The Russian economy is facing a unique challenge as the country's citizens increasingly turn to cash, a trend that has been accelerated by the ongoing war with Ukraine and the resulting economic strain. This shift towards cash is not just a temporary reaction but a significant development with far-reaching implications for the country's financial landscape.
One of the primary drivers of this change is the disruption caused by mobile internet shutdowns, which have become a common occurrence due to the threat of Ukrainian drone attacks. These shutdowns have made it difficult for many Russians to use their cards for payments, leading to a natural return to cash as a more reliable and secure method of transaction.
The Central Bank's figures reveal a dramatic increase in cash circulation, with 1.56 trillion roubles added to the system since the start of the year. This is a staggering amount and represents the largest rise for the equivalent period outside the Covid-19 pandemic. The timing of this surge is particularly interesting, as it coincides with the government's efforts to counter the drone strikes, which have led to widespread internet disruptions.
The impact of this trend goes beyond individual convenience. It poses a significant challenge for the state's tax collection efforts, which are already strained by a widening budget deficit and the need to fund the war in Ukraine. As more people opt for cash, the government's ability to raise revenue through taxes is being undermined, making it even more difficult to sustain the war effort.
This shift towards cash also reflects a broader economic slowdown in Russia. The oil and gas sector, a major source of state revenue, has benefited from rising oil prices, but the overall economy is struggling. The Russian economy ministry's GDP growth forecast for 2026 has been cut to 0.4%, indicating a weak economic outlook. The government's response to this slowdown includes increasing VAT and lowering the threshold for small and medium-sized businesses to pay it, which has pushed many already struggling firms to the brink.
As a result, businesses are increasingly steering customers towards cash payments to avoid the higher tax burden. This is evident in the closure of stalls at markets and the widespread practice of asking customers to pay in cash, ensuring that less money goes through the till. The situation is so dire that some entrepreneurs are turning to 'grey schemes' to cope with the new tax burden, including avoiding cash-register receipts and paying wages in envelopes to stay below the VAT threshold and avoid payroll taxes.
The Kremlin's goal of cracking down on the shadow economy is now more challenging. Before the VAT rise, President Putin warned against pushing firms into the shadows and called for a reduction in illegal employment. However, the internet shutdowns and the economic pressure are making it harder to achieve this goal. The government's efforts to squeeze money from people through higher taxes and fines are being undermined by the very measures designed to counter terrorist threats.
This trend also taps into a Soviet-era instinct to keep money 'under the mattress,' despite the relatively high returns on bank deposits. The central bank's efforts to combat war-fuelled inflation have kept interest rates high, but the desire for security and control over one's finances remains a powerful force. As a result, Russians are withdrawing cash from bank accounts, including fixed-term deposits, to ensure they can still buy basic necessities during emergencies.
The situation is not just about individual choice but also has significant implications for the broader economy. The shift towards cash is making it harder for the government to collect taxes, which are crucial for funding the war. It also reflects a deeper economic challenge, with the overall slowdown making it difficult to sustain the necessary revenue streams. The government's response to this challenge will be crucial in determining the future trajectory of the Russian economy and its ability to navigate the ongoing crisis.
