Russian tax rises in 2026

Monday 12 January 2026

Russia enters 2026 with a familiar wartime dilemma: she must fund a large and rising security bill while her traditional revenue engine, hydrocarbons, is less reliable than it used to be. The policy response has been blunt. From 1 January 2026 the Russian Federation increased the standard value added tax (VAT) rate from 20 per cent to 22 per cent. That decision, coupled with measures that widen the circle of firms drawn into the VAT net and a further sector-specific levy planned for later in the year, amounts to one of the clearest admissions yet that the state’s fiscal room for manoeuvre is narrowing. 

The economic consequences are likely to be more important than the headline rate change suggests. Russia’s leadership is not merely adjusting a tax parameter; it is reshaping who bears the marginal ruble of war finance, and how that burden transmits through prices, investment and the structure of Russian enterprise.

What is being raised, and where the burden is intended to fall

The centrepiece is the VAT increase to 22 per cent, effective 1 January 2026. In isolation, a two percentage point rise may appear modest. In practice, VAT is one of the most efficient instruments available to a state that wants money quickly, because it is collected throughout supply chains and is hard to avoid at scale without slipping into informality. That is why analysts and officials have framed the rise as a revenue workhorse of the 2026 budget. The Bank of Finland’s commentary on Russia’s 2026–2028 budget framework noted that the projected improvement in budget revenues relies largely on the VAT rate hike. 

The second, less visible but potentially more disruptive change is the tightening of special regimes for small business. Russia has long used simplified regimes to keep smaller firms in the formal economy by reducing administrative friction and, crucially, VAT exposure. In November 2025 Prime Minister Mishustin described a phased reduction in the revenue threshold related to VAT obligations for businesses on the simplified system: down to 20 million rubles in 2026, then 15 million in 2027 and 10 million in 2028. In other words, a larger share of small and medium-sized enterprises (SMEs) will have to register for VAT and charge it, with all the accounting and cash-flow implications that entails.

Third, the Kremlin has signalled further targeted levies. Reuters reported plans for a new tax on imported electronics starting in September 2026, with proceeds directed towards supporting domestic electronics production, explicitly linked to defence capacity and import substitution. This is industrial policy through the tax system: raise the cost of imports, create a revenue stream and channel it into favoured sectors.

Alongside this there is the broader reality of Russia’s “large tax package” adopted earlier, including the corporate profit tax increase to 25 per cent from 2025, with 2026 representing the year when other elements of that package bite more fully in administration and compliance.  The mix matters: when indirect taxes rise at the same time as credit is tight and investment risks are elevated, the economy experiences a compound squeeze.

The near-term macro effect: inflationary pressure and weaker household demand

VAT is designed to be passed through. Businesses can absorb some of it via margins, but in an economy already shaped by sanctions, supply constraints and high borrowing costs, the more common outcome is price transmission.

That has two immediate consequences.

First, inflation pressure increases. Even if the official statistical treatment is careful and even if some essential goods remain on reduced rates, a broad VAT rise affects a large share of transactions. In Russia’s present political economy, where the state is simultaneously attempting to stabilise inflation expectations and to keep war production humming, that is awkward. The central bank’s typical response to sustained price pressure is tight policy, but high interest rates already weigh heavily on the civilian economy. If monetary conditions remain restrictive, VAT becomes not only a price shock but also a demand shock.

Secondly, household consumption softens. VAT is regressive in incidence: lower-income households spend a higher proportion of their income on consumption, so they feel a larger effective burden. Even if nominal wages rise in war-linked sectors, the broader population faces higher prices for everyday goods and services. This matters because Russia’s recent “resilience” has been partly a story of wartime fiscal injections into specific regions and industries. A consumption tax rise works in the opposite direction, pulling purchasing power out of the mass market.

The Kremlin appears to understand the political sensitivity here, which helps explain why the debate over SMEs and VAT thresholds became heated. Reuters described pushback from small business owners and lobbies, and the government’s decision to phase in threshold reductions rather than impose an immediate, sweeping VAT charge on a broad band of smaller firms. The fact that the state felt compelled to soften the initial approach is itself evidence that the leadership expects stress in the private economy.

SMEs and the ‘grey’ economy: formalisation, closures and behavioural adaptation

The most economically consequential part of the 2026 package may be the widening of VAT obligations for smaller firms. VAT compliance is not just a tax bill; it is an administrative regime. It requires invoices, documentation and often a higher standard of accounting. For firms that have survived on thin margins and informal arrangements, this creates three choices:

• Formalise properly, hire or outsource accounting and accept slower cash conversion.

• Restructure activity into smaller entities to stay below thresholds.

• Move further into the shadow economy: cash transactions, under-reporting, or a deliberate shift into sectors where enforcement is weaker.

Which path dominates will vary by region and sector, but the aggregate effect is unlikely to be benign. SMEs are not merely “small”. In many economies they are the mechanism by which households turn skills into income and by which local markets remain competitive. If compliance costs and VAT cash-flow requirements rise sharply, marginal firms close first. That is particularly damaging in services, retail and construction subcontracting, where SMEs provide a great deal of employment.

There is also a second-order inflation effect. When SMEs face new VAT obligations, they either raise prices, reduce quality, or both. Larger firms, better able to comply and to finance working capital, gain relative advantage. Over time that can accelerate concentration in markets that are already susceptible to oligopolistic behaviour, especially where state procurement and defence contracts shape demand.

Banking, investment and the problem of ‘taxing the transmission belt’

Russia’s tax rises are aimed at revenue, but they interact with the financial system in ways that can reduce the very investment the state claims to want.

Reuters reported that Sberbank’s chief executive expected the VAT rise and the removal of certain exemptions to reduce bank profits, with a knock-on effect for dividends paid to the state. This illustrates a recurrent Russian problem: the state taxes and regulates the institutions through which investment must pass. If bank profitability falls while interest rates are high and credit risks rise, banks become more cautious lenders. That reduces private investment and weakens small business survivability, which then reduces the tax base in the medium term.

The Polish think tank OSW commentary on Russia’s 2026 budget makes a related point from the fiscal angle: the government forecasts a sharp rise in non-oil and gas revenues and explicitly links it to higher fiscal burdens, including VAT and the reduction of exemptions affecting SMEs. When a budget relies on extracting more from the non-oil economy at a time when the non-oil economy is being squeezed, the plan becomes self-referential: it works only if the taxed activity does not contract too much.

The strategic logic: shifting the cost of war away from the state’s balance sheet

It is tempting to see the 2026 tax rises as purely fiscal, but they are also strategic. Russia can finance war spending in four broad ways:

• Oil and gas rents.

• Borrowing.

• Monetary expansion or quasi-monetary instruments.

• Domestic extraction through taxes and financial repression.

As sanctions and price discounts limit hydrocarbon rents, and as the state seeks to avoid the political optics of uncontrolled money creation, consumption taxes become attractive. VAT, in particular, spreads the burden widely and continuously, making it less visible than, say, a one-off “war levy”.

The planned electronics import tax reinforces this logic: it targets a politically defensible category (consumer electronics) and can be framed as patriotic import substitution, while also supporting defence-related supply chains. The industrial policy narrative helps to sell a tax rise as a national investment rather than a budgetary necessity.

Likely net effect on the 2026 economy: slower growth, stickier inflation and more distortion

Putting these elements together, the most probable outcome for 2026 is a trade-off that harms long-run growth.

• Growth is likely to slow because household demand weakens and SMEs face higher compliance costs and tighter credit conditions.

• Inflation is likely to be stickier because the VAT rise is a direct price-level shock and because market concentration and import substitution policies reduce competitive pressure.

• Resource allocation becomes more distorted: activity shifts towards state-favoured sectors, defence-related procurement and larger firms that can manage compliance and political risk, while the consumer-facing economy becomes more precarious.

In the short term, the Kremlin may still succeed in raising substantial revenue. That is the point of VAT. Yet the economic price is that Russia’s “civilian” economy becomes thinner, more concentrated and more dependent upon state direction, which in turn reduces productivity growth. The Finnish analysis of the 2026–2028 framework, and the OSW assessment of the budget’s reliance on higher non-oil tax burdens, both suggest that the fiscal plan is built on extracting more from a constrained base rather than expanding that base. 

The deeper risk is political economy rather than arithmetic. A state can raise VAT and broaden compliance, but it cannot easily prevent the behavioural response: informality, avoidance, price pass-through and disinvestment. In a system where trust in institutions is limited and where the war continues to reorder incentives, that behavioural response may prove to be the decisive variable.

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How VAT pass-through works, and what it implies for Russian society in 2026

Value added tax is formally charged on firms, but it is rarely borne by them in a simple or uniform way. The economic burden of VAT depends on how prices, wages and profits adjust in response to the tax, and on the structure of the markets in which firms operate. This process is known as tax pass-through.

The basic mechanics of VAT pass-through

When the VAT rate rises, firms face a higher tax on each unit of value added. They then have three broad options:

• Raise prices to consumers, passing the tax on directly.

• Absorb some or all of the tax by accepting lower profit margins.

• Adjust costs elsewhere, typically through lower wages, reduced hours, lower-quality inputs, or postponed investment.

Which option dominates depends on market power, demand elasticity and competitive pressure.

In highly competitive markets with price-sensitive consumers, firms often struggle to raise prices fully. They may absorb part of the tax in margins or wages. In concentrated markets, or where demand is relatively inelastic, firms are more able to pass the tax through to consumers in the form of higher prices.

Russia’s wartime economy is increasingly characterised by the latter conditions: reduced competition due to sanctions, exit of foreign firms, and greater market concentration around large domestic players with state links.

Why pass-through in Russia is likely to be high

Several features of the Russian economy in 2026 point towards a high degree of VAT pass-through into consumer prices.

First, competition is weaker than in peacetime. Import restrictions, logistical bottlenecks and the exit of Western firms have reduced the number of suppliers in many consumer markets. Fewer competitors make it easier to raise prices without losing market share.

Secondly, many firms already operate with constrained margins. Higher interest rates, limited access to long-term finance and rising input costs leave little room to absorb new taxes. For such firms, price increases are not a choice but a necessity.

Thirdly, the state itself is a dominant buyer and price-setter in large parts of the economy. Where firms depend upon state contracts, especially in defence-adjacent industries, VAT costs are often passed through implicitly via contract pricing, embedding the tax into public expenditure rather than eliminating it.

The net result is that a substantial share of the VAT increase is likely to appear as higher retail prices rather than as lower profits.

Distributional effects: who ultimately pays

Although VAT is uniform in rate, it is not uniform in impact.

Lower-income households spend a larger proportion of their income on consumption, particularly on essentials. Even if some basic goods are zero-rated or subject to reduced rates, VAT increases still raise the overall cost of living. This makes VAT regressive in effect: it takes a larger share of income from poorer households than from wealthier ones.

Middle-income households are affected through a combination of higher prices and weaker job security. SMEs employ a significant share of urban middle-income Russians. As these firms face higher compliance costs and tighter cash flow, they may reduce hiring, freeze wages or cut hours, indirectly transferring part of the VAT burden onto labour.

Higher-income households feel the VAT rise least directly. They consume a smaller share of their income and can more easily substitute between goods, delay purchases, or shift spending abroad or into services less exposed to VAT.

In effect, VAT becomes a mechanism by which wartime fiscal pressure is channelled downwards through society, even if it is formally neutral.

SMEs, cash flow and the hidden cost of compliance

For newly VAT-registered small firms, the burden is not only the tax itself but its timing. VAT must often be paid before the firm has received payment from customers, especially in business-to-business transactions. This creates a cash-flow gap that must be financed.

In a high-interest-rate environment, that financing is expensive. Firms without access to bank credit rely on retained earnings or informal borrowing, increasing fragility. Some firms respond by demanding faster payment or cash, reinforcing informal practices. Others simply exit the market.

This is why VAT threshold changes can have outsized economic effects relative to their headline revenue yield. They change behaviour, not just balances.

Interaction with inflation and monetary policy

A VAT rise creates a one-off upward shift in the price level. If households and firms expect that shift to be permanent, it can feed into wage demands and price-setting behaviour more generally.

The central bank then faces a dilemma. If it tightens policy to contain inflation expectations, it suppresses investment and consumption further. If it tolerates higher inflation, real incomes erode. Either way, the civilian economy bears the cost.

In Russia’s case, where defence spending is largely insulated from market discipline, the adjustment burden falls disproportionately on non-defence sectors.

The broader implication for 2026

In theory, VAT is an efficient tax. In practice, under conditions of war, sanctions and limited trust, it becomes a blunt instrument. It raises revenue, but at the cost of weaker domestic demand, higher prices and increased distortion between large and small firms.

Russian tax rises in 2026 are not merely a fiscal adjustment. They are a mechanism by which the costs of war are distributed across society, quietly but persistently, through everyday transactions.