Given rising war costs and uncertainty about the war’s duration, higher taxes on the population and businesses have become unavoidable
Multinationals in Russia will experience a corporate tax increase from 20% to 25%, which is expected to reduce net profits by an estimated 6% on average across various sectors. These tax hikes also come amid an already high interest rate environment that restricts businesses borrowing capacity. The increased tax burden may lead to cost-cutting measures, including layoffs or reduced investment in local operations, which could affect overall business demand. On the other hand, the adoption of the new tax system will also provide some relief to companies by reducing uncertainty related to unforeseen taxes or one-off payments to the budget. Companies should start incorporating these changes into next year’s budget planning and adjust their financial strategies accordingly.
Higher income taxes will lead to reduced discretionary spending, impacting consumer demand particularly among middle- and upper-middle-income earners. For B2Gs, particularly in the healthcare sector, these changes may enable the government to finance its healthcare spending without significant interruptions, unless there is a substantial further increase in military spending in 2025.
Overview
The current needs to fund the Kremlin’s war machine have forced the Russian government to launch its first major tax reform in 20 years, introducing a progressive tax system. The primary impacts of these changes include higher taxes for corporations, extractive industry, and an increased tax burden on the working middle class. Previously, individuals paid a flat 13% tax on their monthly salaries, except those earning above RUB 5 million who were taxed at 15% since 2021; now individuals with annual incomes above RUB 2 million will see tax rates ranging 15–22%, affecting approximately 3.2% of the labor force according to the Ministry of Finance.
Our View
The new tax changes will enable the government to generate an additional US$ 30 billion in 2025 and approximately US$ 34 billion annually beyond 2025, assuming the economy remains on a growth trajectory despite moderation. This will provide greater fiscal flexibility to the Kremlin, particularly for funding the war in Ukraine and enhancing its military-industrial capabilities. However, the latter is already facing significant challenges due to ongoing sanctions and increased Western scrutiny over enforcement, which complicate but do not completely eliminate parallel imports. On the other hand, these tax proposals will also help to preserve the remaining liquid assets of the National Wealth Fund (NWF), which has been critical in addressing the rising budget deficit but has been reduced by half since the start of the war, falling to US$ 56.4 billion as of May 1, 2024, or 2.9% of forecasted GDP for 2024. Our estimates indicate prolonged lower Ural oil prices, below US$ 50–55/bbl., could deplete the liquid assets of the NWF within two years. Therefore, it was crucial for the government to identify alternative funding sources to manage the increasing budgetary needs, and tax changes were already a long-anticipated measure.
The new tax amendments also introduce benefits for those fighting in Ukraine by maintaining the previous tax rates and for large families with two or more children. This initiative appears to aim at incentivizing more individuals to join contractors fighting against Ukraine by offering them maximum possible benefits. Additionally, the changes do not include an increase in taxes on earnings from bank deposits, dividends, or other financial transactions, which are significant income sources for wealthy individuals in Russia, raising questions about the fairness of the tax amendments.
The latest tax changes, along with the recent appointment of the economist technocrat Belousov as the Minister of Defense, indicate that the Kremlin is preparing for a long war and is willing to mobilize all necessary financial resources to achieve its war objectives in the absence of willingness for negotiations on favorable terms for Russia. However, the prolonged war also means that domestic economic challenges will increase, making it difficult to balance macroeconomic stability with the high costs of war for an isolated and heavily sanctioned Russia.
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