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Last Updated: Tuesday, 27 November 2007, 23:29 GMT
Russians learn how to save and invest
By Konstantin Rozhnov
Business reporter, BBC News

American dollar
Dollars used to be the only trusted means of saving for Russians

Russian pensioner Galina, who has just reached the retirement age of 55, has no savings and counts on a state pension, as most of her countrymen do.

According to a number of surveys, almost 70% of Russians do not have any savings at all.

And of those who do have the ability to invest, only a third have entrusted their money to banks, and about half keep savings in cash at home.

One of the most significant reasons for the lack of confidence in Russia's banking system, its financial market and private pensions is a collection of bad memories from the 1990s.

When the Soviet Union collapsed in 1991, millions of Russians lost their rouble savings due to rocketing inflation and the lack of opportunity to spend or invest their money because of a huge goods deficiency and the non-existence of a financial market.

The financial crisis in 1998, when the rouble's value against the dollar fell fourfold, was a second crashing blow for a lot of Russians.

Besides, throughout the 1990s a lot of people lost their savings in pyramid investment schemes, which tricked people into investing money by promising them huge returns, but soon collapsed.

Rouble resurrection

So for a long time the American dollar - in cash, of course - was the only trusted means of saving for Russians.

But in recent years the declining dollar and growing economic stability in Russia have made the rouble the most attractive currency in the country.

Galina, a Russian pensioner, in Moscow
I have no savings and do not expect there will be some in the future. I live on a state pension
Galina, pensioner, 55

Half of Russians say that the rouble is the best currency for savings, with a quarter trusting in the euro and only a few in the dollar.

The problem, though, is that because of the high rate of inflation - prices are set to rise more than 10% this year - the national currency can not preserve the value of savings as the average interest rate for rouble deposits is lower than the inflation rate.

All these factors explain why about half of Russians see property investment as the best way to gain significant returns.

Dollar-denominated flat prices in Moscow almost doubled during 2006. This year they have stagnated a little, but started to climb again recently.

Some experts say there is potential for the growth to continue, as the prices are up to three times lower than in London, for example.

Question of trust

Irina Denisova, lead economist at the Centre for Economic and Financial Research at New Economic School in Moscow, thinks people do not invest their money in the best way, including in property, because of a lack of trust in financial institutions.

"They try to find an investing form that doesn't depend on the government," she says.

Some people even prefer to invest in their children's future, hoping that they will be supported by them in retirement.

Sergei, 33, in Moscow
I have little savings which I keep in a bank. And I still hope to earn money for my retirement
Sergei, 33

Ekaterina Pokoptseva, an analyst at the Association of Russian Banks, says the structure of Russia's financial market is not household-oriented and attracts mostly institutional investors.

Ms Pokoptseva believes recent events have proved Russians would benefit from investing in public bonds as in Soviet times.

When several months ago Sberbank and VTB, two of Russia's biggest state-owned lenders, decided to sell their shares, it attracted huge public interest.

VTB sold shares worth about $8bn (3.8bn), of which $1.6bn were bought by 131,000 private investors.

"There are not many alternatives [for investments in Russia]. Besides, people do trust state-owned banks," Ms Pokoptseva says.

'No need to save'

Another factor preventing Russians from investing their money is a lack of financial knowledge.

For instance, surveys suggest almost 90% of people have not bought any shares and do not plan to.

Even the consumer credit and mortgage market, that has been growing rapidly recently, did not exist several years ago.

Michail, a Russian student, in Moscow
I am going to live on a state pension
Michail, student, 23

Official statistics show Russians had 4.6 trillion roubles ($189bn) in savings at the start of October and drew down credit of 2.9 trillion roubles, with the credit sum rising faster than the savings.

Sergei, 33, is one of those who do use financial services in an attempt to make their money work.

"I have little savings which I keep in a bank. And I still hope to earn money for my retirement," he explains.

Ms Denisova of the New Economic School thinks most people tend not to save enough: "They spend their money now, and it is bad."

Moscow student Mikhail, 23, says his student allowance goes into his bank account, but he withdraws the whole sum and does not have savings.

"I'm going to live on a state pension [when I retire]," he adds.

His position mirrors the one of Galina, the pensioner, who says: "I have no savings and do not expect there will be some in the future. I live on a state pension."

And some people cannot help thinking that they will not need savings in retirement as the average life expectancy for Russian men is 59 compared to a retirement age of 60.

Professor Liudmila Rzhanitsyna, chief researcher at the Institute of Economics at Russian Academy of Sciences, advises that in Soviet times there was no need to make savings as social guarantees were in place and everybody got a state pension.

In reality, their own funerals were almost the only thing elder people were saving for.

Pension and salary

The problem is, though, that in real terms the value of state pensions upon retirement are lower now than in the Soviet times.

Besides, the value of the average pension in Russia compared to the average wage - a measure of pensioners' life quality - has been going down recently as real pensions have been growing more slowly than real wages, Ms Rzhanitsyna of the Russian Academy of Sciences adds.

Furthermore, recent pension reforms have brought significant changes with the pensions of current Russian workers directly linked to their official salaries.

There are almost 40 million pensioners among Russia's 140 million population, and pension scheme payments are obligatory.

The Kremlin in Moscow
Officials have a lot to do to boost trust in Russia's banking system

But experts believe that up to 50% of working Russians still get paid in cash to avoid taxes.

Businesses say the current tax burden is too heavy for them.

But, as Russian tax residents enjoy the flat personal income tax rate of 13%, employees are more interested now in getting paid officially, as it will influence their future state pensions and will be needed for getting credit as well.

The economic stability that Russia has enjoyed for several years has brought changes in the way some Russians manage to survive and save money.

The government does not have to deal constantly with urgent problems in the economy now, as in the 1990s, and can pay more attention to ordinary people's needs.

For example, a new deposit insurance scheme has been introduced and people have started getting used to borrowing money for their needs.

With parliamentary and presidential elections coming, the fact that most Russians still do not have the slightest chance to save and do not trust in the country's banking system does not seem to affect President Vladimir Putin's popularity .

But the government has a lot to do to make Russians' lives more secure and predictable financially and to match savings standards in developed countries.

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