The Russian economy is facing a unique challenge as the country's citizens are increasingly turning to cash, a trend that has significant implications for the state's tax collection efforts and broader economic stability. This shift is not merely a reaction to the war with Ukraine, but a complex interplay of factors that highlight the resilience of Soviet-era habits and the challenges of modern economic management.
One of the most striking aspects of this trend is the sheer volume of cash being added to circulation. Since the start of the year, Russia has injected 1.56 trillion roubles into the economy, the largest increase for any comparable period outside the Covid-19 pandemic. This surge in cash is not just a temporary phenomenon; it reflects a deeper shift in how Russians are managing their finances. The rise in cash usage is particularly notable in the context of mobile internet shutdowns, which have become a regular occurrence due to Ukrainian drone attacks. These shutdowns disrupt card payments, forcing many to rely on cash.
The psychological aspect of this trend is fascinating. As one Moscow resident explained, having cash on hand provides a sense of control and security. In times of uncertainty, whether it's due to economic stress or security concerns, cash becomes a tangible asset. This is especially true for basic necessities, where the reliability of card payments can be uncertain. The Soviet-era instinct to keep money 'under the mattress' is making a comeback, despite the higher returns on bank deposits.
However, the implications of this trend are far-reaching. The state is finding it increasingly difficult to collect taxes, just when it needs every rouble to fund the war in Ukraine. The Kremlin's efforts to boost revenues by hiking VAT and lowering thresholds for small and medium-sized businesses have pushed many firms to the brink. This has led to a situation where pharmacies, restaurants, beauty salons, and corner shops are steering customers towards cash to avoid taxes. The shadow economy is growing, with about 6% of entrepreneurs turning to 'grey schemes' to cope with the new tax burden.
The situation is further complicated by the fact that the broader economy is slowing. The Russian economy ministry's forecast for 0.4% GDP growth in 2026 is the weakest since 2022. The oil and gas sector, which accounts for a quarter of state revenues, has benefited from rising oil prices, but this is not enough to offset the broader economic slowdown. The Kremlin's strategy of squeezing more money from people through higher taxes and fines is being undermined by its own actions, such as the mobile internet shutdowns.
The challenge for the Kremlin is to balance the need for tax revenue with the risk of pushing more businesses into the shadow economy. The recent increase in cash usage is a symptom of a deeper issue: the struggle to manage an economy under constant stress. The state's efforts to crack down on the shadow economy are laudable, but they must be accompanied by measures to address the underlying economic challenges. The trend towards cash usage is a stark reminder of the complexity of economic management in times of war and uncertainty.
In my opinion, the Russian government needs to reconsider its approach to taxation and economic policy. While the need to fund the war is paramount, the current strategy of squeezing more money from people is not sustainable. The state must find a way to balance the need for tax revenue with the risk of pushing more businesses into the shadow economy. The trend towards cash usage is a wake-up call, highlighting the need for a more nuanced and flexible approach to economic management. The future of the Russian economy depends on the government's ability to adapt to changing circumstances and find a sustainable path forward.
