Moscow needs to raise taxes to keep funding war against Ukraine - Reuters
Illustrative photo: Russia will raise taxes (Getty Images)
Russia will have to raise taxes even more to finance its war against Ukraine. Economists say that the measures already announced to increase revenues will not be enough to finance the country's rapidly growing military spending, according to Reuters.
Russia's draft budget for 2025 allocates about a third of all expenditures, or 6.3% of GDP, to military needs, the highest level since the Cold War. For the first time, the share of defense spending will be twice as high as social spending.
“The 2025 budget suggests that Putin is forced to cut spending in almost all areas to finance the war,” says economist Sergei Aleksashenko, a former deputy governor of the Central Bank.
The loud increase in military spending is causing inflation in Russia's economy. Interest rates have risen to their highest level since 2003, and the ruble has fallen to a one-year low against the dollar. With Western sanctions effectively excluding Moscow from international bond markets, its fundraising options are limited.
The government has already started raising taxes to finance its war in Ukraine, which is now lasting for a third year. A major tax reform is expected to bring in additional revenues of 1.7% of GDP in 2025. Economists argue that this will not be enough.
“The adjustment of domestic taxes will remain a constant focus for the authorities. It is possible that in 2025 we will see many initiatives to amend tax legislation and regulations,” said Alexei Klimyuk from Alfa Wealth..
The expected drop in oil prices, Russia's main export commodity, is also casting a shadow over the country's finances. The draft budget predicts that the price of oil will fall from an average of $70 per barrel in 2024 to $65.5 per barrel in 2027, which will hurt government revenues.
“This structure keeps the budget heavily dependent on oil prices. This means that, if not in 2025 then in the coming years, the question of where to find additional revenue will arise again,” said Natalia Orlova, chief economist at Alfa-Bank.
Limited room for maneuver
The Russian economy has held up remarkably well since the start of the war, despite Western sanctions, with little sign of public discontent amid historically low unemployment and record-high wage growth.
Starting in 2025, an increase in corporate and personal income tax, as well as a new tax on car recycling and a number of smaller tax initiatives are expected to bring in RUB 14.7 trillion over three years.
Finance Minister Anton Siluanov said last year that there was no room to increase spending and warned that if left unchecked, the burden would fall on Russian citizens and businesses through inflation or higher taxes.
Both options have already happened. Inflation is more than twice the central bank's target, and the key interest rate is 21%, the highest since the first years of President Vladimir Putin's rule.
