Russians are giving up double-digit interest on deposits and have been pulling cash out of banks for seven months. After Russian authorities cut mobile networks, saying they would block Ukrainian drones, card payments stopped in major cities across Russia and demand for cash payments surged. On top of that, talk that the government might even seize deposits entrusted by the public to cover war expenses is stoking demand for withdrawals.
On the 18th, The Washington Post (WP), citing data from the Russian Central Bank, reported that 286.4 billion rubles (about 4.81 trillion won) left Russia's banking system over the two weeks from the 1st to the 14th of this month. In July, $7.3 billion (about 10.32 trillion won) flowed out of banks, and in June, $4.5 billion (about 6.36 trillion won) left the system. This month marks the seventh straight month this year of net cash outflows from Russian banks. The total amount withdrawn from Russian banks this year has reached 2.5 trillion rubles (about 45.23 trillion won). In just seven months this year, the figure has already surpassed the 2 trillion rubles (about 34.91 trillion won) that fled over a year in the immediate aftermath of the full-scale invasion in Feb. 2022 as demand for deposit withdrawals surged.
Russians are still pulling money from their accounts even though Sberbank, Russia's largest bank, offered 10% annual interest on one-year time deposits this year. Taras Skvortsov, Sberbank's chief financial officer (CFO), told Russia's RBK radio, "Large sums are leaving every month," adding, "If this trend continues, the situation cannot improve." He predicted this year's withdrawals would roughly double those of the first year of the invasion. Right after the invasion in 2022, when a so-called bank run (a mass deposit withdrawal event) unfolded over two weeks, the Russian government curbed withdrawals by imposing capital controls and raising rates.
This year, Ukraine has increased drone attacks targeting major Russian cities and infrastructure. In response, Russian authorities have repeatedly cut mobile networks in major cities, saying they aim to disrupt the communications and navigation of Ukrainian drones. When communications are cut, card terminals and online payments stop together. Experts noted that this has driven a surge in demand to withdraw cash in advance. Cash circulating outside Russia's banking system is estimated at 19 trillion rubles (about 343.5 trillion won), more than 17% higher than a year earlier.
A former senior official at Russia's Finance Ministry, who requested anonymity, told the WP, "As drones fly and fires start breaking out here and there, anxiety has grown," adding, "As fears rise that money deposited in banks might not be returned, the old wisdom of keeping cash right under the pillow is coming back." The person added, "Some banks did not anticipate this situation and have already put their cash to work elsewhere, and as people withdraw hundreds of billions of rubles a month, the problem is growing."
This year, Russia's economy is experiencing its worst fuel shortage since the Soviet collapse, due to Ukrainian drone attacks on refineries. Major outlets predicted Russia has lost more than 30% of its refining capacity. Despite the economic slowdown, the Russian Central Bank has been unable to cut rates quickly, worried that the fuel shortage could push prices back up. In the end, on June 19 the Russian Central Bank cut its key rate by only 0.25 percentage points. Even so, Russia's benchmark rate currently stands at 14.25% annually. As of the 19th, that is more than 11 percentage points higher than South Korea's benchmark rate of 2.75% per year. Prolonged high rates increase corporations' interest burdens, and as profitability worsens, borrowers' ability to repay corporate loans declines, which can lead to a rise in banks' nonperforming loans.
Amid this, Gennady Zyuganov, leader of the Russian Communist Party, in July argued, "To cover war expenses, we must draw in tens of trillions of rubles of private funds locked in banks," pouring fuel on the wave of deposit withdrawals. CFO Skvortsov noted that after this remark, anxiety spread among Russians that their deposits could be seized.
Alexandra Prokopenko, a former adviser to the Russian Central Bank, told the WP, "It means people do not trust Russia's banking system or its financial system," calling it "a result born of fears that the government could nationalize deposits." While she viewed the likelihood of nationalization itself as low, she added, "I do not rule out a situation where authorities impose withdrawal limits."
Unlike personal deposits, the Russian government is already rapidly nationalizing corporate assets. According to the Prosecutor General's Office, corporate assets nationalized last year totaled $51.5 billion (about 72.8 trillion won). This year as well, in June, assets worth 550 billion rubles (about 10.74 trillion won) linked to Vadim Moshkovich, founder of the major agribusiness Rusagro, were seized by the state. This is the largest nationalization case in Russia since the invasion of Ukraine.
Russia's wealthy and large corporations are accelerating capital flight by moving money to places beyond the reach of regulators. In the second quarter this year, funds leaving Russia exceeded a total of $9.4 billion (about 13.29 trillion won). The WP reported that as the Russian government tightened large cash remittances, opening securities accounts in Kazakhstan, Kyrgyzstan, and Armenia has become a main channel.
Ultimately, on the 20th of last month, Russia's Finance Ministry indefinitely suspended its weekly Government Bonds auctions. Russia's OFZ government bonds are ruble-denominated securities and the main tool for covering the country's budget deficit. Russian banks had long acted as major buyers, purchasing these bonds largely with deposits entrusted by financial consumers. But as withdrawals have accelerated, many banks have been left without even the cash to buy government bonds, experts said. The Finance Ministry also skipped auctions on June 24 and July 8, citing market stabilization. This time, it did not even specify when sales would resume.
Craig Kennedy, a researcher at Harvard University's Davis Center for Russian and Eurasian Studies, told the WP, "No great power repeatedly fails to issue Government Bonds in the middle of a war," calling the indefinite halt to OFZ issuance "an ominous signal that Russia has overreached."
To make matters worse, while the Russian government cannot sell Government Bonds, the money it needs to spend has swelled in the opposite direction. From January to July, Russia's federal budget deficit reached 6.46 trillion rubles (about 107.57 trillion won), already surpassing the full-year target of 3.8 trillion rubles. In the first half, Russia's gross domestic product (GDP) rose just 0.3% from a year earlier, falling far short of the 1.2% growth rate in the first half of last year.
As the recession deepens, loans that Russian banks extended, under government direction, to defense corporations, state projects, and homebuyers are increasingly at risk of default. Reuters reported on the 6th of last month, citing a report from a European intelligence agency, that 10% of Russian corporate loans are estimated to be difficult to repay, and that the retail nonperforming loan ratio at some large banks rose to 15% last year.
Even among the pro-Putin Russian economic elite, grumbling has begun about rising war expenses and the recession. Herman Gref, Sberbank's chief executive officer (CEO), said publicly in late June, "Everyone wants the war to end as soon as possible." Sergei Sobyanin, the mayor of Moscow, told Russia's state-run news agency Tass earlier this month, "If the economic conditions for building a peaceful life are not in place, there are no taxes, no household income, and the political situation changes completely."
On the 17th, Reuters reported, citing multiple sources, that Russia's state development bank VEB dismissed its chief economist, Andrei Klepach. Klepach is a leading figure in Russia's macroeconomics community who worked 10 years at the Ministry of Economic Development before becoming VEB's chief economist in 2014. In a lecture at the Nikitsky Club, where economists and officials gather, in May, he said, "Russia is falling behind not only the West and China but also Ukraine in the competition for technology and the economy." That remark became public only this month through Russian media.
In the lecture, Klepach said, "We cannot win this war of attrition," adding, "Russians are under the illusion that Ukraine will collapse, but Ukraine has not collapsed and will not collapse going forward. Meanwhile, the expenses Russia is bearing keep swelling."