Central bank sees no need for extra measures as worried Russians withdraw cash

• Cash held outside banks rose 17.5% year-on-year to over 19 trillion roubles ($243 billion), driven by internet shutdowns and tax increases encouraging businesses to use cash to avoid taxes
• The banking system's liquidity deficit reached 2 trillion roubles in June and could grow to 3.6 trillion roubles by year-end, putting pressure on banks that rely on deposits for funding
• The surge in cash demand is reversing years of digital payment development, with demand at recent central bank repo auctions exceeding supply by more than one-third

Summary

Russia's central bank reported a significant increase in cash withdrawals as citizens respond to intermittent internet shutdowns, but maintains no additional stabilization measures are needed for the banking system.

Key Figures:

• Cash held outside banks grew 17.5% year-on-year to over 19 trillion roubles ($243 billion)
• Banking system liquidity deficit reached 2 trillion roubles in June
• Central bank projects deficit could expand to 3.6 trillion roubles by year-end
• Central bank cut key rate by 25 basis points on June 19

Main Issue:

Russians are withdrawing cash due to concerns about payment terminal disruptions during internet blackouts, which authorities have implemented to counter Ukrainian drone navigation. This trend is straining banks that rely on deposits for funding, as cash demand growth now outpaces deposit growth.

Additional Factors:

Sberbank's First Deputy CEO Alexander Vedyakhin identified government tax hikes introduced early this year as another driver of cash demand, as small businesses use cash payments for tax evasion. This surge is reversing years of digital payment development in Russia's banking system.

Market Implications:

Despite the liquidity pressure, the central bank asserts it's providing adequate support to banks. Recent repo auction demand exceeded supply by over one-third. Money market rates remain near the key rate, suggesting liquidity levels align with bank needs. Analysts note major banks maintain comfortable regulatory buffers and possess sufficient assets to obtain central bank funding. However, Western and Russian economists are highlighting vulnerabilities in the Russian banking system amid ongoing economic pressures.