Eurasia Press & News
Russia’s federal budget is changing on the fly—it’s still unclear what the final deficit for 2025 will be. However, the Ministry of Finance has already included a candid comment in its draft budget for next year that tax increases will be used for military spending. The essence of the decision is to squeeze more money out of the economy right now, regardless of the consequences. “The horse has been thoroughly worn out,” remarked Putin’s oligarch Oleg Deripaska, dissatisfied with the size of the budgeted investments. He claimed that it would be impossible to “spur” the economy on at this rate.
The population and companies will chip in for the war
“The strategic priority is to finance the country’s defense and security needs, and social support for the families of SVO participants,” the Ministry of Finance clearly outlined the goals of the new budget. Amendments to the Tax Code are also being introduced to “finance defense and security.” There are several of them.
The standard value-added tax (VAT) rate will be increased from 20% to 22%. Thus, starting in 2026, Russia will join the group of countries with the highest VAT rates in the world. Among the major economies, only Italy, which collects 22% of its value added for its budget, and possibly Brazil, which has a variety of partially folded rates, are members of this group.
With this increase, Russia will catch up and immediately surpass Spain and the Netherlands (where the tax rate is 21%), and also surpass France, Britain, Turkey (20%), and Germany (19%). The US has no equivalent tax whatsoever. In Canada, rates vary by province, but are all below 15%. In Japan, South Korea, and Australia, the rate is 10%. In developing countries, the VAT rate is also generally lower than in Russia: 18% in India and Pakistan, 16% in Mexico, 15% in South Africa, 13% in China, and 12% in Indonesia.
Russia has never seen such a VAT. It was worse, but 33 years ago—the base rate was 28% in 1992, but it was lowered in 1993, immediately to 20%, and then to 18% in 2004. The new rate of 22% will be the highest since the Gaidar government.
The new VAT rate of 22% will be the highest since the Yegor Gaidar government.
Furthermore, under the new rules, businesses with revenues of 10 million rubles or more will become VAT payers. Previously, this requirement was for revenues of 60 million rubles or more. This is a massive blow to Russian businesses, especially small and medium-sized ones. A typical victim of this new rule, which expands the scope of VAT payers, can be understood by considering that the average bill in a typical Russian (not Moscow) cafe is around 1,000 rubles, and there are four bills per seat per day.
This means that previously, VAT was payable only by establishments with 42 or more seats, but now the threshold will be six times lower—seven seats. This not only entails additional tax deductions but also accounting costs, as reporting becomes significantly more complex.
In total, the tax reform will generate almost 1.8 trillion rubles for the budget. Of this, the VAT increase will bring in 1.2 trillion rubles, while the impact on small businesses (i.e., the lowering of the VAT threshold) will only bring in 200 billion rubles. The government expects another 74 billion rubles from bookmakers, whose deductions have been increased, and 66 billion rubles from increased excise taxes on alcohol and tobacco.
Lies as State Policy: The Parable of Not Raising Taxes
Raising Russia’s main tax, especially with a broader scope of taxpayers, is an unscheduled measure. Moreover, Putin ordered the prevention of anything similar during the 2024 election campaign. Subsequently, the Ministry of Finance has resolutely and repeatedly rejected the possibility of raising taxes.
At the 2025 St. Petersburg Forum, Finance Minister Anton Siluanov said :
“Under these circumstances, we truly have a perfect storm. And the budget is the same—it’s seriously stormy. Nevertheless, we discussed taxes last year and agreed that we’ll leave them basically alone—and that’s the right thing to do. Because this is also a tool for the predictability of our policy.”
He made similar promises before—for example, before the personal income tax increase on October 16, 2023, in the State Duma: “When forming the three-year budget, we did not plan to address changes to base taxes, including the personal income tax… We believe it is possible to revisit this issue. When? We could look at it in the next budget cycle. But now, as we form the budget for the upcoming three-year period, we have decided not to change the base taxes.”
As early as February-March 2024, Putin publicly proposed raising taxes on the rich, and from January 1, 2025, the personal income tax scale was no longer two-tiered, but five-tiered, and the maximum rate rose from 15% to 22%.
Also, starting in 2025, the corporate income tax was raised from 20% to 25%—and the entire increase went to the federal budget , not the regions. As a result, federal income tax revenues in 2025 increased more than any other item, by 78%: 2.26 trillion rubles were collected from January to July, compared to 1.27 trillion rubles the previous year.
Thus, the minister’s statements can already be seen as a sure sign of preparations for tax increases. And the VAT change is establishing something of a New Year’s tradition: key tax rates have been increasing for the second year in a row, effective January 1. Now taxpayers should have clear expectations, making it difficult to catch them off guard.
It’s logical that they would move money abroad or into the shadow economy in advance, cancel plans for business expansion, or simply shut down their operations. Authorities systematically underestimate such effects, which is why official forecasts regularly prove more optimistic than the actual figures.
In parallel with the federal budget preparations, the Ministry of Economic Development is publishing its macroeconomic forecast for the next three years. And this time, expectations are much more modest: in the baseline scenario, GDP will increase by 1.3% in 2026, while in the conservative scenario, it will only increase by 0.8%. In both scenarios, investment in fixed capital will decline. However, inflation will remain stable in either scenario: by the end of 2025, prices will rise by 6.8%, and by 4% annually starting in 2026, fully in line with the Bank of Russia’s goals.
Comparing these forecasts with those made a year ago reveals how the government is slowly coming to terms with a grim reality. In the fall of 2024, it expected GDP to grow by 2.5% in 2025; now it’s only expecting 1%. Retail turnover was expected to grow by 6-7.6% in 2025; now it’s expected to be no more than 2.5%. And the inflation forecast is the opposite: it was 4.5%, but now it’s 6.8%.
The changes in forecasts show how the government is gradually coming to terms with the ugly reality.
Such comparisons allow us to understand the value of forecasts and plans being made today. Russia’s budget is even less predictable than GDP dynamics. And recent adjustments have been made for the worse. For example, the 2025 budget law initially projected a deficit of 0.5% of GDP, or 1.2 trillion rubles. At the end of April, the law was amended , and the deficit became 1.7% of GDP, or 3.8 trillion rubles.
And now the new official target has been announced : 2.6% of GDP, or 5.7 trillion rubles. The deficit has grown more than 4.5 times! In 2024, the initial budget law projected a deficit of 1.6 trillion rubles; after the spring adjustments, it was expected to be 2.12 trillion rubles; the autumn amendments increased the deficit to 3.3 trillion rubles, but the actual figure was 3.5 trillion rubles.
Fictitious reduction in defense spending
Federal budget expenditures are projected to amount to 44.1 trillion rubles in 2026. This means they will effectively remain at the level planned for 2025–2027 (currently 44.022 trillion rubles). This represents an increase of 1.25 trillion rubles over 2025 expenditures. Subsequently, expenditures will increase , but this effectively amounts to a freeze, as the current growth barely covers inflation.
If the forecast comes true, the spending dynamics will change dramatically compared to the recent past and present.
How are government spending plans planned to slow? The most significant reduction, surprisingly, is planned for the “National Defense” budget. While 13.5 trillion rubles will be spent on it this year, only 12.9 trillion rubles are planned for next year. However, a slight increase is projected for later on .
Despite this, the war remains the largest expenditure item, accounting for 29% of all 2026 budget expenditures. The related “National Security and Law Enforcement” line item will receive another 3.9 trillion rubles (9% of budget expenditures). By comparison, only 7 trillion rubles (16% of all expenditures) are allocated for “Social Policy.”
However, not everyone believes such a reduction will occur. For example, some expenditures could be deferred until 2025, and such an advance payment for state defense procurement for next year is entirely possible, notes economist Sergei Aleksashenko:
“Would anyone object to receiving budget funds earlier? So what if this would require increasing the deficit and borrowing at the end of the year—last December, another scheme was tried and tested, when the Bank of Russia, with the help of banks, issued a trillion rubles to the Ministry of Finance.”
“As for the size of the budget deficit, what difference does it make to you whether it’s four times larger than the original plans or four and a half? But if this year fails miserably—and it already has and there’s no way to fix it—then the planned picture for next year looks quite attractive!”
Expenditures can also be partially written off as other budget items. “If, for example, you search the explanatory note and see where and how many times the words ‘defense’ are mentioned, you’ll discover that a significant portion of defense-related expenses are actually included in other budget items. There are dozens of these references,” noted Andrei Yakovlev, an associate researcher at the Davis Center at Harvard University. “I would view this entire situation as an attempt by the government to essentially create a technical budget that smooths out the rough edges, creating the illusion that everything is balanced. Meanwhile, they’ve raked in all the reserves that could have been effectively tapped,” he says.
A large amount of defense-related spending is included in other budget items.
Indeed, expenditures on arms procurement can be found, for example, in the emergency protection program—”the purchase and repair of weapons, military and special equipment, industrial and technical products, and property within the framework of the state defense order”—at 24 billion rubles in 2026. And overall, 220 billion rubles are allocated in this same program “to ensure the functioning of the Armed Forces of the Russian Federation, national security and law enforcement agencies, troops, and other military formations.”
On the other hand, it’s possible to fight without increasing spending. This is roughly what happened in 2023, when the army was struggling to repel the Ukrainian counteroffensive and suffering from ammunition shortages.
Living off the future
By continually raising tax rates, the Kremlin acknowledges that its growing appetite cannot be satiated by natural economic growth. Putin’s government is attempting to carve out an ever-larger share of the shrinking pie. This is despite warnings of an imminent or already present recession from loyal experts and officials, including Economic Development Minister Maxim Reshetnikov.
However, commenting on the 2026 budget, Reshetnikov no longer worries about recession. He said tax increases are “a prerequisite for a further slowdown in inflation, macroeconomic stability, and the possibility of easing monetary policy, ultimately supporting economic growth.”
If taxes aren’t raised, the budget deficit will be even larger, and this is an inflationary measure that will prevent the Central Bank from lowering the rate, he explained. “This would lead to a longer-term continuation of tight monetary conditions and, accordingly, significantly lower rates of economic growth over the entire forecast horizon.”
That is, according to his logic, higher rates—more tax revenue—lower deficit—lower inflation—easier monetary policy—faster economic growth. The only problem is that excessively raising tax rates may ultimately decrease, rather than increase, total revenue due to the economy’s slowdown and shift to the shadow economy. Otherwise, filling the budget would be a very simple task. The connection between budget deficits and inflation in the short and medium term is often absent: many developed countries have had significantly larger deficits than Russia for many years, while inflation is lower. Monetary policy doesn’t necessarily need to be eased when inflation has declined: the Bank of Russia already engaged in similar easing from April 2022 to July 2023—and ultimately forced itself to tighten again.
If tax increases always led to increased budget revenues without side effects, filling the treasury would be a very simple task.
Finally, monetary easing accelerates growth only in the short term, and not always; otherwise, no country would suffer from stagnation in development, and everyone would endlessly enjoy cheap money from their central banks.
At the same time, the government ignores a much more reliable and direct pattern: raising the tax burden harms economic growth in itself, undermining incentives for productivity and thrift. The classic rule is at work: low taxes are the most important factor in a country’s long-term wealth, while excessively high taxes lead to stagnation and sometimes even decline. High taxes are an affordable luxury for prosperous countries, but by raising taxes on an already stagnant economy, the government is pushing it further into recession in order to immediately raise money for the war. Doing this just a year after raising corporate and personal income taxes is eroding the tax base, or sawing off the branch you’re sitting on.
