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.