The Russian economy is facing a unique challenge as the country's citizens increasingly turn to cash, creating a complex web of consequences for the state and its people. This shift is driven by a combination of factors, including mobile internet shutdowns, tax evasion, and a desire for financial security amidst the ongoing war with Ukraine.
The Central Bank's figures reveal a significant increase in cash circulation, with 1.56 trillion roubles added since the start of the year. This surge in cash usage coincides with a series of Ukrainian drone attacks, which have prompted the Kremlin to shut down mobile internet in various regions. The shutdowns, aimed at countering the drone strikes, have inadvertently made it more challenging for many Russians to pay by card, prompting a return to cash.
One woman in Moscow shared her perspective, emphasizing the sense of control and security that cash provides during emergencies. This sentiment reflects a broader trend of Russians seeking a buffer against uncertainty, as evidenced by previous spikes in cash withdrawals during the partial mobilization and the Wagner mutiny.
However, the shift towards cash has significant implications for the state's tax collection efforts. With a widening budget deficit and the need to fund the war, the government is struggling to maintain tax revenue. The slowdown in the broader economy, exacerbated by the oil and gas sector's reliance on fluctuating oil prices, further complicates matters.
The Kremlin has responded by increasing VAT and lowering the threshold for small and medium-sized businesses to pay it, pushing many already struggling firms to the brink. This tax hike has led to a rise in cash transactions, as businesses try to keep more income off the books. Pharmacies, restaurants, beauty salons, and corner shops are increasingly steering customers towards cash payments, contributing to the shadow economy.
Taras Skvortsov, the chief financial officer of Russia's largest lender, Sberbank, highlighted the concerning trend of businesses paying wages 'in envelopes' under the table. This practice, known as 'grey schemes', is on the rise, with 6% of entrepreneurs avoiding cash-register receipts and engaging in tax evasion. The government's efforts to combat the shadow economy are complicated by the mobile internet shutdowns, which make tax collection more challenging.
The Soviet-era instinct to keep money 'under the mattress' is making a comeback, despite the relatively high returns on bank deposits. Despite double-digit interest rates, Russians are withdrawing cash from bank accounts, including fixed-term deposits. This behavior further underscores the economic uncertainty and the desire for tangible assets.
The situation raises deeper questions about the balance between economic stability and national security. As the government grapples with the challenges of the war, the shift towards cash payments and the growth of the shadow economy present a complex dilemma. It remains to be seen how the Kremlin will navigate this intricate issue and its potential impact on the country's economic future.
