Interest rates being paid on deposits are coming under scrutiny, as the falling Central Bank of Russia refinancing rate and lending rates ease, with inflation grinding to a virtual halt.

The economic downturn which has followed in the wake of the global credit crunch of last winter has brought at least one upside for Russia’s economic policy makers. The last 6 weeks have seen virtually no inflation, and an annual inflation rate which motored through last year at more than 13% is now back in single figures and expected to head lower still.

The easing of Russia’s chronic inflationary problem through the course of this year has allowed the Central Bank of Russia to cut the key refinancing rate seven times since April – bringing it to 10% – allowing retail banks to drop lending rates.

But that is throwing the spotlight on deposit rates, amidst claims some banks – in particular some smaller banks – are offering needlessly high rates, in some cases as high as 18%, which is forcing other banks to follow suit.

Deutsche Bank Russia Chief Economist, Yaroslav Lissovolik, says the situation reflect the still tight liquidity environment faced by some banks, and the need to fight for every last drop of funding.

“The reason why deposit rates are rigidly high is due to the intense competition amongst banks for every marginal depositor that is out there. The competition is high because in the course of this year, during the economic downturn a lot of the banks sustained losses, there were non-payments. And, of course, deposits are the most secure financing base.”

But the financial environment still requires liquidity being carefully handled. With a possible second wave of non performing loans still to come which could pressure the liquidity of the entire banking system, the Central Bank of Russia doesn’t want some banks sucking up the available liquidity at the expense of others, and forcing most of the system to keep higher deposit rates.

In July it agreed a general cap of 18% on deposits with major banks. But now, Deputy Central Bank Chairman, Gennady Melikyan, says it's threatening to go a step further and take licenses off what it sees as irresponsible banks.

“The banks that offer sky-high deposit rates have managed to attract plenty of new clients with savings accounts. These financial institutions think the Central Bank will not dare take away their operating licenses. Believe me, we will. We at the Central Bank think these banks are acting irresponsibly.”

The Central Bank of Russia now sees a realistic deposit rate, after further refinancing rate cuts since July, as somewhere between 12 and 15%.

Yaroslav Lissovolik says the fight for available funding could ease with the state taking steps to bolster both its finances and banking system liquidity in the new year.

“I think one of the steps that will certainly help Russian corporates and banks specifically in this respect, is the issuance of Eurobonds by the sovereign, by Russia itself, in the course of the first quarter of next year.”

But until these measures take effect, and until banks are surer about the strength of their loan portfolios and asset bases, competition for funding will remain tight. Those with money to deposit can shop around, but they need to be wary lest the attraction mask desperation, and a risk they might not be so keen to put their money into.