Increasing Taxes for War: An Analysis of Russia's Annual Budget Draft

Key Chapter Title List

1. Core of the Draft Budget: New Tax Items and Wartime Expenditure
2. Expenditure Plan Comparison: What's Different Between 2026 and 2025?
3. Foreign Policy Priorities: Kremlin's Focus Revealed by Budget Allocation
4. Three Key Factors Driving Russia's Budget Strategy
5. Expected Impact on the Economy: Assessment of SME Impact and Macroeconomic Stability
6. Fiscal Deficit and Reserve Targets: Balancing Revenue and Expenditure and Rebuilding Buffers

Document Introduction

The 2026 federal budget draft recently released by the Russian Ministry of Finance clearly reveals the Kremlin's determination to conduct domestic fiscal mobilization to sustain its military operations in Ukraine. The core of this draft lies in a series of tax increase measures aimed at covering the widening fiscal deficit caused by surging defense spending and shrinking oil and gas revenues under Western sanctions, marking a further tilt of Russia's economic policy towards a wartime fiscal model.

The most significant change in the draft is the plan to raise the value-added tax (VAT) rate from 20% to 22%, while substantially lowering the annual revenue threshold for businesses liable for VAT—from 60 million rubles to 10 million rubles. This is expected to bring an additional approximately 450,000 small businesses and individual entrepreneurs into the VAT net. Furthermore, the government plans to impose a 5% tax on betting turnover and a 25% tax on company profits in the gambling industry. According to estimates by Moscow economist Dmitry Polevoy, these new taxes and the cancellation of some tax incentives could generate an additional 2.4 to 2.9 trillion rubles (approximately $29.3 to $35.4 billion) in revenue for the treasury in 2026, aiming to avoid cuts to the nominal expenditure plan.

Although total revenue is projected to grow by nearly 10% to 40.3 trillion rubles, total federal expenditure is planned to increase only moderately by 4.3% to 44.1 trillion rubles. This reflects a cautious, conservative budget planning approach: neither cutting spending nor strictly controlling its growth ceiling. The budget allocation structure distinctly reflects strategic priorities. Defense and domestic security spending still account for a high proportion of about 38% in the 2026 budget, similar to the roughly 40% level of the past two years. Meanwhile, subsidies to occupied regions of Ukraine have increased significantly, with subsidies to the Donetsk region set to rise to 77.8 billion rubles. Media and propaganda budgets have also been increased, particularly with funding for the "Russia in the World" project aimed at promoting traditional values to overseas youth doubling. In contrast, several livelihood and development projects, including rural development, aviation industry, energy, and primary healthcare modernization, face significant cuts.

Three main factors drive this budget strategy. First, 2025 fiscal revenue fell short of expectations, with oil and gas revenue projected to drop 22% compared to 2024, leading to a deficit rate of 2.6%, the highest since 2020. The government aims to reduce it to 1.6% in 2026. Second, the protracted war in Ukraine and potentially intensified sanctions force Moscow to seek a balance between maintaining defense spending and avoiding fiscal collapse, while planning to rebuild the liquidity reserves of the National Welfare Fund. Finally, persistent high inflationary pressure means a balanced budget helps alleviate price pressures, creating conditions for the central bank to cut interest rates in the future.

Analysis points out that the new tax system will have the most direct impact on small and medium-sized enterprises (SMEs), potentially accelerating market consolidation and forcing small businesses to be acquired or form alliances. However, no severe macroeconomic shock is expected. The VAT increase is estimated to push up inflation in 2026 by only 0.6-0.7 percentage points, and analysts believe Russia's tax burden as a percentage of GDP still has room to increase by 3-5%, remaining relatively low compared to many OECD countries. Overall, the 2026 budget draft represents a key effort by Russia, against the backdrop of a prolonged war and sustained sanctions, to ensure funding for strategic actions through structural fiscal adjustments while maintaining basic macroeconomic stability.