By Fatma Younis
Russia's invasion of Ukraine is straining state finances, prompting President Vladimir Putin to seek new revenue through a series of tax increases as the 2027-2029 budget goes before the rubber-stamp parliament.
Tax Hikes Target Mining and Investment Income
The government proposes a 20%-30% windfall profits tax on mining companies benefiting from higher commodity prices, affecting producers of iron ore, nickel and gold. Higher rates of 13% to 22% will apply to income from interest, dividends and property sales, up from a flat 13% for amounts under 2.4 million rubles and 15% above that. Additional measures taking effect Jan. 1 include a 100-ruble per parcel charge and 22% VAT on previously tax-free foreign goods worth less than 200 euros bought online, plus a 35% tax on dividends paid into restricted accounts for investors from "unfriendly countries."
Budget Deficit Balloons Amid Military Spending
The deficit reached 5.8 trillion rubles ($72 billion) through August, nearly 50% higher than a year earlier and above the revised target of 4.8 trillion rubles, according to the Kyiv School of Economics. The shortfall is driven by lavish military spending, tepid economic growth, sanctions, high interest rates for non-military firms, labor shortages and Ukrainian strikes on oil refineries and export terminals.
Public Reaction Mixed
Muscovites voiced a blend of complaint and resignation. "They need money for state coffers, they need to collect more from people, from ordinary people," said Denis Bystrov, 39. "What can you do?" said Nelly Godunova, 92. "Everyone knows perfectly well that the money's going for the military operation, right?" said Sergei Sukachev, nearly 70, adding he understood the need to "hang on and to get our way."
Long-Term Economic Risks
Analyst Chris Weafer, CEO of Macro-Advisory Ltd, says Russia can cover the deficit in 2027 and likely 2028 but at the cost of higher taxes and reduced funds for normal economic development. "Basically, the budget is now moving to a phase where it is primarily funding the military and the military operation," he said. Growth remains modestly positive but is driven by state spending on military-linked industries while the rest of the economy struggles.
Foreign Assets Seized for War Effort
A Russian subsidiary of German retailer Metro was seized under a law allowing temporary administration of firms from "unfriendly countries" and forced to contribute 1 billion rubles ($12 million) to a war-support fund. Metro AG in Germany said it had no role in the donation, which does not reflect its position.
Limited Financing Options
Sanctions block access to international bond markets, and domestic resources are dwindling. The National Wealth Fund's liquid assets have fallen to 1.7% of GDP. Banks initially resisted low-rate government bonds but resumed purchases after terms improved. The Kyiv School of Economics warns that an adverse shock such as falling energy prices could quickly destabilize the fragile equilibrium.
