Russians are withdrawing more and more money from banks and prefer to pay in cash, amid the repeated interruptions of mobile internet caused by Ukrainian drone attacks and increasing tax pressures on companies.
The phenomenon is worrying authorities in Moscow, who are losing tax revenues at a time when they need additional resources to fund the war in Ukraine, according to a BBC analysis based on data from the Central Bank of Russia.
The largest increase in cash since the pandemic
Since the beginning of the year, an additional 1.560 trillion rubles (approximately 20 billion dollars) in cash have entered circulation. This is the largest increase recorded in the same period of a year since the Covid-19 pandemic.
One of the reasons is the interruptions of mobile internet, which the Kremlin frequently imposes during drone attacks launched by Ukraine. In many areas, card payments become impossible.
“Having cash on hand gives you a sense of control and security. If an emergency situation arises in the city, I know that I will be able to buy basic products even if the mobile network goes down,” said a woman from Moscow who wished to remain anonymous, speaking to the BBC.
This is not the first time Russians have turned to cash. The same phenomenon was observed after the announcement of partial mobilization in September 2022 and during the Wagner Group uprising in June 2023.
Taxes have increased, and companies are trying to hide a portion of their earnings
However, the increase in cash payments complicates tax collection at a time when the Russian economy is slowing down.
In May, the Ministry of Economy in Moscow reduced its economic growth forecast for 2026 to just 0.4%, which would be the slowest pace since 2022.
To bring in more revenue, the Kremlin raised the VAT from 20% to 22% starting in January and lowered the threshold at which small and medium-sized enterprises are required to pay this tax.
In these conditions, pharmacies, restaurants, beauty salons, and neighborhood stores are increasingly encouraging customers to pay in cash, so that a portion of their income does not appear in tax records.
“The stalls in our market have been closing one after the other because it is no longer profitable to remain open. Those who still sell ask customers to pay in cash whenever possible, so that fewer funds pass through the cash register,” said the owner of a small clothing store in the city of Pskov, speaking to the BBC.
According to a survey conducted in May by Opora Russia, the largest organization of small and medium-sized enterprises in the country, about 6% of entrepreneurs say they have resorted to "gray schemes" to cope with the new tax burden, including avoiding issuing fiscal receipts.
Sberbank CEO: "Under-the-table" salaries are making a comeback
Taras Skvortsov, the chief financial officer of Sberbank, Russia's largest bank, warned last month that there are "very serious signals" that more and more companies are paying "under-the-table" salaries.
“It's a very worrying moment. We don't see cash returning to the banking system through collection services, ATMs, or self-service terminals. It remains in people's hands,” he said, as quoted by Interfax.
Cash payments allow companies to declare lower earnings and stay below the VAT threshold, while salaries paid without documentation reduce taxes owed to the state.
The Kremlin is sabotaging its own fiscal strategy
Combating the underground economy has become one of the Kremlin's stated objectives. Before the VAT increase came into effect, Vladimir Putin warned that the new rules should not push companies into the gray economy and called for a "radical reduction in illegal work."
However, according to analyst Alexander Koliandr from the Center for European Policy Analysis (CEPA), the measures taken by authorities for security have the opposite effect.
“Part of the government is trying to extract as much money as possible from the population through higher taxes, fines, and other tax obligations. At the same time, another part of the government, in trying to combat so-called terrorist threats, is making tax collection more difficult through mobile internet interruptions,” he explained to the BBC.
Money goes back "under the mattress"
The reflex from the Soviet era of keeping savings at home seems to be returning, even though banks offer high interest rates.
At Sberbank, a one-year deposit of 100,000 rubles currently has an interest rate of 10%. However, Central Bank data shows that in May, Russians withdrew 550 billion rubles from bank accounts, of which 200 billion came from term deposits.
A resident of Moscow told the BBC that a merchant in a record store offered a discount if paid in cash. “He was very direct about the reason: higher taxes,” he said.
During the interruptions of mobile internet during the Victory Day ceremonies, he saw people running from one ATM to another in central Moscow, trying to find one that still had cash.