Wednesday, March 18, 2015

18/3/15: Russian Deposits Dollarisation and Capital Flight

I have written before about the nature of capital outflows from Russia. One aspect of capital outflows is how the aggregate reflects deposits shifts into forex, known as 'dollarisation' of deposits. When Russian residents withdraw foreign currency from the banks (either via drawing down existent currency deposits or by converting their Ruble deposits into forex), the transaction is registered as capital outflow from Russia, even if they park this currency in safety deposit boxes and in their coffee tins. In other words, capital outflow out of Russia is registered even if cash remains in Russia.

Based on the latest data from the Institute for Foreign Trade, The Gaidar Institute for Economic Policy and the Russian Presidential Academy of National Economy and Public Administration, as of February 1, 2015, share of forex deposits in Russian banks rose to 35.7% of total monetary base excluding cash, up on 19.4% a year ago. The degree of 'dollarisation' (conversion to forex) was higher in 2014 than during the 2009 crisis, when the share of forex deposits stood at 35.3% and is second highest after 1998 crisis peak.

In 2014, Russian residents directly withdrew USD28.6 billion in forex from the banks. A large figure, but significantly less than in 2008 when this figure stood at USD51.4 billion. Over 2014, Russian banking system lost, in total, USD40 billion of forex to cash conversions and deposits withdrawals - all of which was registered as capital outflow from Russia.

The research note can be accessed (in Russian) here:

Interestingly, it tells the story of banks running out of deposit boxes storage capacity around November-December 2014 as households rushed to convert to forex holdings (mistrusting the Ruble) and switched to holding this forex in cash (mistrusting the banks).

February data showed significant moderation in dollarisation. Forex deposits held by the Russian banks fell 10.7% to RUB5.1 trillion, while Ruble denominated deposits those 2.7% to RUB13.8 trillion, with changes driven predominantly by the strengthening of the Ruble (in February, Ruble gained 14% relative to the basket of USD and EUR).

Over the last 12 months, corporate forex deposits rose substantially, with 41.3% of all corporate sector deposits now held in forex - a sign that Russian companies are continuing to build forex reserves to counter existent and potential future sanctions. In effect, Russian companies are cutting back on exporting forex out of Russia in fear of losing control over these funds in the future. At the same time, household forex deposits fell by USD5 billion and Ruble-denominated deposits rose on improved Ruble exchange rate.

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