Russia set to raise taxes to fund war in Ukraine

According to reports, Russia will need to raise taxes even more to pay its war in Ukraine, since the revenue-raising measures previously announced will not be enough to cover the country’s increasing military budget.

Russia’s draft budget for 2025 devotes roughly one-third of total expenditure, or 6.3% of GDP, to the military, the highest amount since the Cold War. For the first time, defense spending will account for twice as much as social spending.

The massive surge in military spending is creating inflationary pressures in Russia’s economy.

The rouble has fallen to its lowest level versus the dollar in a year, while interest rates have increased to their highest level since 2003.

Moscow has few options for borrowing money because of Western sanctions that essentially keep it out of the global bond markets.

To finance its war in Ukraine, which is currently in its third year, the government has already begun to raise taxes.

In 2025, a significant tax change is anticipated to produce extra income equal to 1.7% of GDP. Economists contend that this is insufficient.

An expected fall in the price of oil, Russia’s main export commodity, is also casting a shadow over the country’s finances. The draft budget projects the price of oil will decrease on average from $70 per barrel in 2024 to $65.5 per barrel in 2027, denting state revenues.

Finance Minister Anton Siluanov said last year there was no room to increase spending and warned that if it were not contained the burden would fall on Russian citizens and businesses through inflation or higher taxes.

The Russian economy has held up surprisingly well since the start of the war, despite Western sanctions, with little sign of public discontent amid historically low unemployment and record high wage growth.

Other measures to be introduced in 2025 include a 11.6% cut in support for small businesses and an 11% reduction in funding for an education development programme, according to a Reuters analysis of the draft budget.

Deputy Finance Minister Vladimir Kolychev noted that while military spending has grown by 3.0-3.5% of GDP during the war years, overall spending has grown only by 2%.

Even President Vladimir Putin’s “national projects” – development plans for strategically important areas – are at risk, with some funding shifted to 2028-30, according to economist Andrei Klepach, a former deputy minister of economy.