Tax and bomb: Russia tightens the squeeze on its citizens to keep financing the war in Ukraine

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How Russia stopped being a low-tax country

In January, Russia shifted its personal income tax (PIT) structure from a two-bracket system to a five-tier scale. Economists at Moscow’s Higher School of Economics (HSE) recently estimated that the shift alone cut the growth of real disposable incomes by 0.4% in 2025. Combined with a hike in consumption charges, the increase in taxation is expected to curtail household spending and, in turn, exert downward pressure on overall GDP, warn the authors of the HSE report.

Businesses are also paying more: profit tax jumped from 20% to 25%, mineral extraction levies rose for metals and fertilizer producers, and small firms on simplified tax regimes now have to pay VAT. Altogether, the Finance Ministry projects the state will bring in an extra 2.6 trillion rubles this year, including 1.6 trillion ($20.0 billion) from profit tax and 533 billion ($6.7 billion) from personal income tax, and 17 trillion ($212.5 billion) over five years.

Collections are indeed up. Russia’s Federal Tax Service said revenues across all levels grew 6% in the first five months of 2025, with personal income tax receipts climbing 14% to 300 billion rubles ($3.7 billion). Still, that is far less than the 30% jump recorded a year earlier. Regional income taxes are increasingly redirected to Moscow, with federal PIT inflows up 52% in January-May to 88 billion rubles ($1.1 billion), though this figure is still shy of targets. Profit tax receipts jumped 74%.

Deficit and default

Despite revenue growth from some sources, other tax inflows are falling. With global oil prices low, mineral extraction tax receipts dropped 18% compared with a relatively strong 2024. Overall, revenues are only at the levels of 2023 — which are comparable to those of prewar 2021. Combined with rising government spending and early prepayments for state contracts, the deficit has exceeded initial targets, reaching 3.7 trillion rubles ($46.2 billion), or 1.7% of GDP — far above the 1 trillion rubles ($12.5 billion), or 0.5% of GDP, written into the original budget law. Amendments had to be passed, but the revised ceiling has almost already been reached.

Revenues from sources other than oil and gas grew by 12.7%, or 1.45 trillion rubles ($18.1 billion). But that is no longer enough.

The government’s financial bloc cannot curb the appetite of the military-industrial complex, nor can it weaken the Kremlin’s determination to continue the war. Filling the budget gap with export revenues is proving increasingly difficult: oil prices keep falling, and the International Energy Agency (IEA) has questioned Russia’s ability to compensate with higher export volumes.

Where will the money come from? For now, the plan is to tap the National Wealth Fund. Finance Minister Anton Siluanov has claimed that although noted that “our National Wealth Fund was supposed to be replenished. In the first three months [of 2025], we increased it by more than 200 billion rubles ($2.5 billion).” He added that “we are now using 447 billion rubles ($5.6 billion) from the fund” — just over 10% of its liquid portion. Siluanov said there will be no extra borrowing or new tax hikes. At the same time, he acknowledged that Russia must gradually move away from reliance on oil rents: “The Finance Ministry sees its task, given the instability of rent revenues in the future, as building tax policy and administration with these risks in mind.”

Siluanov also promised not to touch the core tax system: “In any case, until 2030 the basic tax conditions are set and will remain unchanged.” Another round of sweeping tax hikes, he warned, would be a serious social experiment with the risk of driving parts of the economy into the shadows or triggering steep declines in key industries. A higher mineral extraction levy on metallurgists at a time of weak foreign demand for their products has already left companies saying they may be forced to shut down production.

In late July, a warning sign appeared. The Finance Ministry failed to deliver promised payments under a program co-financing long-term savings, in which the state matches citizens’ pension contributions by up to 36,000 rubles ($450) a year for 10 years.

On July 25, nearly 3 million citizens were supposed to receive a combined total of 51 billion rubles ($637.4), but the money never came. “You wanted a default? Here it is,” commented economist Sergei Aleksashenko.

The problem was most likely bureaucratic — after all, the government spends more than 3 trillion rubles ($37.5 billion) a month, meaning the money should have been there. Be that as it may, the funds were not available at that specific time and place. The ministry now insists it is working on the “technical allocation” of the funds, which “will be transferred to citizens’ accounts by September 2025.”

Under such conditions, officials are seizing every chance to boost revenues without formally raising taxes. The burden primarily falls on ordinary citizens. Each new levy may look minor — sometimes framed as a mere “clarification” of existing rules — but taken together, they add up to a significant transfer of extra withdrawals from citizens’ pockets to the state budget.

A sharp rise in duties

Higher state duties on filing court cases were designed to meet two goals at once: raising revenue and reducing pressure on the judicial system. On average, fees are rising by a factor of between ten and fifteen, and in some cases more than fiftyfold. The amendments have already been passed: for example, filing a property claim will now cost 4,000 rubles ($50) instead of 400 ($5). Filing an appeal now costs 3,000 rubles ($37), up from 150 ($2). For economic disputes, the fee rises from 300 ($4) to 10,000 rubles ($125) for individuals and from 2,000 ($25) to 60,000 rubles ($750) for legal entities.

“Take, for example, an incorrect housing payment, incorrect utility charge, or an improperly issued fine: mass lawsuits to recalculate these payments all go through the courts. If the fee used to be 300 rubles ($4), it will now be 3,000 rubles ($37),” explained State Duma MP Oksana Dmitriyeva.

More proposals are under discussion, and the Finance Ministry has suggested raising fees for foreigners: introducing a 500-ruble duty ($6) for registering a place of stay and raising the residence registration fee from 430 ($5) to 1,000 rubles ($12).

So far, these measures appear to be working — at least when it comes to avoiding public discontent.

Cars are seen as a luxury

Motorists appear to be one of the government’s easiest targets. Since Soviet times, car ownership has been a symbol of prosperity, but the fees are also hitting trucks that move goods and special vehicles such as cranes on construction sites or harvesters in fields. That means the government can collect more money from a very wide pool of sources, most of whom cannot realistically stop using vehicles.

The Finance Ministry proposes raising fees from the moment drivers receive their documents. Starting Sept. 1, the ministry wants to double the cost of various driver’s licenses from a range of 2,000-3,000 rubles ($25-$37) up to 4,000-6,000 rubles ($50-$75).

The fee for an international license would rise from 1,600 ($20) to 3,200 rubles ($40). The vehicle passport fee would go up from 800 ($10) to 1,200 rubles ($15). Registering a car with license plates would rise from 2,000 ($25) to 3,000 rubles ($37). Other services tied to vehicle ownership will also become more expensive. As of April 1, 2025, drivers can no longer automatically extend licenses, as a pandemic-era benefit has been scrapped.

The Ministry of Industry and Trade is also targeting car owners. The recycling fee on imported vehicles, first introduced at the request of the state-owned conglomerate AvtoVAZ — best known for making the Lada — is set to increase for individuals bringing in cars that were purchased for personal use. Currently, they pay a reduced fee of 3,400 rubles ($42) for new cars up to three years old and 5,200 rubles ($65) for used cars older than three years.

Now, for cars with engines of 160 horsepower or more, the basic fee will be 20,000 rubles $250). By comparison, companies importing cars pay a minimum of 150,200 rubles ($1,877) for new vehicles and 383,400 rubles ($4,792) for used cars that are more than three years old.

Industry and Trade Minister Anton Alikhanov has openly acknowledged that the main aim is to raise government revenues. “We are talking about tens of billions of rubles. Our estimates vary, from 40 to 60 billion rubles ($500k-$750k),” he told MPs in the State Duma.

The higher recycling levy has already driven down auto sales, raised the price of many goods and services, and left farmers struggling to buy the equipment they need. But the policy is considered successful enough that the government now plans to extend the recycling charge to electronics.

“Aside from gaining extra sources of revenue, we are still stimulating domestic production. And I think similar approaches could be considered in other sectors,” Alikhanov said. Both of his latest ideas remain proposals, but they clearly signal the government’s thinking.

Entrepreneurs no longer needed...

The same logic was behind the announcement that Russia’s experiment with self-employment will end in 2028. Deputy Finance Minister Alexei Sazanov has been less categorical, saying only that the tax regime will be changed. One way or another, however, self-employment will no longer offer any real advantages.

Introduced in 2019, the professional income tax helped bring nearly all of the “garage economy” and small-scale informal work — such as baking cakes at home — into the open. Now, those people have little choice: either start paying full business taxes or shut down, as the tax authorities have learned how to track undeclared work.

For Russia’s 13.5 million self-employed, the 2028 deadline may come sooner. Nikolai Arefyev, deputy head of the State Duma’s Economic Policy Committee, argues that self-employment status hampers the fight against off-the-books work and costs the budget insurance and income tax revenue. “We should not have classified the unemployed as self-employed. There is no such thing as self-employment in any other country,” he complained.

Vladimir Putin has ordered that by year’s end the government will review the possibility of phasing out simplified taxation in certain sectors, thereby pushing people out of self-employment. The simplified regime will remain only for very low incomes. Experts estimate that in the end the 6% tax they currently pay will rise to the level of the standard profit tax — 25%.

The government is not only going after small fry. Limited liability companies and individual entrepreneurs using the simplified system without paying VAT will also face a lower income ceiling before they are forced to switch to full taxation.

...but money is always necessary

Among the initiatives is the unusual idea of a tax on foreign travel. Not on citizens — although many feared this would be the start of border closures — but on tour companies. “Directing abroad the money spent on outbound tourism, while using it instead to develop domestic tourism, would be logical and right. Based on data from electronic travel vouchers last year, we calculate that the total amount Russians spent abroad as tourists reached 700 billion rubles ($8.7 billion). If an extra 200 to 300 rubles ($3-4) were added to the price of each tour, around 5 to 7 billion rubles ($62.5 billion to $87.5 billion) a year could be set aside to develop infrastructure inside the country,” proposed State Duma Tourism Committee chairman Sangadzhi Tarbaev.

The government only has one clear way out of the situation: end the war, agree to peace terms that would at least lift the harshest sanctions, stop seizing businesses from both domestic and foreign owners, and restore functioning institutions, and many others. But of course, these are steps the ruling elite will not take. That means in response to falling tax revenues, the government will continue raising taxes, fines, excise duties and the cost of state services.

The most likely and simplest path is raising excise taxes, something which is always explained as a public health measure given that such duties primarily target alcohol and tobacco. Never mind that last year’s steep increases in excise rates and in the range of alcoholic drinks they apply to drove people back to moonshine and the black market.

Vodka and spirits production in Russia has collapsed, state alcohol and tobacco regulator Rosalkogoltabakcontrol (the Federal Service for Control of Alcohol and Tobacco Markets) announced recently. Between January and June, total production of spirits fell 16.1% year-on-year to 79.3 million decaliters. Vodka output dropped 10.9% to 31.38 million decaliters, while cognac production fell 17% to 3.45 million.

The agency did not disclose how much consumption of illegal alcohol and moonshine has increased, and it is now impossible to find out: where experts once estimated the effect by tracking early mortality, state statistics service Rosstat has since made its demographic data secret.

Another option is VAT. At 20%, that revenue-generating effort is already substantial, and it is charged at every stage of the production and trade chain. Refunds are available, but they often take six months or longer, with tax officials disputing them and courts increasingly siding with the authorities. VAT is one of the most easily collected and administered taxes. So why not raise the rate to 25%? The authorities could also tinker with the income tax scale, lowering the threshold at which higher rates apply or expanding the list of taxable income.

Still, economist Igor Lipsits has said the government may not need to go that far. “I think they will look for the least politically sensitive solutions. I would expect a possible VAT increase and higher excise duties, including broadening the list of excisable goods. I was personally stunned by the excise on liquid steel. But once you start with indirect taxes of this type, you can keep expanding them. Other forms of tax creativity seem less likely to me,” he said.

The rise in the tax burden and other levies has become the last untapped resource for sustaining the war. And now the expression “people are the new oil,” first coined by Deputy Prime Minister Sergei Ivanov in 2009, has suddenly regained relevance — though not at all in the sense the government once intended.