Russia's tax hikes may be driving economy underground as cash use rises

Russia's recent tax increases, intended to bolster federal budget revenues, may be having an unintended consequence — pushing economic activity into the informal sector. However, Russia's central bank disputes claims of rising cash use, citing record levels of cashless payments.

Russia's sweeping tax hikes, introduced to shore up the federal budget amid ongoing military expenditures, may be inadvertently fuelling a shift toward the shadow economy, according to analysts tracking financial behaviour across the country.

The concern centres on businesses and individuals potentially reverting to cash transactions to avoid higher tax burdens. Critics of the tax policy argue that aggressive fiscal tightening can push economic actors underground rather than increasing state revenues as intended.

Central Bank Pushes Back

Russia's central bank has pushed back firmly against this narrative. According to the regulator's own data, cashless payments as a share of retail turnover actually grew by 0.9 percentage points in the first quarter of 2026, reaching a record high of 88.9 percent. The bank also reported that cash withdrawal transactions fell by 4 percent in both the number of transactions and total volume over the same period.

The conflicting interpretations highlight a broader debate about the real state of Russia's economy under wartime fiscal pressure. While official statistics paint a picture of continued digitalisation of payments, independent economists warn that underground economic activity is notoriously difficult to measure and may not be fully captured in central bank data.

Fiscal Pressure Mounts

Russia has significantly expanded its tax base in recent years to fund military operations in Ukraine, including raising corporate tax rates and broadening income tax brackets. These measures have generated controversy domestically, with business groups warning of reduced investment and competitiveness. Whether the unintended effect is a retreat to cash or simply an acceleration of digital payments, the debate reflects the mounting fiscal contradictions facing the Russian economy.