Vladimir Putin is doubling his efforts to continue financing his invasion of Ukraine. His latest solution: the signing, on Friday, July 12, of several decrees to increase taxes for high incomes and businesses. This decision, the Kremlin estimates, should make it possible to finance the explosion of nearly 70% of the Russian military budget in 2024, a consequence of the relentless war against kyiv. Military spending will represent, this year, 6.7% of GDP.
The Duma and the Federation Council, the two houses of parliament, voted in favor of the tax increase plan. Because in Russia, public spending has exceeded revenues by tens of billions of euros since the start of the invasion of Ukraine in February 2022. The federal deficit reached 0.5% of GDP in the first six months of 2024, according to the Finance Ministry. The latter forecasts a deficit of 1.1% this year, a level that is still well below most of the world’s major economies.
Tax the richest and corporations
To compensate for this imbalance, the Russian state will therefore introduce new tax thresholds for the highest incomes – at 18, 20 and 22% – and increase the corporate income tax from 20 to 25%. “These changes aim to establish a fair and balanced tax system,” Finance Minister Anton Silouanov recently justified.
While these tax increases are significant, they will only affect “3 to 4″ percent of Russians and businesses,” the minister assured. This is a sign, according to him, that the authorities are cautious not to affect the standard of living of the majority of Russians, already affected by inflation currently around 8.6%. For the rest of the population, the tax rate will remain at 13%, as it has been since 2001. These new tax thresholds would still bring in around 27 billion euros more, in 2025 alone.
A new strategy to finance the war
Officially, this money is to be used to finance a series of “national projects”: multi-year programs announced at the beginning of the year by Vladimir Putin and which mainly concern social spending. But in reality, it is mainly about financing the war effort in Ukraine, after more than two years of a conflict that is costly economically and humanly.
Another strategic shift in this attempt to maintain control over the financial abyss represented by the Russian-led invasion: Vladimir Putin ousted a long-time member of his government in mid-May, Sergei Shoigu – in order to “rationalize” spending and further increase production for the army – and appointed in his place an interventionist economist with no military experience, Andrei Belousov.