The Kremlin is raising taxes to fund the war against Ukraine. Here’s what you need to know.

The Russian Finance Ministry has drafted a 2026 federal budget and plan for 2027–2028 that would raise the general value-added tax, or VAT, from 20 to 22 percent. The budget package, which would take effect on January 1, 2026, would also lower the income threshold for small businesses eligible for simplified VAT payments from 60 million rubles to 10 million rubles (about $700,000 to $100,000). 

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The Finance Ministry’s announcement openly acknowledged that these and other measures are designed to cover Russia’s “defense and security” expenditures — in other words, to fund the continuation of the war against Ukraine.

If you’re in the habit of taking Russian officials at their word, the plan to raise the VAT rate may have come as a surprise. In 2024, Vladimir Putin assured that the tax system’s basic parameters would remain unchanged until at least 2030. And at the St. Petersburg International Economic Forum in June, Finance Minister Anton Siluanov promised that officials “had agreed not to touch basic taxes.” Moreover, as recently as early September, Putin said that budget revenues should be increased without “raising the tax burden.” 

Nevertheless, the VAT rate increase was entirely foreseeable. Back in August, a Russian government source told Reuters that raising taxes was “unavoidable.” And just two weeks ago, The Bell reported that, according to informed officials, the Russian government was discussing tax hikes. (One source even specified that the VAT rate would be raised to 22 percent.) Four sources close to the Russian government later confirmed The Bell’s report to Reuters. The fact that the VAT rate would increase in 2026 was also reported by the investigative outlet Agentstvo. 

VAT is an indirect tax levied on all goods and services. The consumer pays this “invisible” fee when they make a purchase, and the seller merely acts as an intermediary that transfers the tax payment to the government. As economists told Novaya Gazeta Europe, VAT is the most convenient fiscal instrument for replenishing a country’s treasury: it’s the most difficult tax to evade, and revenues from it flow into the government’s coffers regularly and predictably.

According to The Bell’s estimates, the increase could generate up to one trillion rubles per year — the equivalent of almost $12 billion or 0.5 percent of GDP — in additional revenues for the federal budget. However, this forecast does not account for possible exclusions of certain goods, which were ultimately included in the budget package. The Finance Ministry promised that the reduced VAT rate of 10 percent will remain in place for a range of “socially important” goods, including food, medicine and medical products, children’s items, and other essentials.

Writing on Telegram, economist Dmitry Polevoy estimated that the Finance Ministry’s new plan will bring in 2.4 to 2.9 trillion rubles (about $29 to $35 billion) in additional budget revenues, including 1.8 to 2 trillion rubles ($21 to $24 billion) from the VAT rate hike, 100 to 300 billion rubles ($1.2 to $3.6 billion) from changing the tax regime for bookmakers (who, as of 2026, would be required to fork over 5 percent of their turnover and 25 percent of their profits), and 500 to 600 billion rubles ($6 to $7 billion) from canceling breaks on insurance premiums. 

In any case, it’s clear that raising the VAT rate will help the Russian government the most. According to Reuters, VAT accounted for 37 percent of federal budget revenues last year.

The authorities deny it, but 2025 has proven to be a difficult test for the Russian economy. Its growth rate is slowing, oil prices remain below predicted levels, and the federal budget deficit hit 4.2 trillion rubles ($50 billion) between January and August, exceeding the target of 3.8 trillion set for the whole year. Increasing the deficit would be one way to cover costs, but this would be a less profitable approach for the authorities than collecting additional taxes from the population. 

Most likely. What’s certain is that the costs will largely be passed on to end consumers.

As the Russian Central Bank noted, the 2018 VAT rate increase (from 18 percent to 20 percent) added an additional 0.55 to 0.7 percentage points to annual inflation during the period from July 2018 to April 2019. Economist Dmitry Polevoy estimates that the upcoming VAT rate increase could add 0.6–0.7 percentage points to inflation in the fourth quarter of 2025 and 0.1–0.2 percentage points in the first quarter of 2026.

But because inflation growth this year remains below the Central Bank’s 6–7 percent forecast, the VAT rate increase may simply bring this figure closer to the regulator’s “baseline trajectory.” And, as some economists told RBC, this could have a disinflationary effect in the long term, as the federal budget deficit is expected to shrink.

The Russian authorities are dealing a blow to consumers’ wallets to plug holes in the federal budget — but this isn’t the most dire consequence of the coming VAT hike. What’s more noteworthy is the decisiveness with which the government is taking this step.

Contrary to their own promises, this isn’t the first time since February 2022 that Russian officials have shifted the burden of financing the war onto the population. Russia’s invasion already accounts for a third of all budget expenditures, and increasing taxes is an indirect signal that Moscow has no plans to curtail its military aggression in the foreseeable future.

Kremlin spokesman Dmitry Peskov himself admitted as much in an interview on Wednesday. “What’s going on around us is a war. Right now is the most acute phase,” he told RBC Radio. “We need to win it for the sake of our children, our grandchildren, and our future.”