Russia Raises โขVAT, โSignals Economic Strain From War in Ukraine
MOSCOW – The Kremlin is increasing the Value Added Tax (VAT) from 20% to 22% asโฃ a slowing economy, โfueled by military spendingโฃ and Western sanctions, forces theโฃ government to seek additional revenue sources. The move, announced this week, marks a shift from the โคeconomic conditions of the โขpast two years which saw โincreased state revenue from high oil prices and wartimeโ spending.
Russia’s economicโ growth has decelerated sharply, with government estimates projecting around 1% growth for the current year,โค aโ important drop from the 4% growth โexperienced in both โ2023 and 2024.This slowdownโ isโฃ attributed to aโ combination of โfactors includingโ high central bank interest rates – currently 16.5% – implemented to combat inflation of 8%, declining oil โrevenues (down approximatelyโ 20% this year due to lower global prices, according to the Kyiv School of Economics Institute), and the ongoing impact of Western โขsanctions related to the war in Ukraine.
The increasedโค economic pressure isโค reflected in a widening budgetโข deficit,revised upwards from 0.5% to 2.6%โฃ for the current year, compared to 1.7% in 2023. Russia’s limited access to international borrowingโ markets means โคit must rely on domestic banks โfor credit, โฃmaking increased revenue generationโ a priority.
Finance minister Anton siluanov โขemphasized โthe preferenceโค for raising revenue over increasing borrowing,โ stating that excessive borrowing “would lead to a speeding up of inflation, and as a result, to an increase in the key rate” from the central bank, whichโฃ would negatively impact investment and growth. While the VAT increase may initiallyโ contribute toโข inflation as merchants adjust prices,officials hope it will ultimatelyโค dampenโ demand and aid โฃthe central bank’s effortsโ to control inflation.
analystsโข suggest the โKremlin has sufficient funds to maintain current military expenditures and social programs for the next 12-14 months. However, Alexandra Prokopenko, a fellow โคat the โคCarnegie Russia Eurasia Centerโค in Berlin, predictsโ that โPresident Putin will โsoon face difficult โchoices. “He will need to make tough โฃchoices, trade-offs between maintaining military effort โor, such as, maintaining consumer abundance so people won’t feel 100% thatโ the war isโ going on,” she said.
theโ VAT increase represents a โdeparture from the previous wartime economicโ strategy of boosting disposable income through higher oil revenues, increased military spending, and recruitment bonuses. It signals โa growing need forโข the Kremlin to directly tap consumers to โขfinance the ongoing conflict and maintain โeconomic โstability.
