In a significant move to bolster its war effort in Ukraine, Russia’s Finance Ministry has unveiled plans to raise the value-added tax (VAT) from 20% to 22% starting in 2026, alongside other tax increases aimed at sustaining the nation’s military campaign. Announced on September 24, 2025, these measures reflect the Kremlin’s determination to finance a conflict now stretching into its fourth year, amid mounting economic pressures from global sanctions and fluctuating oil revenues. The proposed tax hikes, which also target gambling businesses and other sectors, are designed to generate billions of rubles to equip the armed forces, modernize defense industries, and support soldiers’ families. As Russia grapples with the financial and social costs of its “special military operation,” the plan has sparked debates about its impact on citizens, businesses, and the nation’s long-term economic stability.
Financing a Protracted War
The war in Ukraine, launched in February 2022, has transformed Russia’s fiscal landscape, with defense spending soaring to unprecedented levels. The Finance Ministry’s latest proposals come as the government prepares its 2026 budget, seeking to secure funds for an increasingly costly conflict. The VAT increase, a central pillar of the plan, is expected to add significant revenue by taxing consumption at every stage of production and distribution. As one of Russia’s largest revenue sources, VAT accounts for over a third of federal tax income, making it a critical lever for addressing budget shortfalls.
The additional funds are earmarked for multiple priorities: equipping troops with advanced weaponry, maintaining salaries for soldiers, and providing social support for their families. The ministry has emphasized that the revenue will also modernize defense enterprises, ensuring Russia’s military-industrial complex remains robust despite Western sanctions. With monthly war costs estimated at over 1 trillion rubles (approximately $10 billion), the government is under pressure to find reliable income streams to sustain operations without destabilizing the economy.
The decision follows recent remarks by President Vladimir Putin, who signaled openness to tax hikes by drawing parallels to historical U.S. policies during the Vietnam and Korean wars. Framing the measures as a patriotic necessity, Putin argued that such steps are standard for nations facing existential challenges. However, the move risks testing public patience in a country already grappling with inflation above 7% and stagnant wages.
A Broader Tax Strategy
Beyond the VAT hike, the Finance Ministry is targeting sectors less likely to provoke widespread public backlash. A sharp increase in taxes on gambling businesses—casinos, online betting platforms, and lotteries—aims to capitalize on an industry that has flourished amid economic uncertainty. Russians, facing financial strain, have increasingly turned to gambling for quick gains, making it a lucrative target for additional levies. The ministry estimates these taxes could generate 200-300 billion rubles annually, providing a cushion for military spending without directly burdening low-income households.
This approach builds on earlier 2025 measures, such as windfall taxes on banking profits and luxury goods, which spared the middle class while squeezing wealthier entities. The gambling tax aligns with the government’s moral stance against vice, allowing officials to present it as both fiscally and socially beneficial. However, industry leaders warn that excessive taxation could push gambling operations underground or offshore, potentially undermining the anticipated revenue gains.
These measures reflect a broader strategy to diversify revenue sources in the face of external pressures. Russia’s oil and gas exports, once the backbone of its economy, have been hit hard by Western sanctions and volatile global prices. Ukrainian drone attacks on refineries have further disrupted energy income, forcing the government to rely more heavily on domestic consumption and selective taxes. This shift mirrors tactics used in past conflicts, where internal fiscal measures proved more stable than export-driven revenues.
Economic Context: A Nation Under Strain
Russia’s economy has shown resilience since the invasion began, avoiding the catastrophic collapse predicted by some Western analysts. After a 2.1% GDP contraction in 2022, growth stabilized through measures like parallel imports and expanded trade with China and India. However, the war’s financial toll is undeniable. Capital flight has exceeded $200 billion since 2022, and the ruble has lost nearly half its value against the dollar. The National Welfare Fund, Russia’s sovereign wealth reserve, has dwindled from $180 billion to under $50 billion, highlighting the urgency of new revenue streams.
Defense spending, now exceeding 10 trillion rubles annually, dominates the budget, crowding out investments in healthcare, education, and infrastructure. Social payments, including up to 5 million rubles per deceased serviceman, have become a significant expense, with over 1 trillion rubles disbursed since the war began. The mobilization of over 500,000 soldiers has strained labor markets, while high casualty rates—unofficially in the hundreds of thousands—have intensified demands for family support programs.
Inflation remains a persistent challenge, eroding purchasing power for ordinary Russians. The VAT hike, by increasing the cost of everyday goods like groceries and utilities, could push inflation higher, potentially sparking discontent among pensioners and low-income families. Small businesses, already struggling with rising costs, may face reduced consumer spending, further slowing economic activity.
Domestic and Political Implications
The tax proposals are navigating a delicate political landscape. While state media portrays them as a unified stand against external threats, independent voices on social platforms express skepticism, with some dubbing the VAT increase a “war tax.” Economists warn that the hike could shave 0.5% off GDP growth by stifling consumption, a critical driver of Russia’s economy. Retail and service sectors, heavily reliant on middle-class spending, are bracing for potential job losses as costs rise.
Among Russia’s elite, the response is pragmatic but cautious. Business tycoons, many tied to the defense industry, view the tax hikes as preferable to asset seizures or forced loans. However, there are concerns that prolonged conflict could necessitate even steeper measures, testing the loyalty of oligarchs who have weathered sanctions but remain wary of domestic instability. The gambling industry, particularly in resort hubs like Sochi, is lobbying for exemptions, citing potential losses to tourism revenue already hit by travel bans.
Public sentiment is mixed. Polls, though heavily controlled, suggest 60% support for the war but declining confidence in economic management. The VAT increase, combined with rising living costs, could fuel passive resistance, such as reduced spending or reliance on informal markets. Rural communities, less exposed to state propaganda, may be particularly hard-hit, as they lack access to the subsidies and jobs concentrated in urban centers.
Global Ripple Effects
The tax hikes signal Russia’s intent to sustain its military campaign, with implications for global security and markets. For Ukraine and its NATO allies, the additional revenue suggests Russia is preparing for a prolonged conflict, with funds likely to accelerate tank, missile, and drone production. Russia’s defense industry is scaling up to produce 1,500 tanks and 4 million artillery shells annually by 2026, a pace that could challenge Ukraine’s Western-supplied defenses.
Economically, the measures could influence global commodity markets. As a major wheat exporter, Russia’s higher domestic taxes may indirectly raise food prices, impacting regions like Africa and the Middle East that rely on its grain. The ruble, which dipped slightly after the announcement, could face further pressure if inflation spikes, affecting trade with partners like China and India. Energy markets are also watching closely, as any disruption to Russia’s oil output—whether from taxes or Ukrainian attacks—could tighten global supplies.
Allies like China and Iran stand to gain from Russia’s fiscal maneuvers. Beijing, now Russia’s top trading partner, benefits from stable oil flows, while a stronger ruble could enhance bilateral trade. Iran, a key supplier of drones and missiles, may see increased orders funded by the new revenues. Meanwhile, Europe, still transitioning away from Russian gas, faces indirect costs as global LNG markets strain under redirected supplies.
The Military-Industrial Push
The tax revenues are set to supercharge Russia’s military-industrial complex. Factories producing tanks, air defense systems, and advanced weaponry will receive funds for modernization, including investments in automation and rare-earth processing to offset sanction-related shortages. Soldier salaries, currently averaging 200,000 rubles monthly for contract recruits, are expected to rise, addressing recruitment challenges amid a shrinking working-age population.
Qualitative improvements are also on the horizon. Russia is accelerating production of hypersonic missiles and integrating artificial intelligence into drones, aiming to counter Ukraine’s technological advancements, such as sea drones that have disrupted Black Sea operations. However, corruption remains a hurdle, with procurement scandals siphoning off billions. Recent anti-graft crackdowns signal the Kremlin’s intent to tighten oversight, but systemic inefficiencies persist.
Social Support Amid Economic Strain
A key focus of the tax plan is supporting the human cost of the war. Funds will expand programs like the “Z-child” initiative, offering bonuses for births to veterans’ families, part of a broader effort to reverse Russia’s declining fertility rate of 1.4. Housing subsidies and education grants for soldiers’ families aim to maintain morale, but critics argue these measures fall short. Mental health services for returning veterans are underfunded, and bureaucratic delays often hinder aid delivery. The VAT hike’s impact on living costs could further strain families, undermining the government’s social promises.
Historical Parallels and Strategic Choices
The Kremlin’s invocation of U.S. tax policies during the Korean and Vietnam wars is a rhetorical gambit to legitimize the hikes. In the 1950s, the U.S. raised income and corporate taxes to fund the Korean War, generating billions without derailing growth. The Vietnam era saw temporary surtaxes that balanced war costs with domestic programs. Russia’s situation, however, is less forgiving: sanctions, a smaller industrial base, and global isolation limit its options. Unlike the U.S., which benefited from postwar economic booms, Russia faces a less certain future, with no equivalent to the Marshall Plan on the horizon.
Progressive taxation, which the U.S. employed effectively, is absent in Russia’s flat 13% income tax system, which shields the wealthy and places disproportionate pressure on consumers. Alternatives like dipping further into the National Welfare Fund or taxing emerging sectors like cryptocurrency mining could provide relief but risk depleting reserves or stifling innovation.
Challenges and Alternatives
Implementing the 2026 budget faces hurdles. While the Kremlin-aligned parliament is likely to approve the plan, regional leaders may resist, citing strained local budgets. The Central Bank warns of inflationary risks, potentially necessitating interest rate hikes to 18%. Small businesses and consumers are already exploring workarounds, such as stockpiling goods or turning to barter systems, to mitigate the VAT’s impact.
Long-term, Russia could diversify into green technology or Arctic resource extraction to reduce reliance on oil, but the war’s demands limit such investments. Non-governmental organizations, though suppressed, are stepping in to aid affected families, highlighting gaps in state support.
A Nation at a Crossroads
Russia’s tax proposals mark a pivotal moment in its war-driven transformation. The VAT hike and related measures are a calculated gamble to sustain military momentum while preserving domestic stability. Yet, they underscore a deeper reality: wars are won and lost not just on battlefields but in budgets. As Russia pours billions into its campaign, the costs—economic, social, and political—mount at home and abroad. Whether these measures fortify the nation or fracture its resilience remains an open question, one that will shape the conflict’s trajectory and Russia’s future in a rapidly changing world.
