Russians pick up the tab The Kremlin’s new tax hike aims to plug a record deficit and fund the war — but it may not be enough

The Russian government has approved a draft federal budget for 2026–2028. The full documents aren’t yet public, but the headline figures and major tax changes announced by the Finance Ministry make the Kremlin’s intentions clear: in 2026, it plans to take 1.2 trillion rubles ($14.4 billion) from the public and funnel it into the state budget and the war — to the detriment of ordinary citizens and private business. Meduza looks at whether that will be enough to plug a record hole in the federal budget, what it could mean for food prices, and how the Central Bank may be forced to adjust interest rates as it struggles to balance inflation targets against a slowing economy.

How much will Russians pay?

Beginning January 1, 2026, Russia’s value-added tax (VAT) will rise from 20 to 22 percent, the Finance Ministry announced on September 24 — despite earlier promises not to touch taxes until 2030. The reduced 10 percent rate will remain for essential goods such as food, medicines and medical supplies, and children’s products. The ministry made no secret of the fact that the 4.4 trillion rubles ($52.8 billion) it expects to extract from the economy over the next three years will go toward military spending and security forces.

The figures are so large because VAT — essentially a consumption tax — is one of the federal budget’s main lifelines. Along with the mineral extraction tax, it provided 70 percent of federal revenues last year, with VAT alone accounting for 37 percent. A higher rate effectively means taking more directly from households, since businesses typically pass much of the added burden on to consumers through higher prices.

The government is also tightening the screws on small businesses. It’s slashing the revenue cap for companies eligible to use Russia’s simplified tax system from 60 million rubles (about $720,000) to just 10 million (about $120,000). The system is hugely popular: about 70 percent of sole proprietors rely on it. In 2024, government revenues from this scheme reached 1.3 trillion rubles ($15.6 billion). Now, with the higher tax load — plus a steep increase in social insurance contributions from 15 to 30 percent for sectors like retail and construction — many small businesses may not survive. “Costs could rise so sharply that it might be easier to shut down or sell the business,” one business owner told The Bell.

The Finance Ministry estimates that cutting the revenue cap for simplified taxpayers will add roughly 600 billion rubles ($7.2 billion) to the budget over the next three years.

What’s next for inflation and the economy?

Russia’s planned VAT hike to 22 percent will trigger a short-term jump in prices but won’t create lasting inflationary pressure, Central Bank head Elvira Nabiullina said the day after the announcement. For the bank’s goal of bringing inflation down, she argued, higher taxes are the lesser evil compared with a widening structural budget deficit or abandoning Russia’s fiscal rule. “The more the government expands the deficit, the higher we have to keep interest rates, and the less space there is for private lending,” Nabiullina explained. She added that the regulator still projects a key rate of 12–13 percent in 2026. The rate currently stands at 17 percent, with the next decision on it scheduled for October 24.

An economist at a Russian analytical center told Meduza the VAT increase will add 0.6–0.7 percentage points to inflation in early 2026, when it takes effect, and another 0.3–0.4 points over the following months. Overall, he said, the impact will be similar to 2019, when the tax was also raised by two points.

The real risk isn’t the temporary spike, but the higher base from which prices will keep climbing, said Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center. “Say a kilo of meat cost 300 rubles [$3.60] before the VAT hike. Afterward, it’ll cost 310 [$3.72]. And from then on, the new price grows from 310,” she explained. “The budget deficit is now being financed directly by citizens.” The result, she warned, is that Russians will be able to afford less and their purchasing power will erode, since “VAT is embedded in practically everything.”

The effect on GDP growth will be “complex,” the economist from a Russian analytical center told Meduza. To measure it, he said, one would need to balance the loss of consumer spending against the boost from government expenditures. “VAT is a redistribution tool that expands the state’s share of the economy — in every sense, including the military,” he noted. Still, he expects the negative effects on GDP to outweigh the positives.

Russia’s Economic Development Ministry has already cut its forecasts. It now expects GDP to grow just one percent in 2025, down from the 2.5 percent it projected in April. For 2026, the outlook has been lowered to 1.3 percent from 2.4 percent. The revisions bring the ministry closer to the Central Bank, which forecasts 1–2 percent growth in 2025 and 0.5–1.5 percent in 2026.

In other words, after two years of growth above 4 percent (4.3 percent in 2024 and 4.1 percent in 2023), the government now predicts the economy will slow to just 1–1.3 percent growth in 2025 and 2026.

How big will the budget deficit be?

Russia’s 2025 budget has spun out of control — squeezed on one side by a slowing economy, low oil prices, a strong ruble, and overly optimistic forecasts from the Economy Ministry, and on the other by the war’s enormous financial demands and Western sanctions. According to new figures from the Finance Ministry, cited by Interfax, the deficit will reach 5.7 trillion rubles ($68.4 billion, or 2.6 percent of GDP) — the highest since the start of the full-scale invasion of Ukraine. That’s nearly five times the shortfall originally written into the budget law: 1.2 trillion rubles ($14.4 billion, or 0.5 percent of GDP). Already this spring, the government amended the budget to raise the target to 3.8 trillion rubles ($45.6 billion, or 1.7 percent of GDP).

For 2026, the government is projecting what Prime Minister Mikhail Mishustin called an “acceptable” deficit of 3.8 trillion rubles (1.6 percent of GDP). Finance Minister Anton Siluanov has set spending that year at 44.1 trillion rubles ($528.9 billion), up from the 42.3 trillion approved ($507.3 billion) for 2025. Revenues are expected to climb from 38.5 trillion rubles ($461.8 billion) in 2025 to 40.3 trillion ($483.4 billion) in 2026. The Central Bank forecasts year-end inflation at 6–7 percent.

For the first time since the war began, spending under the “National Defense” line item will be cut — from 13.5 trillion rubles ($161.9 billion) in 2025 to 12.6 trillion ($151.1 billion) in 2026, according to Interfax and Reuters. But as the outlet Faridaily reports, citing Finance Ministry materials, expenditures on “National Security and Law Enforcement” — which cover the intelligence agencies, Interior Ministry, National Guard, and others — will rise from 3.56 trillion rubles ($42.7 billion) in 2025 to 4.07 trillion ($48.8 billion) in 2026.

Taken together, military and security spending will account for 38 percent of the 2026 budget — only slightly below the record 41 percent planned for 2025, the highest share since Soviet times.