Tax reform and stricter controls fuel cash run

Cashless payment processing has been on the rise in Russia for years. The state is increasingly investing in the fintech sector while at the same time expanding its tax and financial system. This makes the recent increase in the use of cash in Russia all the more unusual. Experts interpret this as a reaction by companies and citizens to the increasing tax burden and stricter transfer controls by the authorities. In the period from May 1 to May 11 alone, Russians withdrew 210.5 billion roubles (2.4 billion euros) in cash, a five-fold increase compared to the same period last year, when 41.2 billion roubles (48 million euros) in cash was recorded. In April, 607 billion roubles (6.9 billion euros) of cash came into circulation, which was the highest figure since 2022 if the traditionally high December figures are excluded. The last time cash in circulation rose more sharply was in September 2022 after the partial mobilization. At that time, the population withdrew a net 930 billion roubles (10.6 billion euros) in cash. In March 2026, more than 300 billion roubles (3.4 billion euros) came into circulation, the highest figure outside of a December in 2.5 years. At the end of April, total cash holdings rose for the first time ever to more than 20 trillion roubles (230 billion euros) for the first time ever. Experts see several reasons for the run on cash. These include the growing shadow economy as a result of tax increases and stricter controls on transfers between private individuals. Another factor is the disruption to the Russian internet and the resulting problems with cashless payments. VAT in Russia was raised from 20% to 22% as of January 1. This is a particular burden for micro-enterprises and SMEs. Last year, they paid VAT on annual sales of 60 million roubles or more, but the 2026 tax reform will lower the threshold to 20 million roubles. In 2027, the threshold will fall further to 15 million roubles (158,000 euros) and finally to 10 million roubles (105,000 euros) in 2028. Tax authority takes stricter approach From next year, the Russian tax authorities want to take a closer look at transfers between private individuals. The focus will be on undeclared income in excess of 2.4 million roubles per year, the equivalent of around 27,450 euros. At the end of March, the Russian government submitted a bill to parliament according to which the tax authorities can request information from the Russian central bank about citizens with undeclared business activities. This primarily concerns Russian citizens without sole trader or self-employed status who regularly receive payments of more than 200,000 roubles (2,300 euros) per month into their bank account. According to experts, the measure primarily affects freelancers, landlords and self-employed specialists. The measure could come into force next year. The state expects this to generate tax revenue of more than 50 billion roubles a year, or 572.2 million euros. Millions of citizens affected According to the Russian Chamber of Commerce and Industry (TPP), this measure could affect seven to ten million people. However, Natalia Milchakova, chief analyst at the international financial services provider Freedom Finance Global, estimates that the proportion of tax evaders with an annual income of over 2.4 million roubles (EUR 27,450) accounts for no more than 1-2% (around 200,000 people) of the total number of people in employment in Russia. The stricter tax controls are not only aimed at "shadow entrepreneurs", but also at citizens with mixed incomes, says Sofia Lukinova, Head of Legal at the Russian consulting firm WMT Consult. The expert includes employees with undeclared side jobs or income from renting out real estate. The stricter tax controls inevitably lead to people in Russia circumventing the rules, Lukinova continues. And this is where cash comes into play. Is cash a threat to the financial system? The Russian economist Andrei Barchota assumes that the demand for cash could increase by 2 to 3 trillion roubles next year as a result of stricter tax controls. roubles, the equivalent of 22.8 to 34.3 billion euros, as a result of stricter tax controls. The general rule is: the more cash in circulation, the more inefficient the monetary system. This has an impact on the liquidity of banks. Economic players with cash would miss out on investment interest, while on the other hand banks would lack cheap borrowed capital, explains Egor Susin, Head of Market Strategies at Gazprombank. An alternative source of liquidity is the central bank, from which banks borrow money. An excessive outflow into cash could lead to a structural liquidity deficit in the banking sector, warns Sofia Donets, Chief Economist of T-Investiziyi at the Russian T-Bank. This means that the banks' liabilities to the monetary authorities are higher than the banks' own funds in the central bank's deposit and correspondent accounts. However, experts agree that it is still too early to make long-term forecasts. The decisive factor is how long the cash trend continues, and a preponderance of cash can also fuel inflation. However, economists currently see no cause for concern in the population's inflation expectations. People are not switching to cash because they are desperate to get rid of their money, but because there are external triggers that make this form of payment more favorable, explains Sofia Donez from T-Bank. International cash ranking The share of cash in the total money supply in Russia has been between 13-15% for several years. This puts the country in the same international league as countries such as the UK (13%), USA (14%), Canada and Israel (15% each). Norway, Iceland (8% each), South Korea, Sweden and Denmark (10% each) have the lowest proportion of cash in the world, according to a ranking by the Scandinavian travel finance service provider Forex. In Germany, people are far more likely to use cash. At 40%, Germany is behind Spain (44%), Turkey and Poland (45% each). Myanmar (98%), Ethiopia, Gambia in West Africa (95% each), Albania and Cambodia (90% each) have the highest cash circulation in the world. This article was prepared for the German-Russian Chamber of Commerce Abroad. The post Tax reform and stricter controls fuel cash run appeared first on ostwirtschaft.de.