Military Spending Makes the kremlin Raise VAT – the Consequences Will Hit Regions and Consumers

​​​​​​​The planned increase in the VAT rate in russia to 22 % from January 1, 2026, is unlikely to ensure the expected growth in budget revenues. According to estimates, VAT revenues in 2026 will be by US$6.1 billion less than predicted by the russian ministry of finance.

The tax increase will have a number of side effects. Domestic demand is expected to decline, reducing excise and customs revenues. Higher prices will reduce corporate profits, the wage fund, and tax payments from personal income. Reduced dividends for private and state shareholders will lead to losses for individual companies, while regions will lose a significant portion of their revenues.

The VAT increase will intensify inflationary pressure and force the Central Bank of the rf to maintain a high policy rate for at least another two quarters. This will increase the cost of government borrowing: the ministry of finance will have to issue bonds with higher yields, which will increase debt servicing costs and reduce the net fiscal effect of the reform.

The 22 % rate will make russian VAT one of the highest in the world, surpassed only by Hungary (27 %) and some Northern European countries. The decision reflects a budget deficit caused by increased military spending and reduced export revenues. As a result, russia will face a further deepening of the economic crisis, an expansion of the shadow economy, and even more expensive loans for businesses and state-owned companies.