With Russia’s invasion of Ukraine intensifying the strain on state finances, President Vladimir Putin is reaching for cash to fund his government and the war, squeezing tax revenue from an economy that’s increasingly skewed toward the military — while civilian needs take a back seat.
The country's 2027-2029 state budget, which will be taken up Thursday in the rubber-stamp parliament, is accompanied by a string of tax hikes announced after the September
parliamentary elections.
While last year the Kremlin went for a broad tax increase, raising value-added taxes at the cash register and making more small businesses pay VAT, this cash grab hits a narrower segment: mining companies and better-off citizens with investment income, property sales and bank accounts.
The budget deficit this year has swelled beyond forecast s due to lavish military spending and tepid economic growth amid sanctions, high interest rates for non-military companies, labor shortages and Ukrainian strikes on oil refineries and export terminals.
The deficit hit 5.8 trillion rubles ($72 billion) through August, almost 50% higher than last year's figure and above the already revised target of 4.8 trillion rubles, according to the Kyiv School of Economics.
The government proposes a 20%-30% windfall profits tax on mining companies that have benefited from prices that have risen since last year. That will hit companies producing iron ore, nickel and gold. Another measure imposes higher rates of 13% to 22% on income from interest, dividends and proceeds from selling property. Such income is currently taxed at 13% for amounts under 2.4 million rubles ($29,800) and 15% above that.
Other proposals to take effect Jan. 1 include a 100-ruble per parcel charge and 22% VAT on formerly tax-free foreign goods worth less than 200 euros that are bought online. There's also a 35% tax on dividends paid into restricted accounts for foreign investors from “unfriendly countries."
People asked about taxes and finances on the street in Moscow responded with a mix of complaints and resignation. "They need money for state coffers, they need to collect more from people, from ordinary people,” said Denis Bystrov, 39.
“What can you do?” said Nelly Godunova, 92. “I've got four university degrees, they were all free, you know? True, I've given plenty to this country. But no matter... If you earned something, you've got to give back.”
“Everyone knows perfectly well that the money's going for the military operation, right?” said Sergei Sukachev, who gave his age as “almost 70.” “I've suffered a little as a businessman, to be honest, but I clearly understand, it's best to hang on and to get our way.”
Russia has enough financing available to cover the deficit in 2027 and probably 2028, says Chris Weafer, CEO of consultancy Macro-Advisory Ltd. “But that is at the expense of raising taxes, of increasing costs for households as well as business,” he said.
“And it means that there is much less money available for normal economic development or infrastructure. Basically, the budget is now moving to a phase where it is primarily funding the military and the military operation.”
“So the economy is now becoming very skewed,” he said. "While there’s still modest positive growth, it is coming from the state spending into these ... state-linked industries, whereas the rest of the economy is struggling badly or even failing.”
A subsidiary of German retailer Metro was seized under a law permitting the temporary administration of firms from “unfriendly countries” and tapped for a billion-ruble ($12 million) contribution to the war effort.
Metro AG headquarters in Germany said it had no role in the donation, which “does not reflect our position or the way we run our business.”
Metro Russia, no longer under the control of headquarters, said the contribution to the “National Front - Everything for Victory” fund would buy vehicles, communications devices and anti-drone equipment for soldiers in what Russia calls its “special military operation” in Ukraine.
Weafer said Russia may be seizing control of foreign companies in anticipation of a deal to secure Russian assets frozen abroad. But the forced donation also raises the risk that the Finance Ministry may see foreign companies as sources of windfall revenue.
Russia's economic numbers don't look that bad — on the surface. The government predicts growth this year of 0.6% of GDP, not great but not a recession either. Unemployment is at a record low, and the government carries very little debt. Earnings from oil exports have held up thanks to higher global prices caused by the war in Iran. The revised deficit for this year will come in around 3% of GDP, according to Finance Minister Anton Siluanov. That is more than the 1.6% achieved last year, but smaller than in many other countries. For instance, the US booked 5.8% of GDP last year. Russia is roughly equal to the EU average of 3.1%.
But that isn't the whole story. Due to sanctions that forbid banks and investors from dealing with Russia, the Kremlin can’t tap international bond markets. And Russia's domestic financial resources have already been extensively drawn down.
One way is to borrow from Russian banks through bond sales. But that came under stress this summer when banks balked at the low interest rate. Sales resumed after the government offered better terms. The government has already tapped the banking system by having banks fund the war with loans to defense companies, shifting the true costs of the war off the federal budget and onto the balance sheets of banks and state-controlled companies, according to the Kyiv School of Economics.
Another pot is the National Wealth Fund, a reserve built up from oil and gas export earnings. But the fund's liquid assets available for spending, such as Chinese currency and gold, have dwindled to 1.7% of GDP.
The Kyiv School of Economics says that Russia's finances are stable -- for the moment.
But “the room for maneuver is limited: an adverse shock such as a drop in global energy prices or an erosion of confidence in the financial system could quickly destabilize the fragile equilibrium.”
