As safe as the Bank? : Household financial behaviour and economic reasoning in post-soviet Russia

Working Paper, NUPI

This study examines the financial behaviour of Russian households from the collapse of communism to the financial melt down in August 1998. By transforming savings into investment, financial intermediaries are important to economic growth. In post-Soviet Russia, financial intermediaries were increasingly unable to attract new household savings, as people turned to foreign currency. What determined the allocation of household savings? The study considers the three main alternatives households could turn to: The state savings bank; commercial financial companies; and foreign currency, mainly dollars. But how do we go about to explain the behaviour of millions of individuals over time? Economists usually assume that people maximise returns on their assets. Financial behaviour would then reflect economic variables such as interest rate, exchange rate and inflation. Such a view fits uneasily with observed behaviour in post-Soviet Russia. However, why would people not allocate their savings in the most profitable way? This study holds that to understand why people do what they do, we should listen carefully - although not uncritically - to what they say and how they say it. On this view, we can explain the behaviour of individuals only if we can understand them. And - since social phenomena are constituted by the behaviour of individuals - such understanding is crucial to the causal explanation of macro level phenomena. The historical narrative thus becomes an important vehicle for explanation of the contemporary world. Through analysis of discourses on financial institutions, as they appeared in newspapers of the day and as I have been able to gather from interviews conducted in 2004, this study identifies certain dramatic events that altered the way Russians perceived different financial institutions and their view on trust, risk and profitability, and finds that such changes in perception go a long way to explain the changes in observed behaviour in this period.