In brief
Amid Ukraine conflict, Russian consumers and businesses are increasingly turning to cash amid mobile‑internet cuts, rising taxes and an uncertain economy. Central Bank data show a record 1.56 trillion roubles added to circulation, the largest non‑Covid surge. The shift undermines state tax collection as small firms use cash to stay under VAT thresholds, while the government’s move to raise VAT from 20 % to 22 % keeps many businesses on the brink. High‑interest bank deposits are tempting yet cash remains preferred for both day‑to‑day spending and off‑book wages. The situation underscores deepening economic fragility as war costs rise.
Russians are returning to cash in record numbers, a trend that highlights how the long‑running conflict with Ukraine is tightening the nation’s finances. Since the start of the year, cash in circulation has risen by 1.56 trillion roubles (about £14.8 billion), a level not seen since the Covid‑19 pandemic, according to Central Bank figures.
The surge is linked to repeated drone attacks on Russian territory that prompt the Kremlin to sever mobile networks to disrupt communications. With card payments cut off, people seek a ‘buffer’ against uncertainty.
A city woman in Moscow explained that “having cash on hand gives you some sense of control and security.” She added that in an emergency, cash is the only reliable way to buy essentials if the mobile network goes down.
The fall‑back to cash is easing the state’s efforts to collect tax, arriving at a time when the government faces a widening budget deficit while trying to fund the war. A recent VAT hike – from 20 % to 22 % – and a lowered threshold for small‑ and medium‑sized firms has pushed many businesses to the edge.
Pharmacies, restaurants, beauty salons and corner shops are increasingly offering discounts for cash payments, helping them sidestep higher taxation. In Pskov, a small clothing shop owner noted that her market stalls are closing because it is no longer profitable to stay open.
The CFO of Sberbank, Russia’s largest lender, warned that businesses are now paying wages “in envelopes” under the table, a practice that further keeps money out of the formal economy.
About 6 % of entrepreneurs admitted using grey‑nominee schemes to avoid the new tax burdens, including forgoing cash‑register receipts. Cash transactions allow businesses to under‑report turnover to stay below the VAT threshold and to avoid payroll taxes.
The drive to keep cash under the surface is compounded by high interest rates on deposits – a one‑year fixed‑term deposit at Sberbank yields 10 % – yet people still prefer cash for day‑to‑day spending. In May, Russians withdrew 550 bn roubles, including 200 bn from fixed‑term deposits.
Government officials are concerned that the inflation‑fueled war economy is pushing more firms into the shadows, especially as they struggle to pay the elevated VAT. The conflict, combined with the state’s security‑focused decisions, is creating a paradox: the very measures that aim to secure the nation further erode the tax base.
Despite great returns on bank deposits, many Russians still withdraw cash, especially during heightened security periods such as Victory Day when mobile‑internet shutdowns intensify. The result is an economy increasingly reliant on cash, straining the state’s fiscal capacity.
