High Rates Everywhere

When I read American personal finance blogs, one thing is constantly in my mind – we, Russians, have such high rates everywhere! I mean credit and loans interest, but also inflation and even bank deposit interest rates and stock market revenue.

I will give here some figures.

1. Inflation.

It might seem monstrous to somebody who is used to 3% inflation, but the official inflation in my country was 9% in 2006. It is even considered to be good, because this is the first year when it’s a one-digit number. As far as I remember – and I stopped being financially naïve not so long ago – inflation used to be a low-teens percentage. I did a search about previous figures on the Internet and that’s what I found:

2006 – 9%

2005 – 10.9%

2004 – 11.7%

2003 – 12%

...

2000 – 20%

...

1995 – 130%

Wow! We surely have made a long way from over a hundred to a single digit! It is also anticipated that the 2007 figure will be less than 9%.

2. “Federal funds” rate.

A number which corresponds to Federal funds rate in the USA currently equals 10.5% in Russia. Let’s have a look at its history:

2006 – 10.5%

...

2000 – 45% (ouch...)

...

1995 – 200% (I never knew this...)

3. Bank deposit.

Bank deposit interest rates usually tend to be a little smaller than “Fed rate”. I compared the current offers of three banks, which are among the biggest and most respectable. On average they give about 8% in interest if savings are kept in rubles and maybe 5-6% if in dollars or euros. The numbers depends on the amount of money put and the deposit period. And well, I distinctly remember 10%+ rates not so long ago.

4. Credit.

Oh, credit is such an expensive thing! The rates gradually decrease but are still soaring.

The most expensive is the money that is borrowed stuff like cell phones, TVs and computers. The rate here can easily go up to 20, 30 and 40%+.

Mortgage usually has a rate in low-teens. I’m not sure I have seen the offers with less than 10% rate.

Student loans are surprisingly expensive, no less than 10%. They are not very popular here. People either get an education for free or their families pay it without using credit.

It seems that auto loans are the cheapest. I’ve seen manageable figures like 3-6%.

5. Stock market.

That’s where high rates are something wonderful and very enjoyable. In 2005 Russian stock market revenue was up to 70% and about 50-60% in 2006. Looking back to 1995... Well, it’s amazing, it’s hundreds %. Why didn’t I have enough money, brains, guts and years to start investing then? :)

I can see a distinct trend here. Nineties were a wild period with enormous figures everywhere. From then the rates have been gradually and steadily declining. I think in the end Russian finance system will reach the state of mostly single-digit rates. It’s interesting to notice that people are very used to these huge numbers. Even financial advisers in personal finance magazines are blinded by them. Very often I see 20 and 30-year financial plans in these magazines where inflation is assumed to be somewhere around 10% and prospective investment 20% and more – such an optimistic hope! But the whole situation is changing and it’s more likely that all these rate figures will be much smaller in 20 or 30 years.

Personal Finance in Russia

Are Russian people financially literate? I wouldn't say so. In fact I can divide Russian people in two categories. The majority of people handle their money rather poorly, they don't invest and they don't think much about retirement. But there are people (very few) who have a significant amount of money. They may be heads of corporations, top-managers or running their own businesses. Those are very well aware about money. It's them who buy stocks, bonds and gold, consult with financial advisers and have their personal finance in order.
I think I belong to neither of groups. I don't have so much money as a person from the second group does, but I am a little more financially literate than a person from the first one. May be I am from that tiny group of people, who have a little money and know the basics of personal finance. I believe my group will grow in future and replace the first one. I see that there are already such magazines on sale like Home finance, Personal budget and Family budget. More and more people learn about controlling their money, saving and investing.

All in all, our personal finance sphere is in a transitional period. People who used to rely on government now start controlling their money on their own.

So, how do things go in my country?

1. Retirement.
About 96% of working Russian people don’t think about their retirement at all. It can be easily explained - for many years the government took care about people in their senior age. A fixed amount which didn't vary much from person to person was paid every month to a 60+ man or a 55+ woman. It's called pension. Now we're in the process of reforming the system. An average Russian person is still eligible for a monthly small fixed amount, but he or she can also make contribution in his retirement account. Also the employer pays about 14% and less of an employee's salary (it is paid not from the salary but from the employer’s funds) in his or her retirement account. A person then can choose where to put his retirement money. These 95-96% don’t choose anything and their money stays in a government fund, which, surprisingly enough, can invest this money only in bonds. So in recent years the gain was less than the inflation rate. However, the minority moved their money in private funds that can invest in stocks and enjoyed a good rise, as the Russian market grew significantly.

2. Saving.
It seems to me that Russian people always used to save. The main reason for that was "in case of emergency". However, the case of "paycheck-to-paycheck" is also rather widespread. It also seems that people use credit much more often nowadays and they don’t save that much.

3. Investing.
Sadly enough, people most often use a single financial tool for savings - keeping cash at home. There is even an expression "to keep one's money under a pillow". In nineties the inflation was extreme and it literally destroyed the value of saved money. Maybe that made people start using bank deposits, which can hardly beat inflation but is still much better than "under a pillow". And the majority of people don’t go further. I think there are less than a million or maybe half a million individuals (out of 140 million population) who invest in stocks directly or put their money in mutual funds. People are just not used to it. They also don’t trust such financial tools because many were swindled out of their money in the wild nineties by fake public companies and funds. Now it’s much more regulated and solid and people start investing in stock market, step-by-step. The number of new investors is growing exponentially.

4. Real estate.

In the Soviet time real estate – mostly apartments – wasn’t purchased. It was given to a person after some years in the workforce. If you wanted to buy an apartment – it was rather cheap. Now the situation has changed dramatically. Real estate has risen in price. However, it is still more or less affordable (excluding Moscow). People with good and stabile jobs have a mortgage and they pay it out rather easily.

But Moscow is the most sought-after Russian place. It therefore leads to acute real-estate shortage which in its turn leads to soaring prices. In two years they more than doubled. Now even people with good wages (as wages in Moscow go) have difficulties getting a mortgage. A monthly payment tends to be enormous.

5. Credit.

Credit has become accessible to everybody not long ago. As in many countries before Russia, people got used to it very quickly and now rely on it heavily. They use it to buy a car, a washing machine, a TV, you name it. There are worries that the country gradually comes into the sort of credit frenzy that can lead to troubles. Meanwhile now it’s more or less manageable.

6. Debit and credit cards.

Although the credit is easily available, credit cards are not widespread. Money is most often lent in the form of cash, and monthly payments are paid also in the form of cash to a teller. Of course it leads to lines in the banks. Banks introduce credit cards as a way to loan money. Not so many people use credit cards to make their daily purchases. On the other hand, it prevents them from piling up credit card debts.

Debit cards are much more widespread. I’ve seen somewhere that they constitute more than 90% of all plastic cards in our country. I think it’s because they’ve been somewhat imposed on people. You see, employees used to get their salary in the form of cash at the account, which led to lines and so on. (By the way, we never use checks. I have never seen one in all my life) In the end a lot of companies chose a bank which would issue debit cards for every employee. Now wages go straight on debit cards. However, most people immediately go to an ATM and cash all the money out. It’s rare to use cards to pay for goods like groceries, books and so on. But it’s going to change, I think.