Move aims to raise trillions for defense spending but risks fueling inflation and slowing growth.

Russia’s Finance Ministry has proposed raising the value-added tax (VAT) from 20 to 22 percent starting in 2026 to finance military spending in Ukraine, a move that could reshape the country’s fragile economy.

VAT Hike Proposal for 2026

On September 24, the Russian Finance Ministry confirmed it would seek a VAT increase to 22 percent, projecting the extra revenue will help sustain military operations into the war’s fifth year. Other proposals include higher taxes on gambling and scrapping certain small business tax breaks. Officials described the draft 2026 budget as “balanced and sustainable,” stressing that defense and security remain strategic priorities.

Putin and Historical Parallels

President Vladimir Putin signaled openness to new tax measures last week, referencing how the U.S. raised taxes during the Korean and Vietnam wars. Despite pledging no significant tax changes before 2030, Putin has pressed the government to find additional revenue streams amid growing financial pressures from the conflict.

Fiscal Impact and Revenue Estimates

VAT already contributed 37 percent of Russia’s federal revenues in 2024. Analysts estimate the hike could generate around 1 trillion rubles (US$11.9 billion) annually. These funds would be directed toward equipping armed forces, paying soldiers, supporting military families, and modernizing the defense industry.

Inflation and Central Bank Concerns

Economists warn the tax hike could undermine recent progress on inflation. The central bank noted that a two-point VAT rise in 2019 added 0.6 percentage points to inflation. T-Bank analyst Sofya Donets projected the 2026 increase could push inflation up by 1.5 points, complicating the bank’s efforts to cut rates and return inflation to its 4 percent target.

Business and Political Reaction

Alexander Shokhin, head of Russia’s main business lobby, labeled the measure “unpleasant” for both businesses and citizens. The ruble remained steady at 83.60 per U.S. dollar, buoyed by expectations of slower rate cuts. Meanwhile, U.S. President Donald Trump called Russia a “paper tiger,” warning of deep economic trouble, while Kremlin spokesman Dmitry Peskov dismissed the remark, insisting Russia’s economy had adapted to wartime pressures.

Broader Implications

The proposed VAT increase highlights Moscow’s mounting fiscal strain as the war enters its fifth year. While the measure could bolster defense funding, it risks eroding household purchasing power, weakening growth, and testing business resilience—an economic balancing act with significant consequences for Russia and its trading partners, including Europe and Asia.

Russia’s proposed VAT hike underscores the economic toll of prolonged war. While the Finance Ministry frames it as essential for defense and family support, the plan carries clear risks of inflation and slowed growth. The decision will shape not only Russia’s fiscal stability but also its capacity to sustain a costly conflict with global repercussions.

Sources: Straits Times (2025) , Kuwait Times (2025)

Keywords: Russia Economy, VAT Increase, Vladimir Putin, Ukraine War, Defense Spending, Inflation