MOSCOW, October 29: Russian President Vladimir Putin’s government is seeking additional revenue through tax increases and other financial measures as the prolonged war in Ukraine puts mounting pressure on state finances, forcing Moscow to balance rising military expenditure against the needs of the civilian economy.
Russia’s proposed 2027-2029 state budget, scheduled for consideration by parliament on Thursday, includes several tax changes announced after the September parliamentary elections. The measures target mining companies, wealthier individuals, online shoppers and foreign investors with restricted accounts.
Unlike last year’s broader tax increases, which included higher value-added tax (VAT) and expanded VAT obligations for small businesses, the latest proposals focus on specific sectors and sources of income.
Budget Deficit Rises Amid Military Spending
Russia’s budget deficit has exceeded earlier projections amid heavy military expenditure, sluggish economic growth, international sanctions, high borrowing costs for civilian businesses and labour shortages. Ukrainian strikes on Russian oil refineries and export terminals have added further pressure.
According to figures cited by the Kyiv School of Economics, Russia’s budget deficit reached 5.8 trillion roubles, or approximately USD 72 billion, through August. That was nearly 50 per cent higher than the figure recorded during the same period last year and above the revised annual target of 4.8 trillion roubles.
To raise additional funds, the government has proposed a windfall profits tax of 20 to 30 per cent on mining companies benefiting from higher commodity prices. Producers of iron ore, nickel and gold are among those expected to be affected.
The proposed changes also include higher tax rates, ranging from 13 to 22 per cent, on income from interest, dividends and property sales. Currently, such income is taxed at 13 per cent for amounts below 2.4 million roubles, or around USD 29,800, and 15 per cent above that threshold.
Other measures scheduled to take effect on January 1 include a 100-rouble charge on each parcel and a 22 per cent VAT on certain imported goods purchased online that were previously exempt from tax because they were valued below 200 euros.
The government has also proposed a 35 per cent tax on dividends paid into restricted accounts belonging to investors from countries Russia considers “unfriendly”.
Public Resignation Over Higher Taxes
The proposed measures have prompted mixed reactions among Moscow residents, with some expressing frustration while others said they understood the government’s need to raise revenue.
Denis Bystrov, 39, said the authorities were seeking to collect more money from ordinary citizens to replenish state finances.
Nelly Godunova, 92, said she accepted the need to contribute if she had earned money, while acknowledging the contributions she had already made to the country.
Businessman Sergei Sukachev, who is nearly 70, said he had experienced some difficulties but understood the government’s priorities amid the war.
Civilian Economy Faces Growing Challenges
Chris Weafer, chief executive of consultancy Macro-Advisory Ltd, said Russia had sufficient financing options to cover its deficit in 2027 and potentially in 2028, but warned that doing so would come at a cost to households and businesses.
He said the growing share of public spending directed towards military operations was leaving fewer resources available for civilian economic development and infrastructure.
According to Weafer, Russia’s economic growth has become increasingly dependent on government spending and industries linked to the state, while other sectors continue to struggle.
The government forecasts economic growth of 0.6 per cent this year. Russia also has record-low unemployment and relatively low public debt, indicators that suggest resilience on the surface.
However, international sanctions have restricted access to foreign bond markets, limiting the Kremlin’s ability to borrow internationally. Domestic financial resources have also come under increasing pressure.
Foreign Companies And State Reserves Under Pressure
Russia has increasingly relied on domestic borrowing, including bond sales to Russian banks, to finance its spending. Such efforts faced difficulties earlier this summer when banks resisted offering financing at lower interest rates, although sales resumed after the government improved the terms.
The banking sector has also been drawn into financing the war through loans to defence companies, shifting some of the financial burden away from the federal budget and onto banks and state-controlled businesses, according to the Kyiv School of Economics.
Another source of funding is the National Wealth Fund, established using oil and gas export revenues. However, its liquid assets available for spending, including holdings in Chinese currency and gold, have fallen to around 1.7 per cent of GDP.
The government has also used legal provisions allowing temporary state administration of businesses from countries designated as unfriendly.
A Russian subsidiary of German retailer Metro was reportedly placed under such administration and made a contribution of one billion roubles, equivalent to around USD 12 million, to a fund supporting the war effort.
Metro AG, headquartered in Germany, said it had no role in the contribution and that it did not reflect the company’s position or business practices. Metro Russia said the money would be used to purchase vehicles, communications equipment and anti-drone systems for Russian soldiers.
Weafer suggested that the seizure of foreign businesses could be linked to preparations for possible negotiations over Russian assets frozen abroad. However, he warned that such actions could also encourage authorities to view foreign-owned companies as potential sources of additional revenue.
Financial Stability Faces Risks
Despite the mounting pressures, Russia’s revised budget deficit is expected to be around 3 per cent of GDP this year, according to Finance Minister Anton Siluanov. That would be higher than last year’s 1.6 per cent but broadly comparable with the European Union’s average and below the United States’ reported deficit of 5.8 per cent of GDP last year.
Higher global energy prices, attributed in the report to the war in Iran, have also helped sustain Russian oil export earnings.
Nevertheless, the country’s financial position remains vulnerable. Sanctions have restricted access to international capital, while liquid reserves have been significantly reduced and domestic borrowing has become increasingly important.
The Kyiv School of Economics has assessed Russia’s finances as stable for now but warned that the government’s room for manoeuvre is limited.
A sharp decline in global energy prices or a loss of confidence in the financial system could undermine the current balance, adding to the challenge of financing military operations while maintaining economic stability.
