Rising taxes, falling profits: Moscow struggles to fund its war economy
Photo: Russian government forced to raise taxes (Getty Images)
The Russian government is being forced to raise taxes in hopes of increasing budget revenue growth, according to the Foreign Intelligence Service of Ukraine (SZR).
“The planned increase of Russia’s VAT rate to 22% starting January 1, 2026, is unlikely to ensure the expected growth in budget revenues. According to estimates, in 2026, VAT income will be $6.1 billion lower than projected by Russia’s Finance Ministry,” the SZR said.
Expected consequences
The report notes that the tax increase will have several side effects. A decline in domestic demand is anticipated, which will result in reduced revenues from excise taxes and customs duties. Higher prices will lower corporate profits, payroll funds, and income tax revenues.
In addition, reduced dividends for private and state shareholders will lead to losses for individual companies, while regions will lose a significant share of their income.
The VAT increase will also intensify inflationary pressure and force the Russian Central Bank to maintain a high key interest rate for at least two more quarters. This will raise the cost of government borrowing, requiring the Finance Ministry to issue bonds with higher yields, increasing debt servicing costs and reducing the net fiscal effect of the reform.
Record-high taxes
At the same time, a 22% rate would make Russia’s VAT one of the highest in the world — surpassed only by Hungary (27%) and a few Northern European countries.
This decision reflects a shortage of budgetary resources resulting from rising military spending and declining export revenues. As a result, Russia will face a deepening economic crisis, an expanding shadow economy, and even more expensive loans for businesses and state-owned companies.
Russian economy in crisis
Earlier, the intelligence service noted that the Russian economy has reached a point where even official statistics can no longer conceal the depth of the crisis.
According to the SZR, the total profit of Russian enterprises fell by 8.3% between January and August 2025 — evidence of a sharp contraction in business activity.
Despite the authorities’ attempts to project “economic stability,” analysts estimate that Russia is currently spending about half of its state budget on the war against Ukraine, further deepening the internal crisis.
