Russia Warned of Spiking Risk of Run on the Banks

Economic turbulence in Russia has raised the chances that depositors will hurry to withdraw their money from banks, it has been reported.

Russia’s Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF), which is linked to Russia’s authorities, has said there has been an increased possibility of “depositor flight” or a run on the banks.

The prediction comes amid economic uncertainty amplified by a record-high key interest rate of 21 percent imposed by the Russia’s Central Bank (CBR) to curb inflation fueled by high spending on the military amid Vladimir Putin’s full-scale invasion of Ukraine.

Newsweek has contacted CMASF for comment.

Why It Matters

The CBR last week kept its key interest rate unchanged at 21 percent for a fourth straight meeting, to cool rising inflation driven by Moscow’s invasion of Ukraine.

The central bank said it would keep borrowing costs high for a long time to return inflation to its target of 4 percent from its current level of 10.3 percent.

It also warned U.S. tariffs on imports from the rest of the world could push inflation higher, by reducing demand for Russian oil and weakening the Russian currency, the ruble.

Within this context, the CMASF forecast noted “geoeconomic instability” could cause a “panic reaction” among depositors akin to other “shocks” such as at the start of the war in a sign of the turbulence faced by Russia’s sanctions-hit economy.

What to Know

In its April report, CMASF said that the probability of systemic liquidity risks or “depositor flight” has increased sharply based on its early warning system which draws on economic indicators.

The system establishes that a risk below 0.3 means there is a low probability, while between 0.3 and 0.5, there is an average probability of depositor flight. This risk has increased from 0.27 in February, to 0.6 in April.

The current level has only been reached four times, the most recent in March 2022, after the start of Vladimir Putin’s full-scale invasion, when Russians withdrew foreign currency worth $9.8 billion, according to Reuters, as Western sanctions spooked consumers.

The CMASF said the situation is aggravated by the growing likelihood of an economic downturn due to the ultra-tight monetary policy of the central bank, the key rate of which is accused of stifling lending and investment.

It warned of a vicious circle, in which panic among depositors may stimulate banks to further tighten lending to accumulate liquidity to protect against new runs on the banks. In January the CMASF warned of a huge rise in corporate bankruptcies due to the interest rate.

What People Are Saying

Russia’s Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF): “the probability of systemic liquidity risks (“depositor flight”) occurring has increased sharply…(due to) increasing geoeconomic instability which could cause panic among depositors.

“A similar reaction to external instability took place during shocks in 2014, 2018, 2020, 2022.”

What Happens Next

Russia’s economy could face extra pressure with the plunging cost of oil, its lucrative export, which has forced the government to readjust its budget.