The prolonged war in Ukraine, coupled with economic slowdown and repeated mobile internet disruptions, has led to a rapid increase in cash demand in Russia.
On July 19, the BBC analyzed data from the Central Bank of Russia, revealing that an additional 1.56 trillion rubles (approximately $29.7 billion) has been injected into circulation this year. This marks the largest increase for the same period since the COVID-19 pandemic.
The surge in cash demand is attributed to the Russian government's mobile internet restrictions. Following ongoing drone attacks from Ukraine, the government has repeatedly limited mobile internet access across the country, citing the need to disrupt drone operations.
As internet outages prevent the use of card and mobile payments, citizens are reportedly stockpiling cash in preparation for emergencies, according to the BBC.
Additionally, the government's tax increases have contributed to the rise in cash transactions. In January, Russia raised the value-added tax rate from 20% to 22% to cover war expenses and lowered the revenue threshold for small and medium-sized enterprises subject to VAT.
As tax burdens increase, many businesses, including restaurants, pharmacies, hair salons, and local shops, are increasingly requesting cash payments from customers to underreport their sales. Reports indicate a rise in the practice of paying employees in cash to avoid payroll taxes, known as 'envelope wages.'
A survey conducted in May by Opora Russia, the country's largest small business association, found that about 6% of business owners are utilizing 'gray market' methods, such as not issuing cash receipts, to reduce their tax liabilities.
Despite the Central Bank of Russia maintaining high interest rates to curb inflation triggered by the war, bank deposits are seeing a withdrawal trend. According to the Central Bank, 550 billion rubles (approximately $10.5 billion) were withdrawn from bank accounts in May alone, with 200 billion rubles (about $3.8 billion) coming from time deposits.
As economic and social instability due to the war grows, there is a resurgence of the mentality to keep cash at home, reminiscent of the Soviet era. Cash withdrawals surged during the partial mobilization announcement in September 2022 and the armed rebellion by the Wagner Group in June 2023.
The increase in cash transactions is exacerbating the Russian government's struggles with budget deficits. As cash payments rise, it becomes easier for businesses to underreport sales and wages, complicating tax collection.
In May, the Russian Ministry of Economic Development lowered its economic growth forecast for the year to 0.4%. If this projection holds, it would mark the lowest growth rate since the war began in 2022.
While the oil and gas sector, which accounts for about a quarter of government revenue, benefits from rising international oil prices due to the war, the overall economic growth is slowing due to the financial burdens of prolonged conflict, high interest rates, and increased taxes.
Taras Skvortsov, Chief Financial Officer of Sberbank, Russia's largest bank, expressed concern, stating, "Cash is not returning to the banking system through cash transport or ATMs; it is remaining in people's hands. This is a very worrying situation."
* This article has been translated by AI.
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