Kremlin Shifts Tax Burden to Wealthy and Mining Sectors as War Deficit Balloons
Facing a widening budget deficit driven by military spending, Russia is introducing targeted tax hikes on mining firms and high-income earners for the 2027-2029 period. While the state avoids a full financial crisis, the fiscal squeeze is diverting resources away from civilian infrastructure and public welfare, with the economy increasingly skewed toward state-linked military industries.
Key points
- The 2027-2029 state budget includes a 20-30% windfall profits tax on mining companies producing iron ore, nickel, and gold.
- Income from interest, dividends, and property sales will face higher rates, ranging from 13% to 22%, up from previous tiers of 13% and 15%.
- The budget deficit reached 5.8 trillion rubles ($72 billion) through August 2026, nearly 50% higher than the same period last year.
- New measures include a 22% VAT on foreign online goods under 200 euros and a 35% tax on dividends for foreign investors from unfriendly countries.
- The National Wealth Fund’s liquid assets have dwindled to 1.7% of GDP, limiting the government’s ability to absorb economic shocks.
Background
This fiscal tightening follows a period of intense military mobilization and propaganda efforts, including the Kremlin’s recent push to brand energy attacks as 'Putin strikes' to boost approval ratings. The tax measures also arrive amid diplomatic maneuvers, such as proposed trilateral talks with the US and China that exclude Ukraine, and a significant gap between Kremlin claims of territorial gains and independent estimates from the Institute for the Study of War.
Why it matters
The shift from broad tax increases to targeted levies on the wealthy and resource sectors signals a strategic attempt to fund the war without triggering immediate public unrest. However, this approach risks long-term economic erosion, as the state prioritizes military output over civilian infrastructure and social services, potentially destabilizing the fragile economic equilibrium if global energy prices drop or confidence in the financial system wanes.
What to watch
The Russian parliament is expected to rubber-stamp the 2027-2029 budget and associated tax hikes on Thursday. The government will likely continue to rely on domestic borrowing and the dwindling National Wealth Fund to cover the deficit, while monitoring the impact of new taxes on consumer spending and foreign investment.
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