Expert: Russia Needs to Further Raise Taxes to Fund Russo-Ukrainian War

The economic consequences of Russia’s invasion of Ukraine are beginning to manifest in the country. Economists believe that the measures announced by the Russian government to increase revenue are insufficient to cope with the escalating military expenditure, and the country needs to further raise taxes to support its war in Ukraine.

According to the draft budget released by the Russian government for 2025, around one-third of total expenditure, or 6.3% of the Gross Domestic Product (GDP), will be allocated to military spending. This proportion is the highest level since the Cold War, with defense spending expected to be twice that of social expenditure for the first time.

The sharp increase in military spending is putting inflationary pressure on the Russian economy. Interest rates have reached their highest level since 2003, and the ruble has plummeted to a one-year low against the US dollar. The country’s financing options are limited as Western sanctions effectively prevent Russia from accessing the international bond market.

Putin’s government has begun to raise taxes to fund the war that has been ongoing for two years and eight months. A major tax reform is expected to bring in additional revenue equivalent to 1.7% of GDP in 2025, but economists believe this is still insufficient.

Analyst Alexei Klimyuk from Alfa Wealth stated, “Adjusting domestic tax revenues will always be a priority for the authorities. We may see many proposed amendments to tax laws and regulations in 2025.”

The expected drop in oil prices is also projected to impact the country’s finances, as oil is a key export commodity for Russia. The budget draft anticipates a decrease in the average oil price from $70 per barrel in 2024 to $65.5 per barrel in 2027, thereby weakening national revenue.

Natalia Orlova, Chief Economist at Alfa-Bank, mentioned, “This structure makes the budget heavily reliant on oil prices. This means that the issue of finding additional revenue will resurface, if not in 2025, then in the coming years.”

Finance Minister Anton Siluanov cautioned last year that there is no room for increased expenditure and warned that without control, the burden would fall on Russian citizens and businesses, leading to higher inflation rates and increased taxes.

In fact, both scenarios have already unfolded. Russia’s current inflation rate is more than double the central bank’s target. The benchmark interest rate stands at 21%, the highest level since the beginning of Putin’s rule.

Despite facing Western sanctions, the Russian economy has shown unexpected resilience since the start of the war, with historically low unemployment rates, record wage growth, and minimal signs of public dissatisfaction.

Starting from 2025, increases in corporate and personal income taxes, as well as new car disposal taxes and a series of smaller tax proposals, are expected to generate revenue of 14.7 trillion rubles (approximately $151 billion) over three years.

Evgeny Nadorshin, economist at PF Capital, commented, “This is a budget of high taxes, debt service costs, and geopolitical expenses.”

Nadorshin noted that the government’s new tax proposals include imposing higher “exit taxes” on foreign companies leaving Russia, and plans to increase taxes paid by Russians when purchasing assets.

He said, “The budget has never been financially focused on extracting income from every possible source as it is now.”

According to Reuters’ analysis of the budget draft, other measures to be introduced in 2025 include an 11.6% reduction in support for small businesses and an 11% decrease in funding for education development projects.

Regional budget subsidies for social welfare, including funding for supplementing the national pension, will be cut by 31%, while financing for modernizing social services projects will decrease by 35%.

Economist Sergei Aleksashenko stated, “The 2025 budget shows that Putin is forced to cut spending in almost all areas to finance the war.” He previously served as Deputy Chairman of the Central Bank.

Deputy Finance Minister Vladimir Kolychev mentioned that while military expenditure as a proportion of GDP has increased by 3.0% to 3.5% during the war, overall expenditure has only grown by 2%.

Kolychev acknowledged the shift in government priorities in a rare public appearance, stating, “This indicates adjustments in priorities, with all other expenditure, apart from military spending, actually reduced by 1% to 1.5% of GDP, which is the current fiscal consolidation.”

According to former Deputy Minister of Economic Development Andrei Klepach, even Putin’s “national projects,” aimed at strategic development areas, are at risk, with some funds being delayed to 2028-2030.

He said, “In 2026-2027, we need to find opportunities through unallocated funds and reserves to ensure consistency and stability. Otherwise, the target parameters will be at risk.”