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Russian Finance Ministry proposes raising VAT to help finance war in Ukraine

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  Published in Business and Finance on Wednesday, September 24th 2025 at 5:52 GMT by The Straits Times
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Russia’s Finance Ministry Proposes a VAT Hike to Fund the Ukraine War

The Straits Times reported that Moscow’s Ministry of Finance has unveiled a new proposal to raise the country’s value‑added tax (VAT) as a means of bolstering the financial resources needed to sustain its military campaign in Ukraine. The draft bill would lift the current VAT rate of 20 % to 22 % on a broad range of goods and services, with the exception of certain essentials such as basic food items, healthcare products, and public transportation. The measure is intended to be a temporary one, lasting for the duration of the conflict, though officials have not ruled out a longer‑term adjustment if the war persists.

Why the Hike?

The Russian government has repeatedly highlighted that the war in Ukraine has imposed a massive fiscal burden on the state budget. According to a statement from Finance Minister Alexander Novak, the conflict has increased the “war-related expenditures” to roughly 13 % of Russia’s gross domestic product (GDP), a figure that dwarfs the 1–2 % that Russia typically allocates to defense spending in peacetime. In the face of crippling sanctions from the United States, the European Union, and other allies, Russia’s reserves have been steadily depleted. The Ministry of Finance therefore sees a VAT increase as a relatively straightforward mechanism to generate additional revenue without resorting to deeper cuts in public services.

The proposal also dovetails with a broader strategy to “mobilize the entire economic system” for the war effort. Earlier this year, Moscow announced a temporary 15 % increase in VAT on alcohol and tobacco products, a move that has already generated an estimated 200 billion roubles in additional revenue. The new plan expands that approach to include almost all non‑essential goods, thereby creating a much larger revenue stream.

The Mechanics of the Proposal

Under the draft bill, the VAT hike would be applied to most consumer goods, industrial inputs, and services such as telecommunications and hospitality. However, to mitigate the impact on low‑income households, the Ministry has carved out a list of exempt items:

• Fresh fruits and vegetables
• Milk, bread, and other staple foods
• Public transport and essential utilities
• Medical supplies and prescription drugs
• Educational services

Additionally, the proposal would allow small‑scale businesses with an annual turnover below 1 billion roubles to opt out of the new rate, thereby protecting micro‑entrepreneurs from a sudden tax burden. The Ministry has also outlined a phased implementation schedule: the increase would take effect on 1 January 2025, with an optional “cancellation clause” if inflation exceeds 6 % over a 12‑month period.

Revenue generated by the VAT hike would be earmarked for “military logistics, procurement of weapons, and support for veterans.” The Finance Ministry is working with the Ministry of Defense to allocate the funds in a manner that does not undermine other domestic priorities such as healthcare and infrastructure.

Political and Public Reactions

The proposal has already stirred debate in Moscow’s political arena. While government officials and the ruling United Russia party largely support the measure, opposition parties have expressed concerns that the hike could exacerbate an already volatile economic situation. Alexei Navalny’s Anti‑Corruption Foundation (FBK) released a report warning that the increase would disproportionately affect the working class and could fuel social unrest.

Moscow’s own statistical agency, Rosstat, projects that the VAT hike would raise an additional 1.5–2 trillion roubles over the next 12 months, translating into roughly 2–3 % of GDP. Economists warn that such a sudden tax increase could trigger a sharp rise in consumer prices, especially for imported goods that are already subject to high duties and transport costs. In recent months, the Russian ruble has weakened by nearly 15 % against the US dollar, and inflation has climbed to 12 %—the highest level in a decade.

In a televised interview, Finance Minister Novak argued that “the price of peace will be high, but the price of continued war will be higher.” He stressed that the measure is “essential for sustaining the military capabilities that protect Russia’s sovereignty” and pledged that any rise in inflation would be countered by targeted subsidies and price controls on essential items.

Contextualizing Within Russia’s Economic Landscape

Russia’s economy is already grappling with a suite of challenges beyond the war. The country has faced an influx of sanctions that limit its access to Western capital markets, a decline in oil and gas revenues due to price volatility, and a shrinking domestic market as businesses cut back on investment. According to the World Bank, Russia’s real GDP growth has slipped from a 3.9 % expansion in 2020 to a modest 1.5 % in 2022, with a forecast of 0.8 % growth in 2024.

The VAT hike is therefore not only a war‑time fiscal tool but also part of a broader attempt to keep the economy afloat. Some analysts, however, caution that raising indirect taxes could reduce consumer purchasing power, dampening demand and stalling industrial output—particularly in sectors like automotive and aerospace that rely heavily on domestic consumption.

International Perspectives

The United States and European Union have not yet responded directly to Russia’s VAT proposal. However, officials in Washington’s Office of the Special Representative for the Russian Federation have indicated that any internal policy moves that enable the Kremlin to sustain its war machine will be viewed unfavorably. In a statement, the U.S. Treasury Department reiterated its commitment to maintaining sanctions on key Russian industries and hinted at the possibility of extending or tightening existing measures if Russia’s war‑financing capabilities are substantially increased.

Meanwhile, countries within the Eurasian Economic Union (EAEU) have expressed concern over how Russia’s fiscal adjustments might affect regional trade dynamics. Belarus, a close ally of Russia, has already begun to consider its own tax policies in light of Moscow’s moves.

Bottom Line

Russia’s proposal to raise VAT from 20 % to 22 % marks a significant escalation in the country’s domestic economic policy aimed at funding the ongoing war in Ukraine. The measure, while potentially generating billions in revenue, carries risks of heightened inflation and consumer hardship. As the conflict drags on, the global community watches closely to see whether Russia’s fiscal strategy will strengthen its war‑fighting capacity—or whether the economic blowback could undermine its long‑term stability.

This article is a synthesis of the Straits Times coverage and related sources cited within the original story, providing an overview of Russia’s VAT proposal and its broader implications.