The Russian government is considering raising the value-added tax (VAT) rate to curb the budget deficit and preserve reserves.

Source: Reuters, citing sources

Details: The discussions are taking place despite Russian ruler Vladimir Putin’s public assurances that no tax increases are planned, Reuters says. 

The draft budget is to be submitted to parliament on 29 September.

Quote : "Its key components are agreed with Putin beforehand and are unlikely to be significantly altered during the formal parliamentary debate."

Details: Russia, now in its fourth year of war against Ukraine, has already raised personal income and corporate taxes this year, yet the government still had to triple its forecast for the federal budget deficit to 1.7% of GDP in May. 

According to an anonymous official cited by state media earlier this month, the actual deficit may exceed that figure, while the planned 0.9% of GDP deficit for 2026 is also under threat.

Four sources close to the government confirmed a report by independent media outlet The Bell that the government is discussing raising VAT from 20% to 22% in order to curb the growing deficit.

The timing of the decision remains unclear, but one source noted the change could be introduced in the 2026 budget if the current budget rule, which requires oil windfall revenues to be set aside, remains in force.

"How can the deficit be reduced while adhering to the budget rule? Only by raising taxes, because there's hardly anything left to cut, either military spending or social spending," one source explained.

According to Reuters calculations, VAT accounted for 37% of federal revenue in 2024, and its increase could halve the projected deficit for 2026.

The Russian economy continues to grow despite tougher Western sanctions over the war in Ukraine. However, GDP growth is forecast to slow to about 1% compared with 4.3% last year, while inflation remains above 8%. A significant share of the workforce and about 40% of government revenue are directed to defence and security.

Government spending remains the main driver of Russia’s economic growth. Given Putin’s dissatisfaction with the pace of the economy and the need to keep funding a war of attrition in Ukraine, cuts are seen as unlikely.

Background: 

• Kremlin spokesman Dmitry Peskov claimed that Russia’s macroeconomic situation remains "reliable and predictable" despite the rouble's collapse and the onset of recession.
• Russia’s economy faces deeper problems than officially acknowledged, and in the coming year there is a real risk of a systemic banking crisis.
• Old-fashioned bartering is making a comeback in Russia's foreign trade, as companies circumventing Western sanctions exchange wheat for Chinese cars and flax seeds for building materials.

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