Russia’s cash habit is back, and the state is paying for it

Cash has a habit of resurfacing when trust thins out. In Russia, it is back in fashion for reasons that are hardly flattering: mobile internet shutdowns are disrupting card payments, taxes are rising, and businesses under pressure are trying to keep more income off the books. The irony is neat enough to write itself. A state that wants tighter control is helping push economic activity into the shadows.

According to Central Bank figures analysed by the BBC, Russia has added 1.56tn roubles, or about £14.8bn and $20bn, in cash to circulation since the start of the year. That is the biggest increase for the equivalent period in any year outside the Covid-19 pandemic. The immediate trigger is easy to see. After Ukrainian drone attacks, the Kremlin has repeatedly shut down mobile internet across large parts of the country, leaving many people unable to pay by card. Officials say the outages are meant to counter the strikes.

The effect is not limited to panicked shoppers and cautious households. It is also changing how firms behave. With margins squeezed by a weaker economy and a VAT rise from 20% to 22% in January, pharmacies, restaurants, beauty salons and corner shops are increasingly steering customers towards cash. The aim is simple enough: less money through the till, less tax paid. Opora Russia, the country’s largest small and medium-sized business association, said in a May survey that about 6% of entrepreneurs had turned to so-called grey schemes, including avoiding cash-register receipts.

The state, naturally, is not amused. It has lowered the threshold at which small and medium-sized businesses must pay VAT, and President Vladimir Putin has warned that the new rules should not push firms into the shadows. He also called for a radical reduction in illegal employment. Yet the pressure runs in both directions. Alexander Kolyandr of the Center for European Policy Analysis told the BBC that one arm of government is trying to squeeze more money out of people through taxes and charges, while another, by shutting mobile internet to counter security threats, is making tax collection harder.

The numbers suggest the habit is spreading beyond shop counters. Central bank data showed Russians withdrew 550bn roubles from bank accounts in May, including 200bn roubles from fixed-term deposits. Taras Skvortsov, chief financial officer of Sberbank, said there were very serious signs that more businesses were paying wages in envelopes, and that cash was not returning to the banking system through collection points, ATMs or self-service terminals. In other words, it is staying where the state would rather not have it.

The broader backdrop is no kinder. The economy ministry cut its GDP growth forecast for 2026 to 0.4%, pointing to the weakest growth since 2022. Oil and gas revenues have been helped by a recent rise in prices after the Iran war, but that does not disguise the wider slowdown. The Kremlin has raised VAT and tightened the screws because it needs revenue to fund the war in Ukraine. That need is only growing, while the tax base becomes harder to police.

There is also a more old-fashioned response to uncertainty: hide the cash and hope for the best. A Moscow woman told the BBC that holding banknotes gives her a sense of control and security, especially if the mobile network goes down. Anton, a copywriter in Moscow, said a vinyl shop offered him a discount for paying in cash and was explicit about the reason: higher taxes. He also saw people struggling to withdraw money at a flower market during the tightened security around Victory Day in May. One woman, he said, moved from ATM to ATM looking for one that still had banknotes.

Russia’s wartime economy is discovering a familiar truth. When the state makes payments less reliable and taxes more punishing, people do not suddenly become more compliant. They become more inventive. And the cash ends up where the authorities least want it: outside the system, and harder to count.

Written by Freya Stensrud freya.stensrud@alpineweekly.com