Jens Asbjørn Bøgen
Last time, the Russian government did it, inflation rose.
The Russian government is exploring all possible options ahead of looming budget deadline.
What is happening?
Despite President Vladimir Putin’s public assurances that taxes would not rise, Russian officials are considering increasing the value-added tax (VAT) to help contain a widening budget deficit, four sources told Reuters.
The proposed hike comes as Russia prepares to submit its draft budget to parliament on September 29. Though debate is expected, key budget elements are typically pre-approved by Putin and rarely undergo major changes.
Budget pressures mount amid costly war
Now in its fourth year of war with Ukraine, Russia is feeling the financial strain. Although income and corporate taxes have already gone up in 2025, the government was forced in May to triple its deficit forecast to 1.7% of GDP.
That figure is now expected to be surpassed. Even the lower 0.9% deficit target for 2026, set in a prior budget law, looks increasingly unrealistic, according to officials and state media reports.
VAT hike could halve deficit, insiders say
According to four sources familiar with internal discussions, officials are weighing a VAT increase from 20% to 22%, a move first reported by independent outlet The Bell.
Reuters calculations suggest the hike could halve the projected 2026 deficit.
One source noted that with defense and social spending essentially untouchable, raising taxes is “the only option” left to meet fiscal goals without breaching budget rules tied to oil revenue.
A critical revenue stream
VAT currently generates around 37% of Russia’s federal budget income. A small hike could make a big impact—especially as the government looks to reduce reliance on its rainy-day reserves.
Sources said the tax change is under consideration for the 2026 budget, provided the existing budget rule—which redirects oil profits above $60 a barrel into reserves—remains in effect.
Growth slows, inflation stays high
Despite ongoing Western sanctions, Russia’s economy has managed to grow, though the pace is slowing. GDP growth is expected to fall to around 1% in 2025, down from 4.3% the year before.
Inflation, meanwhile, remains stubbornly above 8%, with a large chunk of the workforce—and about 40% of budget revenues—now dedicated to defense and security spending.
Cuts off the table as war spending continues
President Putin has voiced frustration over the slowing economy but made clear that defense spending must continue to support the Ukraine conflict. With social programs politically sensitive, spending cuts appear unlikely.
“There’s hardly anything left to cut,” one government source told Reuters. “It is like shearing a piglet—lots of squealing, not much use.”
Budget rule and oil revenue in focus
Finance Minister Anton Siluanov has reaffirmed Russia’s commitment to the budget rule, which steers excess energy income into reserves. The fund currently holds about 4 trillion roubles in liquid assets, with 447 billion set aside for deficit coverage this year.
Global oil dynamics continue to affect Russia’s strategy, especially with India now under U.S. pressure to reduce Russian imports amid sanctions enforcement.
Putin pledges stability, but questions remain
Putin previously promised that there would be no major tax changes before 2030, following the sweeping 2025 tax hikes. He recently urged the government to boost revenue through productivity gains—not new taxes.
However, insiders argue that productivity improvements alone won’t close the budget gap, particularly when military spending is protected and social cuts yield minimal savings.
Central Bank cautiously supports tax hike
Elvira Nabiullina, head of Russia’s central bank, gave measured support to a VAT hike, saying after a September 12 meeting that increasing revenue was preferable to expanding the deficit.
She tied the deficit size to the bank’s ability to reduce interest rates, which currently stand at a steep 17%—a level considered too high to foster meaningful growth.
Borrowing options exist, but at a price
Though Putin has said that Russia’s low debt levels give it room to borrow, the cost of doing so is steep. Government borrowing rates hover around 13%, and interest payments are projected to reach 2% of GDP in 2025.
As inflation bites and growth slows, the Kremlin faces tough choices: raise taxes, cut spending, or lean more heavily on costly debt.
This article is made and published by Jens Asbjørn Bogen, which may have used AI in the preparation
