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In Russia we currently have 11% of Central Bank's interest rate and you can get credit in commercial bank for about 25% in year. Why are interest rates so high?

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    $\begingroup$ Is the question "For what reasons we may observe a "high" Central Bank interest rate"? If yes, the question is too broad -if, that is, one manages to characterize what "high" means (high compared to what?). Please reconsider narrowing down your question: For example, was the CB interest rate in Russia much lower a few years ago and you want to know why it increased? Are there some macroeconomic information that you can provide on the Russian economy (growth, inflation etc)? As is, your question has to be closed. Visiting meta.economics.stackexchange.com/q/164/61 could be a good idea. $\endgroup$ – Alecos Papadopoulos Sep 14 '15 at 17:33
  • $\begingroup$ One reason your CB may have established higher interest rates is to entice Russian's to leave their money in the domestic (Russian) thereby mitigating capital flight (since Russia's economy has been performing poorly and the value of the currency has fallen sharply). $\endgroup$ – 123 Sep 15 '15 at 0:08
  • $\begingroup$ People what kind of buisness do you know which can survive under so much high interest rate? For the 25 years after CB was established we did not have a chance to take credit in comercial bank for less than 25% How economic could ever perform good in such conditions? $\endgroup$ – Marat Zakirov Sep 15 '15 at 5:43
  • $\begingroup$ It should be noted that the ruble has traditionally had an inflation rate around 8% (though varying wildly and peaking around 16% a couple of times in the past ten years). Only in the past 6 months has the rate fallen to what would be considered "normal" for most western currencies. $\endgroup$ – Hot Licks Dec 14 '17 at 23:41
  • $\begingroup$ @HotLicks You speak about consequence but I am asking about cause. The cause is CBR macrofinance polirtics. Again I ask same stupid question which I am pretty tired to ask. Give me an example of real sector industry (which generates real physical product or hi tec software) which can survive under > 12% of interest rate? If your real sector dies you will suddenly get high inflation this is 2x2=4. Look at year incomes of Russian CBR and bank sector its ENORMOUSLY HIGH. $\endgroup$ – Marat Zakirov Dec 15 '17 at 7:29
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I think the answer to your question does not require reference to economic theory as you are trying to understand why Russians cannot borrow at low rates. The prevailing high rates are not there for suppressing business activity, etc. This is something to do with the risk appetite of Russian commercial banks when dealing with domestic businesses.

Why are Russians facing rates as high as 25% when the base rate is 9%?

Central Bank's current base rate is 9%, also called repo rate. This rate is the main monetary tool used by CB to influence the interbank interest rates and the interest rates for loans, mortgages and savings. As you can see, the CB rate is low, but the commercial banks are adding huge premium (here it is 16%) to the base rate when lending to domestic businesses. Perhaps, they may face high default risks, political risk, high inflation, exchange rate risk, etc.

As a side note, this is a typical characteristic of a transition economy, that's said, Russians will face relatively high interest rates till they gain 'developed' status.

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  • $\begingroup$ I don't think the last statement is entirely true. Compare historical Brics interest rates here. Russia is characteristically higher than the rest. Also, look at lending rates data from the World Bank. Bolivia has a lower rate than Belgium. Chile has a similar rate than France. Estonia has a lower rate than Finland. I think the answer is more complex than what you make to believe. $\endgroup$ – luchonacho Aug 25 '17 at 9:29
  • $\begingroup$ Russians will face relatively high interest rates till they gain 'developed' status So russia will remain stay crypto colony untill forever? $\endgroup$ – Marat Zakirov Aug 25 '17 at 10:53
  • $\begingroup$ @luchonacho We always have outliers in the data, don't we? Albania, Azerbaijan, Lithuania, FYR Macedonia, Poland, Kazakhstan, Uzbekistan, etc. have had high interest rates for a long time. In general, a typical emerging economy experiences rapid productivity growth due to economic restructuring as a result interest rates (lending rates) remain high. The World Bank data you quoted must be Central Bank official rate data.Marat Zakirov appears to be interested in interest rates quoted by local bank on loans to local businesses and consumers. $\endgroup$ – london Aug 26 '17 at 0:31
  • $\begingroup$ @MaratZakirov, I see you have a good sense of humor. Russia's economy gained a bit of stability only after Putin came to power, then the sanctions since 2014 and problems galore again. Perhaps, one day Rouble will be accepted as a reserve currency as Putin envisiages. $\endgroup$ – london Aug 26 '17 at 0:33
  • $\begingroup$ @london Because of high interest rate and RCB policy overall we can't develop industry with high added value and that is why continue to be just a resource colony for Europe. Putin is an economic idiot ("thanks" to west which praises Nabiulina) there is no hope on changes until he and his friends rule. $\endgroup$ – Marat Zakirov Sep 12 '17 at 8:34
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Answering the questions on the title, high-interest rate of the central bank (or increasing the policy rate by the central bank) means that they are trying to suppress the economic activity in order to avoid high inflation. In most of the countries, the purpose of the central bank is to stabilize the price fluctuation. When they increase its rate, it will move other interest rates through financial agencies' activity. Higher interest rate can prevent firms to borrow more, thus the economy might become sluggish.

As for your remarks about banking rate, there are two things to mention. Firstly, interest rate depends on its duration. Usually longer the duration, higher the interest rate. The policy rate is usually a very short one, so it might be natural that the policy rate and bank rate differs. Second, the policy rate can be to some extent thought as a risk-free rate while banking rate might include risk premium of that bank. This is why the bank rate is higher than policy rate.

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  • $\begingroup$ means that they are trying to suppress the economic activity in order to avoid high inflation If you suppress economic activity you may also suppress (and actually you do) goods production. do: 1) Hight inflation 2) Hight rates 3) Less economic activity 4) Lower goods production repeat until economy is not dead $\endgroup$ – Marat Zakirov Aug 24 '17 at 14:08
  • $\begingroup$ The CB is not trying to suppress economic activity. Interest are in the low side of the cycle. Look here. $\endgroup$ – luchonacho Aug 24 '17 at 14:45
  • $\begingroup$ is not trying to suppress economic activity Tell this to previous commenter $\endgroup$ – Marat Zakirov Aug 25 '17 at 10:52
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A conventional answer would be that interest rates represents the rate of return Russian banks agree upon to lend money to physical clients/enterprises. If you believe this, you can create the following explanations. Two things come to my mind.

Option A: High Costs

Russian banks are unproductive and poorly managed. Their operational business is so inefficient that forces the bank to add a high premium on the interest rate.

Option B: High Risks

Russian banks have to lend money to clients with high risks. What would you do as a bank if you face many clients with high risks? You charge a higher price so in case somebody fails you may cover the sunk costs by revenues generated from credits to other clients. This is a simple way to `compensate' for uncertainty.

You can have a combination of two of course and that could already explain some of the differences you observe in the world and in Russia as well. Note for instance, that financial sanctions decreased stability of the Russian banks in a number of ways: a) enterprises (thus lenders) do not have access to external finance anymore and given the record low interest rates in Europe it means less access to cheap finance b) banks cannot finance on the external market themselves; thus if you have a liquidity problem you have less sources to take finance from.

This is not the end of the story however, as banks usually differentiate the interest rates they charge depending on the type of product they offer and a type of client, who wants to lend. If they do a poor job at differentiating between good and bad borrowers, another option arises:

Option C: Banks do poor job at separating the wheat from the chaff // Signalling does not work

Imagine you have two type of borrowers: risky and non-risky. If you would have perfect information on everyone, you could easily charge interest rates according to how risky the business of clients is. Lower rate for a risk-free guy, higher rate for a risky guy. But reality is more complex: you do not know for sure. And here they sit and show their documents, balance sheets, profits and loss statements etc both giving an impression how brilliant their business is. Yet if you know (post factum) that half of you clients go bankrupt, what do you do? Well, you just charge a high interest rate for both of the guys! Maybe it will be the wrong guy who will take your loan in the very end but at least you'll get high interest payments before he goes bankrupt. Maybe it is exactly the case with Russian banks. That is, maybe they just do a horrible job at investigating how reliable business of their lenders is. That indeed might be the case because many of Russian banks expanded their business in mid-2000 on the boom of the consumer credits. And it is not a heavy job to do: broad consumer base, high diversification - just give money to everyone and be happy. Yet now, when income stagnates, the business model does not work that good anymore. What do you need to do? Well, you need to start working with the enterprises. But lending to them is more complicated if you want to know for sure: you need knowledge of how business operates, what business-risks are relevant, how responsible is the team, how the industry feels in general and the list goes on. Maybe most of Russian banks do not know how to do it good and therefore keep charging high interest rates.

A Little Sidenote

Keep in mind two things however: a) My answer comes from the micro-perspective. The macro guys would probably point out on the issues related to capital flows and macro regulation, b) You better be clear which numbers you are reffering to and where do they come from. I've just checked the web-site of Sberbank. The web-site reports the following borrowing rates (minimum interest rate charged per annum): consumer credit (12.9%), morgage for flats in built houses (8.9%), security-free SME loan (17%), securitized SME loan (14.52%), SME loan for investment purposes (12.2%). Yes, these are minimal rates meaning that the actual rates are higher. But note two things: they are very far from 25% you mention (and I bet that the rates in private banks have to be lower if they want to compete with Sberbank) and there is a high variation between them: the maximum difference is around 8%. And we are talking just about one bank.

Thus, when you claim that the interest rates in Russia are way higher than in other developing countries you have to be sure that you compare apples with apples. And that you compare the averages of the apple sizes in both cases and do not take the maximum size on one side and the minimum size on the other. Hopefully you will find some of my explanations trustworthy ;)

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  • $\begingroup$ Artem, first of all thank you for your response. Macrospectivly speaking could you ever imagine any industrial plant (I am not even speaking about sci-fi plant for modern microchips etc) which can handle even 8% of interest rate? It is nonsense... The only business could take such high interest rate credit is trade, market speculation, etc. So making such high rate CBR actually forbids industry in Russia, why, for what purpose? The only segments of Russian real economy that is growing are segments with state funding with ~0% like military-industrial complex $\endgroup$ – Marat Zakirov Oct 24 '17 at 8:08

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