Russians turn to cash, putting more strain on slowing wartime economy

Russians are returning to cash, as mobile internet shutdowns disrupt card payments, and more businesses seek to dodge tax under mounting financial pressure more than four years into the war with Ukraine.

Russia has added 1.56tn roubles (£14.8bn; $20bn) in cash into circulation since the start of the year – the biggest rise for the equivalent period in any year outside the Covid-19 pandemic, according to Central Bank figures analysed by the BBC.

The spike comes amid a wave of Ukrainian drone attacks, which have repeatedly led the Kremlin to shut down mobile internet across large swathes of the country, leaving many unable to pay by card. The government says the aim of the shutdowns is to counter the drone strikes.

“Having cash on hand gives you some sense of control and security,” one woman in Moscow told the BBC on condition of anonymity. “If there’s an emergency in the city, I know I’ll still be able to buy basic necessities, even if the mobile network goes down.”

The latest increase follows several earlier wartime surges in cash withdrawals as Russians have sought a buffer against uncertainty.

Cash in circulation jumped after President Vladimir Putin announced a partial mobilisation in September 2022 and during a brief mutiny by the Wagner mercenary group in June 2023.

Now, the shift is making it harder for the state to collect tax, just as it faces a widening budget deficit and needs every rouble it can raise to fund the war in Ukraine.

Although Russia’s oil and gas sector, which accounts for about a quarter of state revenues, has benefited from a recent rise in oil prices following the Iran war, the broader economy is slowing.

In May, the Russian economy ministry cut its GDP growth forecast to 0.4% for 2026, putting the country on course for its weakest economic growth since 2022.

To boost revenues, the Kremlin hiked VAT from 20% to 22% in January, and lowered the threshold at which small and medium-sized businesses have to pay it, pushing many already struggling firms to the brink.

With margins squeezed by higher taxes and a slowing economy, pharmacies, restaurants, beauty salons and corner shops are increasingly steering customers towards cash to keep more income off the books.

“Stalls at our market have been closing one after another because it’s no longer profitable to stay open,” said one woman, who runs a small clothing shop at a market in the western city of Pskov.

“Most of those still trading ask customers to pay in cash whenever they can, so less money goes through the till.”

Taras Skvortsov, chief financial officer of Russia’s largest lender Sberbank, warned last month that there were “very serious signs” that more businesses were paying wages “in envelopes” under the table.

“This is a very worrying moment… We are not seeing cash return to the banking system through cash collection, ATMs or self-service terminals,” said Skvortsov, in comments cited by state news agency Interfax. “It is staying in people’s hands”.

About 6% of entrepreneurs said they had turned to “grey schemes” to cope with the new tax burden, including avoiding cash-register receipts, according to a May survey by Russia’s largest SME association, Opora Russia.

Cash payments help businesses understate turnover to stay below the VAT threshold, while cash wages help them avoid payroll taxes.

Cracking down on the shadow economy has become a key goal for the Kremlin. Before the VAT rise took effect, Putin warned the new rules must not push firms into the shadows and called for a “radical reduction in illegal employment”.

“One arm of the government is trying to squeeze as much money as possible out of people through higher taxes, fines and other charges,” Alexander Kolyandr, a non-resident senior fellow at the Center for European Policy Analysis, told the BBC.

“But another, in trying to counter so-called terrorist threats, is undermining that strategy by making it harder to collect tax,” he said, referring to the mobile internet shutdowns.

The Soviet-era instinct to keep money “under the mattress” is making a comeback despite double-digit returns on bank deposits, which have been kept high as the central bank battles stubborn, war-fuelled inflation.

A 100,000-rouble (£950; $1,280) one-year fixed-term deposit at Sberbank, Russia’s largest lender, currently pays 10% interest.

Even so, central bank data showed Russians withdrew 550bn roubles from bank accounts in May, including 200bn roubles from fixed-term deposits.

Anton, a copywriter living in Moscow, said a vendor at a vinyl shop offered him a discount for paying in cash. “He was upfront about the reason, higher taxes,” he told the BBC.

When mobile internet shutdowns intensified during heightened security around Russia’s Victory Day celebrations in May, he said he saw people struggling to withdraw money to spend at a flower market in central Moscow.

“There was a woman going from one ATM to another, looking for one that still had banknotes.”