The Russian economy is facing a unique challenge as the country's citizens increasingly turn to cash, driven by a combination of factors related to the ongoing war with Ukraine and the government's response to it. This shift has significant implications for both the economy and the state's ability to collect taxes, highlighting the complex dynamics at play in Russia's financial landscape.
One of the primary reasons for this trend is the disruption caused by Ukrainian drone attacks, which have led to widespread mobile internet shutdowns across the country. These shutdowns, aimed at countering the drone strikes, have made it difficult for many Russians to pay by card, prompting them to opt for cash instead. This is particularly interesting given that Russia's oil and gas sector, a significant source of state revenue, has seen a boost due to rising oil prices following the Iran war. However, the broader economy is slowing, with the GDP growth forecast for 2026 being cut to 0.4%, indicating a challenging economic environment.
The increase in cash circulation is not a new phenomenon. It has occurred during previous wartime surges, such as when President Vladimir Putin announced a partial mobilization in September 2022 and during the Wagner mercenary group's brief mutiny in June 2023. However, the current situation is making it harder for the state to collect tax, exacerbating the budget deficit and the need for every rouble to fund the war. This is a critical issue, especially when considering the government's efforts to boost revenues through measures like hiking VAT and lowering the threshold for small and medium-sized businesses to pay it.
The shift towards cash is also impacting businesses, with pharmacies, restaurants, beauty salons, and corner shops steering customers towards cash payments to keep more income off the books. This is a response to the higher taxes and slowing economy, which are squeezing margins and making it less profitable to stay open. As a result, many stalls at markets are closing, and those still trading are encouraging cash payments to avoid the higher tax burden.
The phenomenon of paying wages 'in envelopes' under the table is also on the rise, according to Taras Skvortsov, the chief financial officer of Russia's largest lender, Sberbank. This practice is a response to the new tax burden and the difficulty in collecting tax due to mobile internet shutdowns. The shadow economy is becoming a significant concern for the Kremlin, which has set a goal to reduce illegal employment and crack down on these practices.
The Soviet-era instinct to keep money 'under the mattress' is making a comeback, despite the double-digit returns on bank deposits. This is a surprising development, given the high interest rates offered by banks. However, it highlights the trust issues and economic uncertainty that Russians are facing. The central bank's data shows that Russians withdrew a significant amount of money from bank accounts in May, including from fixed-term deposits, indicating a preference for cash.
In conclusion, the Russian economy is experiencing a unique challenge as citizens turn to cash, driven by a combination of factors related to the war and the government's response. This shift has significant implications for the economy and tax collection, and it highlights the complex dynamics at play in Russia's financial landscape. The government's efforts to boost revenues and reduce the shadow economy are crucial in addressing these challenges and ensuring the country's economic stability.
