TL;DR: Russia will raise VAT from 20% to 22% starting January 2026 to address budget deficits caused by high military spending. The move aims to generate about $15.5 billion annually but may raise inflation temporarily and strain consumers and small businesses. This breaks Putin’s previous tax hike promise amid dwindling welfare reserves and a slowing economy.
Russia’s Finance Ministry proposed increasing VAT from 20% to 22% starting January 2026 to raise an estimated 1.3 trillion rubles ($15.5 billion) annually, mainly to fund rising defense and security costs.
- The federal budget deficit reached 4.88 trillion rubles ($61.1 billion) in the first seven months of 2025, exceeding the government’s full-year target amid weak oil prices and slower economic growth forecasts (GDP growth cut to 1% in 2025 and 0.5% in 2026).
- Essential goods like bread, dairy, meat, medicines, and children’s products will keep a reduced 10% VAT rate, but most other goods and services will see higher taxes, potentially raising inflation by about 1.5% in early 2026.
- The VAT registration threshold for small and medium enterprises (SMEs) will be lowered from 60 million rubles ($700,000) to 10 million rubles ($116,000), likely increasing tax burdens on tens of thousands of small businesses.
- President Vladimir Putin had promised no new tax hikes before 2030 but cited external pressures and high defense spending as reasons for the change; defense now accounts for over 40% of the federal budget.
- The National Wealth Fund, Russia’s main fiscal reserve, has fallen sharply from over $125 billion pre-war to below $45 billion liquid assets, with reserves expected to run out in 12–18 months at the current spending pace.
- The tax hike is expected to reduce the budget deficit but may also suppress consumer spending and GDP growth, raising concerns about economic stability ahead of the 2026 parliamentary elections.