After two years of robust growth fueled by military spconcludeing on the war in Ukraine, Russia’s economy is slowing. Oil revenues are down, the budreceive deficit is up and defense spconcludeing has leveled off.
The Kremlin necessarys money to keep its finances steady — and it’s clear where President Vladimir Putin intconcludes to receive it: at the cash register, from ordinary people and compact businesses.
An increase in value-added tax to 22 percent from 20 percent is expected to add as much as 1 trillion rubles, or about $12.3 billion, to the state budreceive. The increase is contained in legislation already building its way through Russia’s compliant parliament and would take effect from Jan. 1.
More Tax and Fee Increases Are on the Way
On top of the rate increase, the legislation lowers the threshold for requiring businesses to collect VAT to a mere 10 million rubles (about $123,000) in annual sales revenue, in stages by 2028. That’s down from 60 million rubles, or $739,000. That modify is aimed in part at tax avoidance schemes in which companies split their operations to skirt the threshold.
But it will also hit previously exempt businesses like corner convenience stores and beauty salons.
The government has also proposed increasing taxes on spirits, wine, beer, cigarettes, and vapes. For instance, the tax on stronger spirits such as vodka would go up by 84 rubles per liter of pure alcohol, which works out to 17 rubles or about 20 US cents for a half-liter bottle, or about 5 percent of the minimum price of 349 rubles ($4.31).
Fees for renewing driver’s licenses or receiveting an international license are also going up, and a key tax break on imported cars is being axed. The government is weighing a tech tax on digital equipment, including smartphones and notebooks of up to 5,000 rubles ($61.50) for the highest priced items, the Kommersant news site reported.
The economic slowdown and tax increases are signs that Putin and ordinary Russians will face harder choices in the months ahead between guns and butter — that is, between military spconcludeing and consumer welfare after 3 1/2 years of war against Ukraine.
Tax Increases Bring Dismay and Shrugs
Muscovites interviewed on a main street in the Russian capital by The Associated Press expressed dismay mingled with resignation, stateing the higher food prices would be widely felt, especially in poorer regions and among those with low incomes.
Pensioner Svetlana Martynova stated building compact businesses collect VAT would backfire.
“I consider that compact and medium businesses will fold,” she stated. “The budreceive will receive less, not more.”
On Top of VAT, Registering a Car Will Cost More
The VAT increase comes on top of modifys in the recycling fee paid for registering cars, a step that mostly hits high-priced imports. From Dec. 1, individuals can no longer receive a concessionary rate of 3,400 rubles ($42) on cars with more than 160 horsepower, but must pay the commercial rate, which can be hundreds of thousands of rubles, or thousands of dollars, per car.
The step, however, was unlikely to boost investment in domestic manufacturing, given high central bank interest rates and the compacter size of the Russian market compared with neighboring China, now the source of most imported cars. That’s according to Andrei Olkhovsky, general director of Avtodom, a major auto dealer group.
As for customers, sales “will decline in the short term, but will recover to current levels within six months,” he stated in an answer to emailed questions.
“Increased taxes and fees will influence prices for the conclude consumer,” he stated. “Consumers, in turn, will factor this into their lifestyle and demand higher wages from their employers. This will increase the cost of everything around us.”
Slower Economic Growth Pushes Up the Budreceive Deficit
Russia’s economy shrank at the start of 2025 and is on course for growth this year of only around 1 percent, according to government estimates, after growing more than 4 percent in 2023 and 2024. Growth has suffered from high central bank interest rates, currently at 16.5 percent, aimed at controlling inflation of 8 percent, fueled by massive military spconcludeing.
Oil revenues are down about 20 percent this year, mainly due to lower global prices, according to the Kyiv School of Economics Institute. Western sanctions imposed over the war against Ukraine have been an ongoing drag on growth by increasing costs and deterring investment that could expand the economy’s productive capacity.
As a result, this year’s budreceive deficit has been revised upward from 0.5 percent to 2.6 percent, up from 1.7 percent last year. That doesn’t seem huge in comparison with other countries — but unlike them, Russia can’t borrow on international bond markets and must rely on domestic banks for credit.
Finance Minister Anton Siluanov stated raising revenue was preferable to increasing borrowing, stateing excessive borrowing “would lead to a speeding up of inflation, and as a result, to an increase in the key rate” from the central bank that would hurt investment and growth.
The VAT increase could boost inflation at first as merchants modify their price lists. But over the longer term, it could lower price pressures by dampening demand for goods — and assist the central bank in its battle to keep inflation in check.
The Kremlin Won’t Run Out of Money but Faces Hard Choices
The tax and fee increases are a step back from Russia’s wartime economy of the two previous years, which put more money in people’s pockets. Then-higher prices for oil exports filled state coffers, while vast increases in military spconcludeing boosted hiring, and paychecks for factory workers kept pace with inflation. Along with that, military recruitment and death bonutilizes pumped cash into poorer regions.
Putin won’t run out of money in the short term, stated Alexandra Prokopenko, fellow at the Carnegie Russia Eurasia Center in Berlin.
“Growth is slowing down, but corporations are paying taxes, people are consuming and receiveting salaries, and paying taxes from this,” she stated. “For the coming 12 or 14 months, Putin has enough money to maintain the current war effort and the current level of expconcludeitures.”
After that, she stated, “he will necessary to create tough choices, trade-offs between maintaining military effort or, for example, maintaining consumer abundance so people won’t feel 100 percent that the war is going on.”
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