The Tax Trap: moscow Has Strangled Small Businesses and Is Missing Out on Revenue

Small businesses in russia are moving into the shadow en masse – and the state treasury is already feeling the consequences. According to the results of the first quarter of 2026, the federal Tax service recorded a collapse in revenue from small businesses and the self-employed: just $7.5 billion – by 16% less than a year ago. The ministry of finance estimates the actual decline to be even steeper – up to 22%, depending on the calculation method.

In early 2026, moscow raised the VAT rate, eliminated insurance contribution exemptions, and lowered the revenue threshold for access to the simplified tax system. These measures were supposed to bring in about $2.7 billion in additional revenue for the budget. They did not.

Instead, entrepreneurs resorted to splitting their businesses, minimizing official income, or simply disappearing from the registries. The patent system – one of the key tools for small entrepreneurs – showed negative revenue: minus $20 million. The reason is simple: due to inflation, nominal incomes rose, and some entrepreneurs automatically exceeded the preferential limits, which had not been revised for a long time. Revenues under the simplified system – the main regime for small businesses – decreased by approximately 9%, to $2.1 billion.

Against this background, the overall state of the federal budget is dire. In the first quarter, revenues fell by 8.2% to $111 billion, while expenditures jumped by 17% to $172 billion. The deficit exceeded $60 billion – and that’s in just three months, while the planned annual figure is $50.5 billion.

Regions will be espeially vulnerable: payments under special regimes are primarily credited to local budgets. A reduction in these revenues will widen cash gaps and force federal subjects to increasingly reach out to moscow for transfers.

The kremlin’s logic is to keep the pressure on. But the tighter the fiscal control, the deeper businesses go into the shadow. The circle is complete: reforms designed to fill the budget are actually draining it.