©picture alliance / Russian Look | Kremlin Pool
Russia is increasingly returning to cash. Since the beginning of this year, 1.56 trillion rubles in cash has been put into circulation, the sharpest increase for that period in years, excluding the COVID-19 pandemic. This is reported by The Moscow Times and BBC News, based on figures from the Russian central bank.
The shift is linked to the war against Ukraine, but also to practical problems in daily life. In several regions, mobile internet connections regularly go down after Ukrainian drone attacks have prompted security measures by the Kremlin. As a result, payment cards and digital payments sometimes fail to work, and more and more Russians are turning back to paper money and coins.
A woman in Moscow told the BBC that cash gives her a sense of control and security, because in an emergency she can still buy basic necessities even without a mobile network. But the shift to cash also has a tax-related reason. Since January, the Russian government has raised the VAT rate from 20 to 22 percent and lowered the threshold below which small and medium-sized businesses are required to pay taxes. According to the BBC, pharmacies, restaurants, beauty salons, and small shops are increasingly asking customers to pay in cash so that a portion of their revenue can remain off the books. Sberbank’s chief financial officer, Taras Skvortsov, warned that more companies are paying wages “in envelopes” and that the money is not flowing back into the banking system.
Small business owners are also feeling the pressure. A survey by the business association Opora Russia shows that about 6 percent are already using “gray schemes,” such as hiding revenue or failing to issue receipts. In a market town in western Russia, a vendor said that stalls are closing one by one because it is no longer profitable to stay open. The figures underscore the slowdown in Russia’s war economy. In May, the Ministry of Economy lowered its growth forecast for this year to 0.4 percent. According to the central bank, Russians withdrew 550 billion rubles from bank accounts in May alone, including 200 billion from term deposits. Despite high savings interest rates, cash therefore remains the safe choice, while at the same time the government wants to extract more money from the economy to finance the war.
This is how Russians are complicating Putin’s war
This trend is hurting Putin’s war chest in three ways: the government is collecting less tax revenue, has less control over cash flows, and must work harder to close the growing budget deficit. After all, because Russians are using cash more often, more revenue is slipping out of the tax authorities’ sight. As a result, VAT, payroll, and other tax revenues are declining, just when Moscow needs more money to finance the war. The shift toward cash also facilitates the black market and “envelope” wage payments, preventing money from flowing back into the banking system and reducing the government’s control over the economy. And that is particularly painful because Russia is already grappling with rising war costs, higher taxes, and a slowing economy; according to the BBC, this means the Kremlin has to work harder to secure every ruble.
©picture alliance / Russian Look | Kremlin Pool