russia ukraine war

Russia Raises ⁢VAT, ‌Signals Economic Strain From War in Ukraine

MOSCOW – The Kremlin is increasing the Value Added Tax (VAT) from 20% to 22% as⁣ a slowing economy, ‍fueled by military spending⁣ and Western sanctions, forces the⁣ government to seek additional revenue sources. The move, announced this week, marks a shift from the ⁤economic conditions of the ⁢past two years which saw ‍increased state revenue from high oil prices and wartime​ spending.

Russia’s economic‌ growth has decelerated sharply, with government estimates projecting around 1% growth for the current year,⁤ a‍ important drop from the 4% growth ‍experienced in both ‍2023 and 2024.This slowdown​ is⁣ attributed to a‌ combination of ‍factors including‌ high central bank interest rates – currently 16.5% – implemented to combat inflation of 8%, declining oil ‍revenues (down approximately​ 20% this year due to lower global prices, according to the Kyiv School of Economics Institute), and the ongoing impact of Western ⁢sanctions related to the war in Ukraine.

The increased⁤ economic pressure is⁤ reflected in a widening budget⁢ deficit,revised upwards from 0.5% to 2.6%⁣ for the current year, compared to 1.7% in 2023. Russia’s limited access to international borrowing‍ markets means ⁤it must rely on domestic banks ​for credit, ⁣making increased revenue generation‌ a priority.

Finance minister Anton siluanov ⁢emphasized ‌the preference⁤ for raising revenue over increasing borrowing,‌ 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, which⁣ would negatively impact investment and growth. While the VAT increase may initially​ contribute to⁢ inflation as merchants adjust prices,officials hope it will ultimately⁤ dampen‌ demand and aid ⁣the central bank’s efforts​ to control inflation.

analysts⁢ suggest the ‌Kremlin has sufficient funds to maintain current military expenditures and social programs for the next 12-14 months. However, Alexandra Prokopenko, a fellow ⁤at the ⁤Carnegie Russia Eurasia Center⁤ in Berlin, predicts‌ that ‍President Putin will ‌soon face difficult ​choices. “He will need to make tough ⁣choices, trade-offs between maintaining military effort ‍or, such as, maintaining consumer abundance so people won’t feel 100% that‌ the war is‍ going on,” she said.

the‍ VAT increase represents a ‌departure from the previous wartime economic​ strategy of boosting disposable income through higher oil revenues, increased military spending, and recruitment bonuses. It signals ‌a growing need for⁢ the Kremlin to directly tap consumers to ⁢finance the ongoing conflict and maintain ‍economic ‌stability.