Russia's economy, buoyed by military spending on the war in Ukraine, is now slowing. With oil revenues falling and the budget deficit widening, the Kremlin is turning to consumers and small businesses for revenue. A proposed increase in value-added tax (VAT) from 20% to 22% is expected to raise up to 1 trillion rubles ($12.3 billion) for the state budget from January 1.
The legislation also lowers the threshold for businesses to collect VAT from 60 million rubles ($739,000) to 10 million rubles ($123,000) in annual sales, phased in by 2028. This aims to curb tax avoidance but will affect previously exempt small businesses such as corner shops and beauty salons. Additionally, taxes on alcohol, tobacco and vapes are set to rise, along with fees for driver's licenses and the removal of a tax break on imported cars. A potential tech tax on smartphones and notebooks could add up to 5,000 rubles ($61.50) per item.
Muscovites expressed dismay mixed with resignation. Pensioner Svetlana Martynova warned that collecting VAT from small firms would backfire: 'I think that small and medium businesses will fold. The budget will get less, not more.' Higher food prices are expected to hit poorer regions hardest.
Russia's economy shrank at the start of 2025 and is forecast to grow only 1% this year, after 4% growth in 2023 and 2024. High central bank interest rates of 16.5% are curbing inflation but also stifling growth. Oil revenues are down 20% due to lower global prices, and Western sanctions continue to deter investment. The budget deficit has been revised up to 2.6% from 0.5%, and unlike many countries, Russia cannot borrow on international markets.
Andrei Olkhovsky, general director of auto dealer group Avtodom, noted that increased taxes and fees will raise prices for consumers. '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,' he said. He predicted short-term sales declines but recovery within six months.
