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In Russia, expats should be concerned with beating inflation and taxes to preserve the value of their savings. As a general rule, you shouldn’t keep your Ruble banknotes and coins for long. The same goes for current accounts that don’t pay interest.
Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with inflation in Russia. If you plan to return to your home country, you might prefer beating the inflation rate of that country.
Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside Russia but you invest in any Ruble assets, you are effectively making a currency bet.
Inflation in Russia
Inflation currently stands slightly at 6.5%.
Russian inflation has historically been very high. In the 1990s, the inflation rate could be a 3-digit-number, if not a 4-digit number. In the 2000s, inflation was generally between 8% and 20%. Nowadays, Russian policymakers have successfully stabilised and anchored inflation above 5%, but below the 10% mark. Over the long run, it is largely possible to see inflation going to the same low levels as those seen in Western economies, say 2%.
Should inflation actually go down substantially, one could expect market interest rates to go down. In such circumstances, Russian asset prices would rise, perhaps violently.
For more information on monetary policy, see Foreign Exchange for Expats in Russia.
Russian savings accounts generally have an inflation-busting yield. Term deposits are more likely to attract a higher yield. Typically, yields on an easy-access savings account generally exceed 6%. Even with high inflation, this is fairly good if you compare this to US or UK rates.
Yields can shrink even lower if the central bank decides to lower the prime rate. It should be noted that Russia has been quite happy with imposing negative real interest rates on its savers over the past 15 years, to above -7% during the pre-2008 oil boom. However, the outlook for Russian savers is unlikely to be so harsh in the future insofar as Russia is gradually moving to a low-inflation economy.
When it comes to investments, expats are generally better off parking their money in the currency with a high real interest rate, but this rule is best not observed too strictly.
Russian securities (costs)
Do consider carefully the applicable transaction costs if you wish to trade Russian securities. Here are the main costs you should be aware of:
Commissions are generally higher if you invest through an overseas stockbroker.
Russian securities (overview)
Russia is trying to expand its financial markets, with Moscow as a world-class financial centre.
Be wary of volatility when you invest in securities. Volatility is heavily dependent on the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on interest rates. If they are going up, stock prices should go down. At the moment, interest rates in Russia can go either way, depending on what the central bank will actually do.
You are responsible for deciding how much risk you want to take on. There is no set answer to this question, as this largely depends on your personal circumstances. A qualified wealth manager may assist you regarding this matter.
On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.
A lot of money can be made on currency bets, but a lot of money can be lost as well. (see the introductory paragraphs for hidden currency bets when you are an expat)
Russia is an emerging country, and emerging economies are strongly subject to “hot money” flows. Hot money refers to money that frequently moves across borders in order to make profits on FX capital gains or interest rate differentials (carry trade strategies). In many cases, hot money flows involve borrowing a low-yield currency (USD, HKD, CHF or JPY) in order to invest in a high-yield currency. As most emerging countries have high-yield currencies, their currencies tend to appreciate steadily over a long period but they are potentially exposed to very sharp downturns (e.g. when developed countries tighten monetary policy). Major examples include, but are not limited to:
As of 2013, emerging countries are generally much less vulnerable to hot money flows than they were 15 years ago. This is the result of economic resilience over the past decade, and, to some extent, central bank monitoring.
As an expatriate, you don’t necessarily want to be a speculator. Therefore, it is essential that you take some steps to reduce your FX exposure. If you park your money in a currency which you eventually intend to spend, you have little FX exposure. Otherwise, you are effectively making a currency bet.
Ray is a Canadian citizen who has been posted to Moscow for three years. He will return to Canada later on.
His net salary is RUB3m per year, but he intends to spend only RUB1m per year. He thinks it would be appropriate to save an additional RUB500,000 for a rainy day whilst he is in Russia.
Ray is effectively making a currency bet if he fails to convert 3m * 3 – 1m * 3 – 500,000 = RUB5.5m into Canadian dollars.
Alternatively, FX exposure can be reduced (or increased) through the purchase of relevant derivative products (e.g. FX options, swaps or forward contracts). Derivatives can be highly effective but they are quite complex, especially for individuals with little financial education. It is advisable to seek professional advice before taking action.
Overseas investments generally
If you wish to invest in overseas assets, there are a few points you need to check:
Retaining overseas assets might be helpful if you plan to return to your home country. Additionally, investing in your home country might be a good solution if you think you have too little experience with the Russian financial markets.
The first thing to check is your residence status for tax purposes. See TAXATION – Overview of Tax Issues for Expats in Russia.
Your worldwide investment income is taxable in Russia if you are resident in Russia for tax purposes. If you are non-resident, you are liable to tax in Russia on your Russian-source income only.
Residents generally benefit from lower tax rates, with the headline rate at 13%, the dividend rate at 9%, and an exemption for many capital gains. For more information on investment taxation, see TAXATION – Investment Taxation for Expats in Russia.
Sections in FINANCIAL CONSIDERATIONS IN RUSSIA:
» Money Transfers for Expats in Russia
» Foreign Exchange for Expats in Russia
» Banking for Expats in Russia
» Pensions for Expats in Russia
» Investment for Expats in Russia
» Wealth Management for Expats in Russia
» Property Investment for Expats in Russia
» Insurance for Expats in Russia
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