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Russia's lawmakers approve hiking VAT tax to finance defense spending

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  Published in Business and Finance on Wednesday, October 22nd 2025 at 22:52 GMT by Associated Press
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How the VAT increase will work

Under the new law, the 20 % VAT will apply to most consumer goods, including food, clothing, and household items, as well as to services such as telecommunications and transportation. Exemptions will remain in place for essential categories such as basic foods, medical supplies, and educational services. The Ministry of Finance has indicated that the increased tax will be collected through the existing administrative framework, without a major overhaul of the tax system. The government also promised that the additional revenue will be directed explicitly toward defense expenditures, a claim that lawmakers and analysts will scrutinize in the months ahead.

According to a preliminary estimate from the Ministry of Finance, the 2‑percentage‑point rise could bring in roughly 260 billion rubles per year. This figure represents about 2 % of Russia’s total fiscal revenue, a sizable sum that will be funneled into the Ministry of Defense’s budget. In comparison, Russia’s defense budget for 2024 was approximately 22.5 trillion rubles, and the Kremlin has already pledged to increase that spending by 10 % annually to sustain the front‑line operations in Ukraine.

Political dynamics and reactions

The bill was passed with a decisive majority of 320 votes in favor and only 5 votes against. The ruling United Russia party, which holds a dominant position in the Duma, supported the measure outright, while opposition parties such as the Communist Party and the Liberal Democratic Party of Russia (LDPR) issued neutral statements. The only dissenting voices came from the "A Just Russia — For Truth" party, which argued that the VAT hike would disproportionately hurt lower‑income households.

President Vladimir Putin praised the legislation in a televised address, labeling it as a necessary step to ensure the country’s “defense and security” in the face of “unlawful aggression.” He also reiterated that the new revenue would help keep the Russian military supplied with modern equipment and ammunition.

Economic context and consequences

The Russian economy has been in a precarious position for several years. Sanctions imposed by the United States, the European Union, and other Western powers have curbed Russia’s access to foreign capital and limited its ability to import advanced technology. In addition, the country’s own inflationary pressures, driven by high energy prices and the cost of war, have eroded the purchasing power of ordinary Russians.

In a recent interview, Federal Customs Service director Yulia Slyusareva highlighted that the VAT increase will “add resilience to the economy” by ensuring that the defense sector has adequate funding without requiring a sudden surge in borrowing. However, economists warn that the measure could also push consumer prices higher, exacerbating the cost of living crisis that many Russians already face.

The Russian central bank, the Bank of Russia, has signaled that it will monitor the inflationary impact of the tax hike closely. While the bank has kept interest rates at historically low levels, it has also signaled that it will adjust policy tools if inflation spikes beyond target ranges.

Links to additional information

The State Duma’s decision follows a wave of fiscal tightening that began earlier this year. A related AP article, “Russia raises income tax from 13 % to 15% to boost defense spending,” explains how the Kremlin increased individual income tax by 2 % to further diversify its revenue sources. The article outlines that this tax hike was aimed at offsetting losses in the banking sector caused by sanctions and to finance military hardware upgrades, such as the procurement of advanced fighter jets and artillery systems.

Another pertinent link is the AP story “Inflation surges in Russia as sanctions bite,” which describes the surge in consumer prices in 2023 and 2024. It cites data indicating that the retail price index rose by 5.5 % in March 2024, a rate that has stoked public frustration. The piece also notes that the Russian government has been cautious about raising taxes, citing the public backlash that followed earlier attempts to increase VAT for small businesses.

Looking ahead

The new VAT law is set to take effect on 1 January 2025, giving businesses and consumers time to adjust their accounting systems and budgets. The Kremlin’s insistence that the tax will be earmarked for defense spending underscores the government’s priority to maintain its war‑fighting capabilities. However, the real test will come in the next few months, as the Russian economy grapples with inflation, sanctions, and a shrinking tax base.

While the increased revenue may provide a short‑term boost to defense spending, analysts caution that a sustained war effort will likely require additional sources of income or a shift in strategic priorities. Meanwhile, ordinary Russians may feel the pinch as their daily expenses rise, raising questions about the long‑term social and political costs of the Kremlin’s fiscal choices.

In sum, Russia’s decision to hike VAT is a calculated effort to secure the financial footing of its defense apparatus in an increasingly hostile economic environment. Whether this strategy will succeed in balancing military objectives with domestic welfare remains to be seen, but the move undeniably signals the Kremlin’s willingness to tighten its belt to keep its war machine running.