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After two years of strong growth due to war military spending ukraineRussia’s economy is slowing down. Oil revenues have declined, the budget deficit has increased and defense spending has decreased.
kremlin Needs money to keep its finances stable – and that’s clearly where the President is Vladimir Putin It is intended to be received: at cash registers, from ordinary people and small businesses.
Raising the value-added tax from 20% to 22% is expected to add 1 trillion rubles, or about $12.3 billion, to the state budget. The increase is enshrined in legislation already passing through Russia’s obedient parliament and will take effect on January 1.
More taxes and fees are going to increase
In addition to the rate increase, the law also lowers the threshold for businesses to collect VAT in annual sales revenue in phases by 2028 to just 10 million rubles (about $123,000). That’s less than 60 million rubles or $739,000. The change is partly targeted at tax avoidance schemes in which companies divest their operations to avoid limits.
But it will also affect 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 example, the tax on strong spirits such as vodka will increase 84 rubles per liter of pure alcohol, which is 17 rubles or about 20 US cents or about 5% of the minimum price of 349 rubles ($4.31) for a half-liter bottle. Fees to renew a driver’s license or obtain an international license are also rising, and a major tax exemption on imported cars is being eliminated. The government is imposing a technology tax on digital devices, including smartphones and notebooks, of up to 5,000 rubles ($61.50) for the highest-priced items, Kommersant news site reports.
Economic recession and tax increases are signs of Putin and ordinary Russians The coming months will face tough choices between guns and butter—that is, between military spending and consumer welfare after a 3 1/2-year war against Ukraine.
Tax hikes lead to disappointment and shrugs
Muscovites interviewed by The Associated Press on a main street in the Russian capital expressed disappointment with the resignations and said higher food prices would be felt widely, especially in poorer areas and among those with lower incomes.
Pensioner Svetlana Martynova said charging VAT from small businesses would have the opposite effect.
“I think small and medium businesses will close,” she said. “The budget will be less, not more.”
Apart from VAT, car registration will cost more
The VAT increase comes on top of changes to the recycling fee paid for registering cars, a move that mostly affects higher-priced imports. From December 1 individuals can no longer get the discounted rate of 3,400 rubles ($42) on cars with more than 160 horsepower, but must pay the commercial rate, which can run into hundreds of thousands of rubles or thousands of dollars per car.
However, the move was unlikely to boost investment in domestic manufacturing, due to high central bank interest rates and the small size of the Russian market compared to neighboring China, which is now the source of most imported cars. This is according to Andrei Olkhovsky, general director of Avtodom, a major auto dealer group.
As far as customers are concerned, sales “will decline in the short term, but will recover to current levels within six months,” he said in response to emailed questions.
“Increased taxes and duties will impact prices for the end consumer,” he said. ,consumers In turn they will incorporate it into their lifestyle and demand higher wages from their employers. “This will increase the cost of everything around us.”
Slow economic growth increases budget deficit
Russia’s economy shrank in early 2025 and is on track to grow only around 1% this year, according to government estimates, after growing more than 4% in 2023 and 2024. Growth has been hurt by high central bank interest rates, currently at 16.5%, aimed at controlling inflation of 8% due to massive military spending. According to the Kyiv School of Economics Institute, oil revenues have fallen by about 20% this year mainly due to low global prices. Western sanctions imposed during the war against Ukraine are continuing to put pressure on growth by increasing costs and inhibiting investment that could expand the economy’s productive capacity.
As a result, this year’s budget deficit has been revised down by 0.5% to 2.6%, from 1.7% last year. This doesn’t seem very big compared to other countries – but unlike them, Russia cannot borrow on international bond markets and must rely on domestic banks for loans.
Finance Minister Anton Siluanov said that increasing revenues is better than increasing borrowing, adding that excessive borrowing from the central bank would “accelerate inflation and result in an increase in the key rate”, which would harm investment and growth.
The VAT increase could first lead to inflation as traders change their price lists. But in the longer term, it could ease price pressures by reducing demand for commodities – and help the central bank in its fight to keep inflation under control.
Kremlin will not be short of money but will face tough choices
The tax and duty increases are a step back from Russia’s wartime economy of the past two years that has put more money in people’s pockets. The then-high prices for oil exports filled the state coffers, while a massive increase in military spending boosted hiring, and wages for factory workers kept pace with inflation. Additionally, military conscription and death bonuses flowed cash into poor areas.
Putin will not run out of money in the short term, said Alexandra Prokopenko, a 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 it,” he said. “For the coming 12 or 14 months, Putin has enough money to maintain the current level of war effort and spending.”
After that, she said, “he will need to make tough choices, trade-offs, between maintaining the military effort or, for example, maintaining consumer abundance so that people don’t feel 100% that there is a war going on.”