Russians turn to cash, straining slowing wartime economy
Amid rising uncertainty from the war, cash withdrawals in Russia surge, complicating tax collection and exacerbating the economic slowdown.
Russians are increasingly hoarding cash, adding pressure on the already slowing wartime economy. According to BBC sources, cash in circulation spiked after President Vladimir Putin announced partial mobilization in September 2022 and during the Wagner mercenary group mutiny in June 2023. This shift makes it harder for the state to collect taxes as it faces a widening budget deficit and needs funds for the war in Ukraine.
Although Russia's oil and gas sector benefits from rising oil prices following the Iran war, the broader economy is decelerating. In May, the economy ministry cut its GDP growth forecast for 2026 to 0.4%, the weakest since 2022.
To boost revenues, the Kremlin raised VAT from 20% to 22% in January and lowered the threshold for small and medium businesses, pushing many to the brink. With margins squeezed by higher taxes and a slowing economy, pharmacies, restaurants, beauty salons, and shops increasingly steer customers toward cash to keep income off the books.
A vendor in Pskov market said stalls are closing one after another, and most traders ask for cash to reduce money going through the till. Sberbank's CFO Taras Skvortsov warned of "very serious signs" that more businesses pay wages in envelopes, with cash not returning to the banking system.
A May survey by Opora Russia found 6% of entrepreneurs turned to "grey schemes" to cope with the tax burden, including avoiding cash-register receipts. Cash payments help understate turnover and avoid payroll taxes.
The Kremlin aims to crack down on the shadow economy. Before the VAT hike, Putin warned the rules must not push firms into the shadows and called for reducing illegal employment.
Analysts note that government measures—squeezing money through higher taxes and fines while shutting down mobile internet for security—undermine each other. The latter hinders tax collection as people cannot access digital payments.
Despite double-digit deposit rates (e.g., 10% at Sberbank), the Soviet-era habit of keeping cash "under the mattress" returns. Central bank data show Russians withdrew 550 billion rubles from accounts in May, including 200 billion from term deposits. A Moscow copywriter reported a vinyl shop offering a discount for cash due to higher taxes. During the Victory Day internet shutdowns, people struggled to withdraw cash from ATMs, with one woman searching for a machine that still had banknotes.
