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Cash or Credit?

The Government Wants Russians to Transition from Cash to Plastic Cards in a Bid to Reduce Cash Circulation Banknotes By Tai Adelaja Russia Profile 05/17/2012

Starting next year most Russians will have to kick their cash habit as the country's Ministry of Finance moves to prohibit public and private employers from paying salaries and wages in cash. The ministry may also set new limits on cash payments at retail outlets throughout the country as part of its two-pronged effort to curb tax evasion and reduce the amount of cash in circulation, local media reported on Thursday. The new measure is being touted by ministry officials here as a way to wean Russians from their growing cash addiction, which analysts say is also harming commerce.

Making employers deposit salaries electronically directly into payroll bank accounts offers many advantages, including eliminating the need for cashiers in offices, sources inside the Finance Ministry were cited by the Izvestia newspaper as saying on Wednesday. Businesses also stand to gain, as they would avoid the risks associated with armored car heist, a common occurrence in Russia, the sources said. In addition to business entities, individuals too will benefit. As millions of Russians who are used to carrying rolls of ruble notes around make more use of plastic cards, the chances of getting mugged will be minimal, officials say. Some analysts have suggested, however, that the true purpose of the new rule is simply to boost sales tax collections by making life hard for consumers who often pay in cash without demanding a receipt, in effect splitting the savings from evading the country’s sales tax with retailers.

The Finance Ministry’s latest proposals are contained in a raft of amendments to the country’s Labor Code, which is currently being reworked by a special working group at the ministry as well as by Opora Russia, a business association that represents small and midsize businesses, Izvestia reported. Under the amended labor rules, salaries or wages must be paid by the employer strictly into an employee’s payroll account at his or her bank of choice. The only exemptions under the rule are for firms operating in remote areas where banking services are unavailable, and also for companies with fewer than 35 employees (or fewer than 20 employees for retail outlets). The new rule would be binding on both legal business entities and individual entrepreneurs. Sergei Borisov, the president of Opora Russia, said the new rule could put an extra burden on small businesses, especially in cases where workers in the same company demand that their salaries be paid into different banks, rather than a single bank as is the practice in large companies.

Many state and private companies in Russia have already teamed up with various banks to launch the so-called payroll projects, which enable employees of client companies to receive their wages and salaries through the banks, often using plastic cards. However, less than 50 percent of enterprises in urban areas operate under the system, while over 70 percent of workers in rural areas still receive their wages in cash, said Anatoly Aksakov, the president of the Association of Regional Russian Banks.

Roughly 50 percent of Russians are weary of using debit and credit cards because "the culture of cash is strongly ingrained in Russians, even those with credit card accounts,” a survey conducted by MasterIndex in December found. The survey, which also noted an upswing in the use of payment cards among Russians aged 25 to 45, said 14 percent of respondents complained of a lack of credit card payment facilities at retail outlets, while 11 percent said they have problems figuring out how to use plastic cards. The Ministry of Finance is trying to address such concerns through another amendment that will compel Russian grocery, retail and specialty stores to be equipped to process plastic card payments. Only those paying a single tax on imputed income (non-cash income, like insurance premiums paid for by employers) and companies with annual revenues of less than two million rubles ($64,570) will be exempt.

Consumer advocates say, however, that the new rule will discriminate against older Russians, many of whom don’t use credit cards and have never had a bank account. Russian banks, which charge businesses up to two percent for credit card transactions, could also end up being the main beneficiaries of the new rules, Moscow's leading tabloid Moskovsky Komsomolets wrote on Thursday. In Russia, there is the minimum balance requirement on bank card accounts, which could range from 100 rubles ($3.2) to 500 rubles ($16) but which cannot be withdrawn by the legitimate owner, the paper said. "This creates the impression that banks have lobbied for the measure," said the paper. “Unless banks cut fees on credit cards and current accounts, they’ll be the ones making more money from the new law.”

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