Cash Is King in Wartime Russia: A Telling Indictment of Putin’s Economic Policies

The resurgence of cash as a preferred medium of exchange in Russia signals significant economic woes and the government’s failed efforts to stimulate growth. The return of cash, which had declined in recent years, is particularly damning for Vladimir Putin’s economic policies, including his decision to hike value-added tax (VAT) and lower the threshold for small businesses to pay it.

Russia has seen a massive increase in cash circulation since the start of the year, with 1.56 trillion roubles added to circulation – the largest increase outside of the Covid-19 pandemic. This trend is not limited to one-time withdrawals; Russians are increasingly opting for cash over digital payments due to mobile internet shutdowns aimed at countering Ukrainian drone attacks. The Kremlin’s strategy may have some military benefits, but it has inadvertently created a culture of cash reliance among citizens.

The motivations behind this shift are multifaceted. Economic uncertainty surrounding the war in Ukraine has prompted many Russians to seek a buffer against potential disruptions. As President Putin’s popularity wanes and the economy shows signs of slowing down, individuals and businesses alike are turning to cash as a means of preserving some semblance of control.

Tax evasion is another significant factor driving this trend. With VAT now standing at 22% – up from 20% just months ago – many small businesses are struggling to stay afloat. To keep their margins intact, they’re opting for cash payments, which allow them to hide income and avoid payroll taxes. A recent survey by Opora Russia found that nearly 6% of entrepreneurs have resorted to “grey schemes” to cope with the new tax burden.

The irony is palpable: while Putin’s government is cracking down on the shadow economy, its own policies are inadvertently fueling it. Alexander Kolyandr, a non-resident senior fellow at the Center for European Policy Analysis, notes that one arm of the government is trying to squeeze as much money as possible out of people through higher taxes and fines, while another is undermining this strategy by making it harder to collect tax.

The consequences of this trend are far-reaching. As cash payments become more prevalent, they help businesses understate their turnover, further exacerbating the government’s revenue woes. This has serious implications for Putin’s ability to fund his war machine; with a widening budget deficit and an economy on course for its weakest growth since 2022, Russia is facing a perfect storm of economic challenges.

The Soviet-era instinct to keep money “under the mattress” may be making a comeback in modern-day Russia. Despite double-digit returns on bank deposits, which have been kept high as the central bank battles stubborn inflation, many Russians are opting for cash – not just out of prudence but also due to a lingering distrust of the banking system.

The story of Anton, a Moscow resident who witnessed vendors offering discounts for cash payments, highlights this point. “He was upfront about the reason: higher taxes,” Anton said. This anecdote is a telling example of how Putin’s policies have created an environment where citizens are forced to rely on cash as a means of survival.

As Russia struggles to find its footing in a rapidly changing economic landscape, one thing is clear: the return of cash is not just a symptom of economic uncertainty but also a direct result of the government’s failed economic policies. The next few months will be critical in determining whether Russia can stabilize its economy or if it will continue down a path of cash-based transactions.