Russians are giving up double-digit deposit interest and have been withdrawing cash from banks for seven months. After authorities cut mobile networks, saying they would block Ukrainian drones, card payments stopped across major cities in Russia and demand for cash payments surged. On top of that, talk has spread that the government will even seize deposits entrusted by the public to cover war expenses, fueling demand for withdrawals.
On the 18th, The Washington Post (WP), citing Central Bank data, reported that 286.4 billion rubles (about 4.81 trillion won) flowed out of Russia's banking sector over the two weeks from the 1st to the 14th of this month. In July, $7.3 billion (about 10.32 trillion won), and in June, $4.5 billion (about 6.36 trillion won) moved out of banks. This month marks the seventh 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 The total amount withdrawn from Russian banks this year has reached 2.5 trillion rubles (about 45.23 trillion won).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, it has already surpassed the 2 trillion rubles (about 34.91 trillion won) that left over a year immediately after the full-scale invasion in Feb. 2022 as withdrawal demand for deposits surged.
Russians are taking money out of 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 amounts of money are leaving every month," and "If this trend continues, the situation cannot improve." He predicted this year's withdrawals would roughly double those in the first year of the invasion. Right after the 2022 invasion, when a so-called bank run (mass deposit withdrawal) unfolded over two weeks, the government previously 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, citing the need to disrupt Ukrainian drones' communications and navigation. 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 sector is estimated at 19 trillion rubles (about 343.5 trillion won), up more than 17% from a year earlier.
A former senior Finance Ministry official, speaking on condition of anonymity, told WP, "As drones fly and fires begin breaking out here and there, anxiety has grown," adding, "With fears rising that money deposited in banks may not be returned, the old wisdom of keeping money 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, but as people withdraw hundreds of billions of rubles a month, the problem is growing."
This year, Russia's economy is suffering 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 Central Bank has been unable to cut rates quickly over concerns that the fuel shortage could push prices back up. Ultimately, on June 19, the Central Bank lowered the benchmark rate by only 0.25 percentage points. Even so, Russia's policy rate now stands at 14.25% a year. As of the 19th, that is more than 11 percentage points higher than Korea's benchmark rate of 2.75% a year. If high rates persist, corporations' interest burdens grow, and companies with deteriorating profitability become less able to repay loans, which can lead to an increase in banks' nonperforming loans.
Amid this, Gennady Zyuganov, head of the Russian Communist Party, said in July, "To cover war expenses, we must draw tens of trillions of rubles in 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.
Aleksandra Prokopenko, a former adviser at the Central Bank, told WP, "It means people do not trust Russia's banking system or its financial system," calling it "a result of the fear that the government could nationalize deposits." While she assessed the likelihood of nationalization itself as low, she added, "I do not rule out a situation where authorities impose limits on withdrawals."
Unlike personal deposits, the Russian government is already rapidly nationalizing corporate assets. According to the Prosecutor General's Office, corporate assets nationalized last year amounted to $51.5 billion (about 72.8 trillion won). This year as well, in June, the state seized assets worth 550 billion rubles (about 10.74 trillion won) tied to Vadim Moshkovich, founder of the large agribusiness Rosagro. This is the largest nationalization case in Russia since the invasion of Ukraine.
Russia's wealthy and big corporations are accelerating capital flight by moving money beyond the reach of regulators. In the second quarter, more than $9.4 billion (about 13.29 trillion won) left Russia. WP reported that as the government tightens large cash remittances, opening securities accounts in Kazakhstan, Kyrgyzstan and Armenia is being used as a main channel.
Ultimately, on the 20th of last month, the Finance Ministry suspended weekly Government Bonds auctions indefinitely. Russia's OFZ bonds are ruble-denominated government debt and a primary tool for covering fiscal deficits. Russian banks had played the role of big buyers, purchasing these bonds the most with deposits placed by financial consumers. But as deposit withdrawals gained speed, many banks found themselves without even the cash left 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 they would resume.
Craig Kennedy, a researcher at Harvard University's Davis Center for Russian and Eurasian Studies, told WP, "No great power repeatedly fails to issue Government Bonds in the middle of a war," calling the indefinite halt of OFZ issuance "an ominous sign that Russia has overreached."
As fate would have it, while the government has been unable to sell Government Bonds, the money it needs to spend has swelled in the opposite direction. From January to July, the federal fiscal deficit reached 6.46 trillion rubles (about 107.57 trillion won), already exceeding the government's full-year target of 3.8 trillion rubles. Russia's gross domestic product (GDP) in the first half grew just 0.3% from a year earlier, far short of last year's first-half growth rate of 1.2%.
As the downturn deepens, loans that Russian banks extended at the government's direction to defense corporations, state projects and homebuyers face rising risk of default. Reuters reported on the 6th of last month, citing a report from an intelligence service of a European country, that 10% of Russian corporate loans are estimated to be difficult to repay, and that the retail nonperforming loan ratio at some major banks rose to as high as 15% last year.
Even among the economic elite who had defended Putin, grumbling has begun over rising war expenses and the downturn. Herman Gref, Sberbank's chief executive officer (CEO), said publicly in late June, "Everyone wants the war to end as soon as possible." Moscow Mayor Sergey Sobyanin told state news agency Tass earlier this month, "If the economic conditions are not in place to build a peaceful life, there will be no taxes, no household income, and the political situation will be completely different."
Reuters reported on the 17th, citing multiple sources, that state development bank VEB dismissed its chief economist, Andrei Klepach. Klepach, a leading figure in Russia's macroeconomics community, worked 10 years at the Economic Development Ministry before becoming VEB's chief economist in 2014. In a May lecture at the Nikitsky Club, a gathering of economists and officials, he said, "Russia is falling behind not only the West and China but also Ukraine in technology and economic competition." The comment became known outside Russia 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. In the meantime, the expenses Russia is bearing continue to grow."