Russia's war against Ukraine has had far-reaching consequences for its economy, and now, in a worrying sign of strain, citizens are increasingly turning to cash for their daily transactions. A dramatic surge in the use of physical currency is taking place as widespread mobile internet shutdowns force people to abandon digital payments, leaving businesses struggling to stay afloat.
According to data from Russia's Central Bank, an unprecedented £14.8 billion worth of new notes has been printed since the start of the year, sparking concerns about the economic implications of this shift. The move away from digital payments is being driven in part by the Ukrainian drone attacks that have prompted repeated shutdowns of mobile internet services across vast areas of the country. These blackouts, intended to disrupt communications between Ukraine's military and its drones, are having an unintended consequence: leaving many Russians unable to make card payments or transfer funds online.
The use of cash is also being encouraged by economic pressures on businesses. A slowing economy, combined with a recent hike in VAT from 20% to 22%, has squeezed margins for small and medium-sized enterprises, forcing them to find ways to stay ahead. Some are now actively promoting the use of physical currency, allowing them to keep more income off the books, avoid payroll taxes, and operate further beneath the radar.
The Russian government's efforts to counter these trends are complicated by the fact that every rouble is crucial for funding its military operations in Ukraine. The proliferation of cash transactions makes it harder for authorities to collect tax revenues at a time when they need them most – with a widening budget deficit and an economy faltering. While the oil and gas sector has benefited from recent price rises, providing about a quarter of state revenues, the broader economy is showing signs of weakness.
The consequences of this trend are far-reaching. The 'grey economy', which encompasses all transactions that fall outside of official records, is growing rapidly in Russia. This poses a significant challenge for President Vladimir Putin's government, which has struggled to balance its efforts to counter perceived terrorist threats with the need to keep businesses onside and revenues flowing into state coffers.
As one analyst noted, the head of Russia's largest lender, Sberbank, Taras Skvortsov, recently expressed concern that cash is not returning to the banking system but instead 'staying in people's hands', fuelling a deepening shadow economy. This raises fundamental questions about the long-term sustainability of Russia's economic model and its ability to fund its military operations.