Russia Raised VAT to 22% to Pay for the War. It Still Isn’t Enough

Russia’s federal budget collected less revenue in 2025 than originally planned for the first time since the pandemic, a shortfall that has pushed the Kremlin to raise its value-added tax rate from 20% to 22% starting January 1 and pull far more small businesses into the VAT system, according to The Moscow Times’ assessment of the country’s 2026 fiscal trajectory.

The Oil Money Is Drying Up

The core of Russia’s budget problem is straightforward: oil and gas revenue, the traditional backbone of Kremlin finances, has fallen by more than 25% as a stronger ruble and tightening Western sanctions squeeze what Moscow can earn from crude exports, according to the New Eurasian Strategies Centre’s analysis. When the 2025 budget was set, revenues were projected at 40.3 trillion rubles; updated forecasts now suggest actual collections closer to 36.6 trillion rubles, a gap of roughly $46 billion at current exchange rates, per The Moscow Times.

The World Bank expects a global oil supply surplus to push Brent crude prices down from an average of $68 a barrel in 2025 to around $60 in 2026, the lowest level in five years, further squeezing the discount Russia must already offer buyers willing to purchase sanctioned crude. With GDP estimated at 217.3 trillion rubles in 2025, total defense spending of around 15.86 trillion rubles, more than $198 billion, now represents a share of the economy that leaves little room for the civilian investment that might otherwise support long-term growth, The Moscow Times reports.

A Central Bank Fighting Inflation on Its Own

Against this fiscal backdrop, the Bank of Russia has pursued an unusually consistent disinflation campaign under Governor Elvira Nabiullina, cutting its key rate eight consecutive times from a record 21% last June down to 14.25% by its June 2026 decision, according to the central bank’s own rate announcement. That June cut of just 25 basis points came in below the market’s median expectation of a 50-basis-point reduction, with the central bank citing persistent pro-inflationary risks tied to higher energy prices from the Middle East war, refinery damage from Ukrainian strikes, and wage growth that continues to outpace productivity, per Trading Economics’ tracking of the decisions.

Annual inflation stood at 5.6% as of mid-June, still well above the Bank of Russia’s 4% target, though down meaningfully from the 9.5% rate recorded in 2025, according to the central bank’s own data. The Moscow Times’ longer analysis of the anti-inflation campaign notes that Russia’s consumer price index rose 39% across the four full wartime years from 2022 to 2025, compared with 61% in Ukraine over the same period, and a staggering 200%-plus in Iran, framing Nabiullina’s inflation-targeting approach as unusually disciplined by wartime standards, per The Moscow Times’ longer profile of the policy.

The Cost of That Discipline

That discipline has not come free. The New Eurasian Strategies Centre describes Russia as moving through the final phase of a familiar economic cycle: downturn, fiscal stimulus, inflation, interest rate rises, downturn again, disinflation, rate cuts, and eventually recovery, a sequence the think tank says has suppressed economic activity across many sectors as interest-rate pressure compounds the drag from sanctions and wartime resource reallocation, according to its analysis of key rate dynamics. Growth forecasts for both 2025 and 2026 now cluster around just 1%, according to Russia’s own Economic Forecasting Institute and the IMF alike, a marked slowdown from the wartime stimulus-driven expansion of earlier years.

A potential end to the war in Ukraine, paradoxically, could increase short-term recession risk by reducing output in defense-related industries and lowering household incomes tied to military production, the New Eurasian Strategies Centre’s analysis notes, underscoring how deeply the war economy has become embedded in Russia’s growth model.

New Taxes on Everything From Laptops to Small Firms

Beyond the VAT increase, Russian authorities are lowering the annual revenue threshold for mandatory VAT registration from 60 million rubles to just 10 million rubles, sweeping far more small and medium-sized enterprises into the tax system, according to The Moscow Times’ January analysis. The government also plans a new levy on finished electronic goods including laptops, smartphones, and lighting products. The head of Russia’s New People party has publicly warned that lowering the VAT threshold will disproportionately hit small and medium-sized enterprises in the regions, according to reporting cited in the same Moscow Times analysis, a rare instance of intra-establishment pushback on fiscal policy.

What to Watch Next

The Bank of Russia’s next key rate decision falls on July 24, with a summary of the prior meeting’s discussion published July 1, according to the central bank’s own communications calendar. Nabiullina has reaffirmed that inflation should return to the 4% target sometime in 2026, a view broadly shared by Prime Minister Mikhail Mishustin and Finance Minister Anton Siluanov, though The Moscow Times notes that even Defense Minister Andrei Belousov has, with some reservations, supported the anti-inflation policy, a rare point of consensus across an otherwise divided Russian economic leadership. Whether that consensus survives a second consecutive year of budget shortfalls and rising consumer taxes is the question shaping Russia’s economic trajectory through the remainder of 2026.