How are Russia’s economy and finances doing?

“Russia’s government has announced plans to raise the rate of value added tax from 20 to 22 per cent, backtracking on President Vladimir Putin’s promises as the war against Ukraine drags on the economy,” writes the Financial Times.

“The finance ministry justified it by saying the funds would primarily be used to cover Russia’s spiralling defence and security expenditure (the war, to call things by their name — Pavlo Sheremeta), as well as for support for veterans and social spending.”

“The Kremlin’s priority remains military expenditure,” said Alexandra Prokopenko, a former central bank official, who is now at the Carnegie Russia Eurasia Center in Berlin.

“At the start of the war, the spending on the army came from reserves and surplus oil and gas revenue. Then they raised corporate taxes. Now all businesses and Russian citizens are going to finance the war directly, because there aren’t any other sources left,” she added.

Russia’s budget deficit has already risen to $50 billion, or 1.9% of GDP, amid falling revenues due to declining oil prices and U.S. efforts to pressure Russia’s energy exports.

The Ministry of Finance expects the budget deficit to reach 2.6% of GDP for the full year. Official GDP growth forecasts for this year have been revised down from 2.5% to 1%, and for 2026—from 2.4% to 1.3%.

This is the second increase in direct taxes since the full-scale invasion of Ukraine in 2022, in addition to the introduction of a progressive personal income tax in 2024 and numerous irregular levies invented by the government, including “voluntary contributions” from Western companies leaving the country.

VAT thresholds have also been lowered to include small businesses that were previously exempt.

According to Finance Minister Siluanov, oil and gas sales, which previously accounted for nearly half of Russia’s budget, are expected to make up no more than 22% of its revenues next year. Siluanov said this will make the budget “more muscular” to “respond to any constraints we face.”

President’s press secretary Peskov insisted that Russia remains stable. “Russia’s economy has mostly rebuilt itself around the needs of the [war] in such a way that all the requirements for the front are easily covered.”

But Moscow will likely have to cut spending in other areas to maintain the current level of military expenditure, Prokopenko argued. “The Russian economy isn’t a paper tiger just yet (as Trump said the day before yesterday). They have enough resources to support the war at this level, but other expenses are already harder to finance,” she said.

What will Ukraine’s response be to the Russian mobilization of finances and militarization of society?

This is why I am pressing so hard on the need to increase Ukrainian productivity, which is currently roughly three times lower than the enemy’s. Either we radically boost the productivity of every hryvnia at work — especially in the public sector — or, in the context of decreasing external aid, we will likewise have to raise taxes to cover the enormous deficit (15–20% of GDP) in our state budget.

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About the author. Pavlo Sheremeta, Ukraine's former Minister of Economic Development and Trade, Professor at the Kyiv School of Economics, founder of a number of new domestic economic schools, Ukrainian Armed Forces officer.

The editorial team does not always share the opinions expressed by blog authors.