Putin dismissed Russia’s ballooning 5 trillion ruble ($59.7 billion) budget deficit as “nothing scary” just weeks before his government proposed raising value-added tax from 20% to 22%—the second major tax increase this year as Moscow shifts war costs onto ordinary Russians.
When dictators break tax promises to fund wars, they are usually running out of simpler options.
Ukraine’s Foreign Intelligence Services see Russia’s fiscal squeeze as evidence of a “systemic crisis” that could create strategic advantages—if Western allies maintain economic pressure rather than easing sanctions.
Russia’s deficit denial meets reality check
Putin’s 5 September comments about the massive deficit revealed something telling about Kremlin messaging. “Some of our colleagues in the government believe we can increase this deficit further. Nothing scary about this,” he told officials, claiming Russia’s low debt levels guarantee “stability of the entire credit and financial system.”
Within three weeks, his Finance Ministry submitted the VAT increase proposal.
Russia’s draft 2026 budget shows spending of 44 trillion rubles ($525.4 billion) against revenue of just 40.3 trillion ($481.2 billion). Finance Minister Anton Siluanov claimed the deficit would be 1.6% of GDP, but the math suggests something closer to 2-2.2%.
Even more telling, the deficit had already hit 4.88 trillion rubles ($58.3 billion) by July—25% above the annual target with five months still to go. Russia has already revised its 2025 deficit projection upward from 1.7% to 2.6% of GDP.
Why Russian fiscal pressure matters
When authoritarian regimes squeeze their own citizens to fund foreign wars, it signals economic desperation. The VAT increase breaks Putin’s 2024 pledge of no tax changes until 2030—domestic promises sacrificed to fund Ukraine’s destruction.
- Sanctions effectiveness: Russian fiscal pressure suggests Western economic warfare is working, even if slowly. Each tax increase shows the Kremlin can’t generate war funding through normal economic growth.
- Energy leverage: A cash-strapped Russia becomes desperate to sell oil and gas, weakening Moscow’s energy weapon against Europe. Desperate sellers accept worse terms.
- Regime stability: Russia’s forced choice between social and military spending creates internal political stress that Western intelligence agencies closely monitor.
Tax burden escalates as promises crumble
As The Moscow Times points out, Russia’s Finance Ministry has justified the need for the VAT hike, which should generate an estimated 1.3 trillion rubles ($15.5 billion) annually, with higher “defense and security spending.
Combined with January’s corporate tax increases and new progressive income taxes, ordinary Russians now fund Moscow’s war machine through direct wallet hits.
VAT particularly stings because Russians can’t avoid it. Unlike income taxes, which mainly affect urban professionals, or corporate taxes, which companies absorb, VAT hits every purchase, from bread to gasoline.
It accounts for 37% of federal revenues, making it the government’s most reliable cash cow despite directly raising consumer prices.
Russian banks face additional pressure through a proposed 10% tax on “excess profits.” Ukraine’s Foreign Intelligence Service noted this mirrors 2023 measures that generated 315 billion rubles ($3.8 billion), but expects banks to contribute only 200 billion rubles ($2.4 billion) this time—“a paltry sum given the overall deficit.”
Ukrainian intelligence: Russia trapped in fiscal crisis
Ukraine’s Foreign Intelligence Service assessed the escalating tax measures as evidence that Russia faces an unsustainable fiscal trap. “There is nowhere else to cut costs—either the army or social welfare, and neither option is being seriously considered,” the intelligence service stated.
Russian leadership can’t slash military spending without admitting strategic failure, but can’t cut social spending without risking domestic unrest.
The assessment described Russia’s approach as “not a strategy, but an attempt to plug holes.”
Ukraine’s spies project the 2025 deficit will range between 5 and 8 trillion rubles ($59.7-$95.5 billion)—significantly higher than official projections. They called the 2.2 trillion ruble deficit planned for 2026 “a financial fantasy.”
When military spending becomes economic suicide
The mounting costs reflect Ukraine’s systematic destruction of expensive Russian equipment. Ukrainian forces have eliminated 11,199 Russian tanks, 23,282 armored vehicles, 33,052 artillery systems, 424 aircraft, and 345 helicopters since February 2022, according to Ukraine’s General Staff figures cited by German media.
Each destroyed tank needs an expensive replacement. Each downed aircraft costs millions. Russia’s $145 billion defense spending in 2025 represents what economists call “military Keynesianism”—throwing money at weapons that get destroyed rather than building productive economic capacity.
Military and security spending now consumes 40% of Russia’s federal budget. For comparison, the United States spends roughly 15% of federal funds on defense during peacetime.
Strategic implications for Western allies
Russian fiscal pressures create a potential leverage window for Western allies. Putin’s forced tax increases indicate the Kremlin cannot sustain current military spending indefinitely, particularly with oil revenues declining and economic growth slowing to 1% annually.
Putin’s willingness to shift costs onto ordinary Russians rather than reduce military spending demonstrates the regime’s commitment to continuing the war despite economic strain.
However, the contradictory deficit projections within Russia’s government suggest that Moscow is struggling to evaluate its financial situation accurately.
As Euromaidan Press previously analyzed, Russia’s economic trajectory follows patterns similar to Soviet decline—military overspending, demographic crisis, and sanctions creating institutional decay. The current tax increases suggest this timeline may be accelerating under wartime pressure.