Russians turn to cash putting more strain on slowing wartime economy

Crashing the underground economy has become one of the Kremlin’s main goals. Before the VAT increase came into force, Putin warned that the new rules should not overshadow firms and called for a “radical reduction in illegal employment”.

“An arm of the government is trying to squeeze as much money out of people as possible through higher taxes, fines and other charges,” Alexander Kolyandr, a non-resident senior fellow at the Center for European Policy Analysis, told the BBC.

“But another undermines that strategy by making it harder to collect taxes while trying to counter so-called terrorist threats,” he said, referring to the shutdown of mobile internet.

The Soviet-era instinct to keep money “under the pillow” is returning, despite double-digit returns on bank deposits held high as the central bank battles stubborn, war-induced inflation.

A one-year fixed-term deposit of 100,000 rubles (£950; $1,280) with Sberbank, Russia’s largest lender, currently pays 10% interest.

Despite this, central bank data showed that Russians withdrew 550 billion rubles from their bank accounts in May; 200 billion rubles of this were from fixed term deposits.

Anton, a copywriter living in Moscow, said that a salesman in a vinyl store offered him a discount when paying in cash. “He was upfront about the reason for higher taxes,” he told the BBC.

He said he saw people struggling to withdraw money to spend at a flower market in central Moscow when mobile internet outages intensified during increased security measures during Russia’s Victory Day celebrations in May.

“There was a woman going from one ATM to another, looking for one that still had bills in it.”