NextFin News - Russia’s cash economy is swelling again, and this time the consequence reaches beyond household fear and inconvenience. The Bank of Russia says 1.56tn rubles has been added to cash in circulation since the start of the year, the biggest rise for the same period in any year outside the pandemic, while the economy ministry has cut its 2026 growth forecast to 0.4%. The result is a familiar wartime pattern with a sharper edge: when cash leaves cards and bank accounts, the state loses visibility, tax collection weakens, and firms under pressure find it easier to move income off the books.
The immediate trigger is not one thing but three. Mobile internet shutdowns have made card payments unreliable across large areas during drone alerts; higher taxes have squeezed small businesses; and tighter bank scrutiny has made some people more willing to hold notes rather than balances. That combination matters because Russia’s wartime economy no longer has much slack. The finance ministry is under pressure to fund military spending, oil and gas revenue remains crucial, and the government has already pushed VAT from 20% to 22% in January while lowering the threshold for smaller businesses to pay it.
The cash surge is not unprecedented. Russians also rushed to withdraw money after the partial mobilisation in September 2022 and during the Wagner mutiny in June 2023. But those earlier spikes were episodic reactions to political shock. The current move is more complicated because it blends fear, habit and incentives. Cash is becoming both a backup payment system and a way to keep revenue opaque. That makes the problem harder to reverse than a simple panic withdrawal. It also raises the question that matters most for investors and policy watchers: is this only a temporary response to internet disruption, or is it the point where a strained wartime fiscal system starts relying on the shadow economy as part of the model?
Why Cash Is Coming Back Now
The short answer is that the payment system has become less reliable at the exact moment businesses and households have fewer reasons to keep money in banks. When mobile internet is shut down, a card terminal becomes a piece of plastic. Cash does not depend on a signal. In that sense, the first-order effect is technical and cyclical: the outage forces a temporary substitution into notes and coins.
But the second-order effect is what makes the story more than a tech problem. Russia is asking firms and households to absorb more fiscal pain at the same time. The Kremlin has raised VAT, squeezed the threshold for smaller firms, and pushed the economy into a slower-growth phase. The economy ministry’s 0.4% forecast for 2026 implies near-stagnation by wartime standards. In such an environment, every extra percentage point of tax pressure increases the incentive to underreport sales, pay wages in cash and stay below administrative thresholds.
That is why Taras Skvortsov, the finance chief of Sberbank, said the bank was seeing worrying signs that more businesses were paying wages in envelopes and that cash was staying in people’s hands. The message is not simply that people like cash. It is that cash is becoming a substitute for trust in the formal system. Once that happens, the mechanism changes from a temporary buffer to a structural leak.
"This is a very worrying moment... We are not seeing cash return to the banking system through cash collection, ATMs or self-service terminals. It is staying in people's hands," Taras Skvortsov, chief financial officer of Sberbank, said.
That is the key distinction. A cyclical cash hoard can unwind when internet access normalises or fear subsides. A structural shift happens when cash is no longer just a hedge but a tool for tax minimisation. Russia appears to have both. The surge began with outages and uncertainty, but the destination increasingly looks like the shadow economy.
The Wartime Fiscal Squeeze Behind The Shift
Russia’s widening budget strain explains why this matters so much. A state that needs more revenue cannot easily tolerate a payment system that makes revenue harder to see. Oil and gas still bring in a large share of federal income, but the broader economy is slowing and spending pressures remain high. The government has responded by trying to capture more from the legal economy, which tends to push the margins of smaller businesses into informality.
The VAT increase from 20% to 22% is not just a tax change. It is a behavioural nudge in the wrong direction for compliance. When tax rates rise while growth slows, the return on staying in the formal sector falls. If a baker, pharmacy or corner shop can reduce recorded turnover by steering some customers toward cash, the incentive is obvious. The same applies to wages paid in envelopes: payroll taxes become easier to evade if compensation leaves no digital trail. What looks like an old-fashioned preference for notes is really a low-cost compliance strategy.
Here the wartime context is decisive. In a normal cycle, a central bank or finance ministry could partly offset tax pressure with stronger growth, credit expansion or restored confidence. Russia has less room. The economy ministry’s 0.4% forecast suggests the state is squeezing a narrower base, which makes every leak larger. That is why cash circulation is not just a payment statistic. It is a proxy for how much of the economy is being pulled into the informal margin.
The historical pattern reinforces the point. The cash surges after mobilisation in 2022 and the Wagner mutiny in 2023 were driven by fear of a system break. The current increase is driven by a different blend of caution and cost. That makes it more insidious. If the earlier episodes were emergency withdrawals, the present one is closer to a working habit.
What The Market Has Already Priced, And What It Has Not
Most observers have already priced the first-order story: war creates uncertainty, uncertainty boosts cash demand, and cash demand rises when digital payments become unreliable. That is not the real insight. The underpriced part is the feedback loop between cash, tax compliance and fiscal capacity.
The Bank of Russia has been trying to maintain monetary stability while the economy slows. It cut the key rate by 25 basis points to 14.25% on June 19, after holding tighter policy for much of the period of elevated inflation. The central bank said pro-inflationary risks had increased because of a temporary decline in motor fuel production. That matters because cash hoarding and informal payments do not just weaken tax collection; they also reduce the effectiveness of financial policy by pulling activity away from the banking system.
In other words, the second-order consequence is not only less visible turnover. It is weaker policy transmission. When more money sits outside deposits, the banking system gets less of the cash that typically funds lending and settlement. That can make official rates less potent at the margin and can complicate the state’s ability to steer credit. The leak is not large enough to stop policy, but it is large enough to make every instrument less efficient.
The strongest counter-thesis is that this is still mostly cyclical and that cash usage will retreat once mobile internet improves and the immediate fear from drone attacks fades. That argument is plausible, and it is backed by the fact that Russia has seen earlier wartime spikes that did not permanently remake the payment system. But the counter-thesis is incomplete because it ignores the fiscal incentive structure. If tax pressure stays high and compliance enforcement stays tight, any reversal in outages will only partially reverse the cash shift. People may not need to hoard notes for safety, but businesses may still prefer them for opacity.
The falsifying signal is concrete: if cash in circulation stops accelerating and begins to normalise even while the VAT increase and lower business thresholds remain in place, then the structural-informalisation thesis is wrong. If, on the other hand, cash growth stays elevated through a period of more stable mobile networks, the case that this is becoming structural gets stronger.
That is why this story is not just about cash. It is about how a wartime state responds when growth slows faster than its need for revenue. The immediate answer is more notes in pockets. The deeper answer may be a broader retreat from the formal economy.
What Comes Next
In the short term, the main question is whether mobile internet restrictions keep forcing households and merchants back into cash. If outages remain frequent, cash demand will likely stay elevated regardless of any easing in fear. In the medium term, the more important variable is whether higher taxes and weaker growth continue to push firms toward informal payrolls and off-book sales. In the long term, the issue is whether the Russian state can raise revenue without expanding the shadow economy faster than it expands the official one.
Three scenarios follow from that. In the base case, cash circulation stays high but stabilises as the internet disruptions become more predictable and businesses adapt. In the upside case for the formal economy, outages ease and tax compliance improves enough to bring more cash back through banks and card rails. In the downside case, fiscal pressure intensifies, grey schemes spread, and cash becomes not a temporary buffer but a permanent parallel channel for trade and wages.
For now, the headline number - 1.56tn rubles added to circulation this year - says less about consumer taste for cash than about confidence in the machinery around it. When a wartime economy starts preferring notes to records, the problem is no longer just payment friction.
It is the tax base slipping out of view.
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