A slowing wartime economy pushes the Kremlin to tap consumers for revenue

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% from 20% 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.

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 change is aimed in part at tax avoidance schemes in which companies split their operations to skirt the threshold.

But it also will hit previously exempt businesses like corner convenience stores and beauty salons.

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% 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.

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, saying the higher food prices would be widely felt, especially in poorer regions and among those with low incomes.

Pensioner Svetlana Martynova said making small businesses collect VAT would backfire.

“I think that small and medium businesses will fold,” she said. “The budget will get less, not more.”

On top of VAT, registering a car will cost more

The VAT increase comes on top of changes in the recycling fee paid for registering cars, a step that mostly hits high-priced imports. From Dec. 1 individuals can no longer get 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 smaller 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 said in an answer to emailed questions.

“Increased taxes and fees will influence prices for the end consumer,” he said. “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 budget deficit

Russia’s economy shrank at the start of 2025 and is on course for growth this year of only around 1%, according to government estimates, after growing more than 4% in 2023 and 2024. Growth has suffered from high central bank interest rates, currently at 16.5%, aimed at controlling inflation of 8% fueled by massive military spending. Oil revenues are down about 20% 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 budget deficit has been revised upward from 0.5% to 2.6%, up from 1.7% 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.

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 that put more money in people’s pockets. Then-higher prices for oil exports filled state coffers, while vast increases in military spending boosted hiring, and paychecks for factory workers kept pace with inflation. Along with that, military recruitment and death bonuses pumped cash into poorer regions.

Putin won’t run out of money in the short term, said Alexandra Prokopenko, fellow at the Carnegie Russia Eurasia Center in Berlin.

“Growth is slowing down, but corporates are paying taxes, people are consuming and getting salaries, and paying taxes from this,” she said. “For the coming 12 or 14 months, Putin has enough money to maintain the current war effort and the current level of expenditures.”

After that, she said, “he will need to make tough choices, trade-offs between maintaining military effort or, for example, maintaining consumer abundance so people won’t feel 100% that the war is going on.”