Russia's invasion of Ukraine is intensifying the strain on state finances, prompting President Vladimir Putin to seek new revenue streams. The government is implementing a series of tax increases aimed at funding its operations and the war effort, a move that further skews the economy toward military needs at the expense of civilian priorities.
The 2027-2029 state budget, set to be considered by the parliament, follows recent tax hikes. While last year's approach involved broad tax increases, this year's measures target a narrower segment, including mining companies and wealthier citizens with investment income, property sales, and bank accounts.
The budget deficit for the current year has surpassed forecasts due to extensive military spending and sluggish economic growth. This is compounded by international sanctions, high interest rates for non-military businesses, labor shortages, and Ukrainian strikes on Russian oil infrastructure.
According to the Kyiv School of Economics, the deficit reached 5.8 trillion rubles ($72 billion) through August, a nearly 50% increase from the previous year and exceeding the revised target. The government proposes a 20%-30% windfall profits tax on mining companies, particularly those involved in iron ore, nickel, and gold production. Additionally, income from interest, dividends, and property sales will face higher tax rates, ranging from 13% to 22%, an increase from the current 13% or 15% rates.
Starting January 1, new proposals include a 100-ruble charge per parcel and a 22% value-added tax (VAT) on formerly tax-free foreign goods purchased online under 200 euros. A 35% tax will also be imposed on dividends sent to restricted accounts for foreign investors from "unfriendly countries."
Some citizens in Moscow expressed resignation and understanding regarding the tax increases. "They need money for state coffers, they need to collect more from people, from ordinary people," said Denis Bystrov, 39. Sergei Sukachev, nearly 70, acknowledged that "everyone knows perfectly well that the money's going for the military operation."
Analysts suggest that while Russia has sufficient financing for the next few years, it comes at the cost of increased taxes and expenses for households and businesses. This reallocation of funds leaves less available for normal economic development and infrastructure, leading to an economy heavily skewed towards military funding.
In a separate development, a subsidiary of German retailer Metro was reportedly seized under a law allowing temporary administration of firms from "unfriendly countries." This subsidiary was compelled to contribute one billion rubles ($12 million) to the war effort. Metro AG's headquarters in Germany stated it had no involvement in this donation, which did not reflect the company's position or business practices.
On the surface, Russia's economic indicators appear stable, with projected GDP growth of 0.6% this year and record low unemployment. The government also holds minimal debt. However, sanctions prevent Russia from accessing international bond markets, and domestic financial resources have been significantly drawn down. The National Wealth Fund's liquid assets available for spending have also diminished.
While Russia's finances are considered stable for the moment, experts warn that limited room for maneuver exists. An adverse shock, such as a drop in global energy prices or a loss of confidence in the financial system, could quickly destabilize the current equilibrium.