After two years of strong growth fueled by military spending the war in Ukraine, Russia’s economy is slowing down. Oil revenues decreasedThe budget deficit increased and defense spending stabilized.
The Kremlin needs money to keep its finances stable, and it’s clear where President Vladimir Putin plans to get it: from coffers, from ordinary people and small businesses.
Increasing the value added tax from 20% to 22% is expected to add up to 1 trillion rubles to the state budget, or about $12.3 billion. The increase is included in legislation currently in Russia’s harmonized parliament and will come into force from January 1.
More tax and fee increases on the way
Along with the rate increase, the legislation also gradually reduces the threshold requiring businesses to collect VAT to just 10 million rubles (about $123,000) in annual sales revenue by 2028. This is less than 60 million rubles, or $739,000. Part of this change addresses tax avoidance schemes, in which companies split their operations to get around the threshold.
But it will also affect previously exempt businesses, such as corner markets and nail salons.
The government has also proposed increasing taxes on spirits, wine, beer, cigarettes and e-cigarettes. For example, the tax on stronger spirits such as vodka will increase by 84 rubles per liter of pure alcohol; This works out to 17 rubles, or about 20 US cents, for a half-litre bottle, or about 5% of the minimum price of 349 rubles ($4.31). Fees for renewing driver’s licenses or obtaining international driving licenses are also being increased, and significant tax relief on imported cars is being removed. The government is imposing a technology tax on digital equipment, including smartphones and laptops, of up to 5,000 rubles ($61.50) for the highest-priced items, news site Kommersant reported.
Economic slowdown and tax increases Putin and the ordinary Russians will face tougher choices The coming months are between guns and butter, that is, between military spending and consumer welfare after 3.5 years of war against Ukraine.
Tax hikes bring dismay and shrugs
Muscovites interviewed by The Associated Press on a main street in the Russian capital expressed concern mixed with resignation, saying rising food prices would be widely felt, especially in poor regions and low-income groups.
Retiree Svetlana Martynova said charging small businesses VAT would backfire.
“I think small and medium-sized businesses will fold,” he said. “The budget will be less, not more.”
In addition to VAT, registering a car will cost more
The VAT increase comes on top of changes to the recycling fee paid for registering cars, a move that mostly affects high-priced imports. Starting December 1, individuals will no longer receive the 3,400 ruble ($42) concession rate on vehicles with more than 160 horsepower, but will have to pay the commercial fee, which can be hundreds of thousands of rubles or thousands of dollars per vehicle.
But the move is unlikely to boost investment in domestic production, given high central bank interest rates and the smaller size of the Russian market compared to neighboring China, which is now the source of most imported cars. This is according to Andrei Olkhovsky, general director of Avtodom, a large group of car dealers.
As for customers, it said in its response to emailed questions that sales “will decline in the short term, but will rebound to current levels within six months.”
“Increasing taxes and duties will affect prices for the end consumer,” he said. “Consumers will reflect this in their lifestyles and demand higher wages from their employers. This will increase the cost of everything around us.”
The slowdown in economic growth increases the budget deficit
The Russian economy shrank at the beginning of 2025, and after growing more than 4 percent in 2023 and 2024, the Russian economy is on track to grow only around 1 percent this year, according to government forecasts. Growth has been negatively affected by higher central bank interest rates, currently at 16.5 percent, aimed at controlling 8 percent inflation triggered by massive military spending. Oil revenues have fallen nearly 20% this year, mainly due to lower global prices, according to the Institute of the Kiev School of Economics. Western sanctions imposed over the war against Ukraine are an ongoing drag on growth by increasing costs and discouraging investment that could increase the economy’s productive capacity.
As a result, this year’s budget deficit was revised from 0.5% to 2.6% from last year’s 1.7%. This doesn’t seem like much compared to other countries, but unlike them, Russia cannot borrow from international bond markets and must rely on domestic banks for loans.
Finance Minister Anton Siluanov said raising income was preferable to increasing borrowing and said excessive borrowing “will lead to an acceleration of inflation and, as a result, an increase in the central bank’s key interest rates,” which will harm investment and growth.
An increase in VAT may initially increase inflation as traders change their price lists. But in the long run, it could reduce price pressures by reducing demand for goods and help the central bank fight to keep inflation under control.
The Kremlin won’t run out of money, but it will face difficult choices
The tax and fee increases represent a step back for Russia’s wartime economy from the previous two years, which put more money into people’s pockets. Then-high oil export prices filled state coffers, while huge increases in military spending spurred hiring and factory workers’ wages kept pace with inflation. However, military recruitment and death bonuses also provided cash flow to poor regions.
Alexandra Prokopenko of the Carnegie Russia Eurasia Center in Berlin said Putin will not run out of money in the short term.
“Growth is slowing down, but companies are paying taxes, people are consuming, getting salaries and paying taxes on that,” he said. “For the next 12 or 14 months Putin has enough money to maintain the current war effort and the current level of spending.”
From now on, he said, “he’s going to have to make hard choices, compromises, between maintaining the military effort or, for example, maintaining consumer abundance, so that people don’t 100% feel like the war is going on.”
