putin at every opportunity, it is far from unlikely that an exemption would not be granted.

That puts Hong Kong, Singapore, Malaysia and London on the front lines, as well as China's demi-satellites such as Vietnam, Laos and Cambodia to say nothing of some pariah states such as Iran, Myanmar and North Korea.

The purchase of bonds is prohibited under the sanctions regimes of many countries.

Hong Kong is a special risk - American pressure group the "Carnegie Endowment for International Peace" says that it "scorns" Russian sanctions - but that's due to ignorance. Hong Kong's foreign policy is dictated from Beijing and it has no say in international sanctions. But foreign banks operating there are subject to the law of their home jurisdictions and, of course, to the extra-territorial effect of US sanctions laws in relation to the use of US dollars.

Russia, of course, hopes that by increasing interest rates, money will flow into its banks, even without the issue of bonds in the international market.

Trading Economics shows a significant increase in Russians overseas making remittances in 2021 but fell sharply at the beginning of 2022 No data is yet available for most of 2022 or for 2023. But if remittances have continued to fall, then that will affect ordinary families.

All of this leads to one thing; bankers etc. all over the world must be alert to the efforts by the Russian Central Bank to get money into the economy from overseas.

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