After two years of stable growth, driven by military spending for the war in Ukraine, the Russian economy is showing further signs of slowing down. ΠOil revenues have decreased, the budget deficit has increased, and defense spending has stabilized. The Kremlin needs money to keep its finances stable, and it is clear where the authorities intend to get it: from the treasury, from ordinary people and small businesses.
The increase in the value-added tax (VAT) from 20% to 22% is expected to add up to 1 trillion rubles, or about $12.3 billion, to the state budget, Reuters reported. The increase is included in legislation that is now passing through the Russian parliament and will take effect on January 1, 2026.
In addition to the rate increase, the legislation lowers the threshold for requiring businesses to collect VAT to just 10 million rubles (about $123,000) in annual sales revenue, in stages until 2028. That's a reduction of 60 million rubles, or $739,000. This change is aimed in part at tax avoidance schemes, where companies split up operations to get around the tax. But it will also affect previously exempt businesses, such as grocery stores and beauty salons.
Tax hikes
ΠThe government also proposed increasing taxes on alcoholic beverages, wine, beer, cigarettes and vaping. For example, the tax on hard liquor such as vodka will increase from 84 rubles per liter of pure alcohol, which is equal to 17 rubles or about 20 US cents for a half-liter bottle, or about 5% of the minimum price of 349 rubles ($4.31).
Fee for renewing driver's licenses or obtaining an international license will also increase. they increase, and the key tax relief for the export of cars increases. The government is considering a technology tax on digital devices, including smartphones and laptops, worth up to 5,000 rubles ($61.50) for the most expensive items, the news website "Kommersant" reported.
The economic slowdown and tax hikes, which Russian President Vladimir Putin and ordinary Russians will face before a difficult choice in the coming months between weapons and oil - that is, between military spending and consumer welfare after more than three and a half years of war in Ukraine.
Muscovites interviewed on a main street in the Russian capital by the Associated Press (AP) expressed concern, mixed with resignation, saying that higher food prices would be widely accepted, especially in poorer regions and among low-income groups. &Pensioner Svetlana Martinova stated that requiring small businesses to collect VAT would have the opposite effect.
"I think that small and medium-sized businesses will collapse. The budget will receive less, not more," said Martinova.
The increase in VAT comes in addition to changes in the recycling fee, a payment for car registration, a step that affects the most expensive payment. From December 1, individuals can no longer receive a preferential rate of 3,400 rubles ($42) for cars with a power of over 160 horsepower, and must pay the commercial rate, which can be hundreds of thousands of rubles or thousands of dollars per car.
However, the step is unlikely to stimulate investment in local production, given the high Central bank interest rates and the smaller size of the Russian market compared to neighboring China, which is currently the source of most imported cars. This is according to Andrey Olkhovsky, general director of "Avtodom", a large car group.
As for customers, sales "will decrease in the short term, but will recover to current levels within six months", he said in response to questions sent by email.
"&Pri;increased taxes and fees will affect on prices for the end consumer. ΠConsumers, for their part, will incorporate this into their way of life and will demand higher wages from their employers. This will increase the price of everything around us," said Olkhovski.
The Russian economy is in recession at the beginning of 2025 and is on track to grow this year by only about 1%, according to official estimates, after growing by more than 4% in 2023 and 2024. Growth is suffering from high central bank interest rates, which is currently at 16.5%, aimed at controlling inflation of 8%, supported by huge military spending.
ΠOil revenues are falling, budget deficit is increasing
ΠOil revenues have fallen by about 20% this year, mainly due to lower global prices, according to the Institute of Economics in Kiev. Western sanctions imposed over the war in Ukraine remain a persistent drag on growth, increasing spending and discouraging investment that could expand the economy's productive capacity.
As a result, this year's budget deficit has been revised upwards from 0.5% to 2.6%, compared to 1.7% last year. This may not seem like a lot compared to other countries, but unlike them, Russia cannot borrow on international bond markets and must rely on local banks for credit.
Finance Minister Anton Silyanov said that increasing revenues should be prioritized over increasing borrowing, saying that excessive borrowing of loans "would lead to an increase in inflation and, as a result, an increase in the central bank's base interest rate", which would harm investment and growth.
Increasing the VAT rate may increase inflation initially, as retailers change their prices. However, in the long run, it could reduce price pressures by reducing the demand for goods and helping the central bank in its fight to control inflation. The increase in taxes and duties is a setback from the Russian war economy of the previous two years, which put more money in the pockets of the peasants.
The then higher export prices of oil filled the state treasury, while the huge increase in military spending stimulated the reduction of personnel wages, and factory wages workers are struggling with inflation. In addition, military levies and death bonuses are pumping money into poorer regions.
Vladimir Pi;utin will not run out of money in the short term, says Alexander Pi;ropolenko, a researcher at the Center for Russia and Eurasia "Kapnegi" in Berlin.
"Growth is slowing, but corporations pay taxes, people consume and receive wages and pay taxes on that. For the next 12 or 14 months, Πutin has enough money to maintain the current military effort and the current level of spending."
Πpokopenko added that after that "he will have to make difficult choices, compromises between maintaining the military effort or, for example, maintaining consumer prosperity, so that the they feel 100% that the war continues".