With Wartime Economy Down, Russia to Hit Up Consumers

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, the AP reports. The plan includes:

• VAT: An increase in value-added tax to 22% from 20% is expected to add as much as $12.3 billion, to the budget; the legislation is making its way through Russia's compliant parliament and would take effect on Jan. 1. It also 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 $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.
• Inflation risk: 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 keep inflation in check. 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.
• Drinking, smoking levies: The government 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 20 US cents for a half-liter bottle, or about 5% of the minimum price of $4.31.

• Fees: Charges for renewing driver's licenses or getting an international license 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 $61, the Kommersant news site reported.
• Response on the street: Muscovites interviewed on a main street in the Russian capital 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."
• The slowdown: 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 are an ongoing drag on growth.

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• The budget picture: 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.
• Putin's choices: President Vladimir Putin will have enough money for the war effort and other spending for the next year or so, said Alexandra Prokopenko of 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. But after that, "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."