After two years of robust growth fueled by military spending on the war in Ukraine, Russia’s economy is slowing.
Oil revenues are down, the budget deficit is up and defense spending has leveled off.
The Kremlin needs money to keep its finances steady — and it’s clear where President Vladimir Putin intends to get it: At the cash register, from ordinary people and small 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 budget. The increase is contained in legislation already making its way through Russia’s compliant parliament and would take effect from Jan. 1.
The government also has 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 U.S. 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 getting an international license also are 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 spending and consumer welfare after 3 1/2 years of war against Ukraine.
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 spending.
Oil revenues are down about 20 percent this year mainly due to lower global prices, according to the Kiev 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 budget 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 said raising revenue was preferable to increasing borrowing, saying 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 change their price lists. But over the longer term, it could lower price pressures by dampening demand for goods — and help the central bank in its battle to keep inflation in check.
