Strategic Affairs

How the Ukraine conflict is straining Russia's economy

The lack of external financing options leaves Russia with fewer tools to stabilize its economy.

Russia's President Vladimir Putin attends a meeting during the World Atomic Week international forum, dedicated to the global nuclear industry, in Moscow on September 25, 2025. [Alexei Nikolsky/AFP]
Russia's President Vladimir Putin attends a meeting during the World Atomic Week international forum, dedicated to the global nuclear industry, in Moscow on September 25, 2025. [Alexei Nikolsky/AFP]

Global Watch |

Proposed tax hikes highlight the growing economic burden of Moscow's military offensive in Ukraine.

A unneeded cost paid for by the people of Russia and showing the war in Ukraine is a significant financial burden on its citizens and businesses. With a $50 billion budget deficit in the first eight months of 2025, the Kremlin is scrambling to fund its military operations. The latest proposal? Raising the value-added tax (VAT) from 20% to 22%, a move that would directly impact the wallets of ordinary Russians.

The Russian Finance Ministry has justified the tax hike as a necessary step to fund "defense and security." But on the streets of Moscow, the reaction has been mixed. Accountant Svetlana Vasilenko views it as a step too far. "It's horrible. This rate increase is madness," she said, reflecting the frustration of many business owners already struggling under the current tax burden.

Since the start of the Ukraine conflict, Russia's government spending has surged by more than two-thirds, with military expenditures now accounting for nearly 9% of GDP, levels not seen since the Cold War. This massive ramp-up in defense spending initially helped Moscow weather Western sanctions and avoid an economic collapse. However, the long-term effects are beginning to show.

Inflation has spiked and the budget deficit, already three times larger than at the same point in 2024 is expected to remain significant next year. Unlike other nations, Russia can't turn to international capital markets for funding due to sanctions. Instead, it has been forced to rely on domestic bond investors and depleting its sovereign wealth fund.

While a 2% deficit may seem manageable by international standards, the lack of external financing options leaves Russia with fewer tools to stabilize its economy. The proposed VAT hike is a clear sign that the Kremlin is running out of options.

A heavy burden on citizens and businesses

The proposed tax increase comes at a time when many Russians are already feeling the economic strain. For businesses, the current 20% VAT is already challenging, and an increase to 22% could push some to the brink.

"Even at 20%, it is very difficult for them," said Vasilenko, echoing the concerns of many entrepreneurs.

For ordinary citizens, the tax hike would mean higher prices on goods and services, further eroding purchasing power in a country where inflation is already a concern.

The economic strain on Russia is a stark reminder of the hidden costs of prolonged conflict. While the Kremlin has managed to avoid the economic collapse predicted by some Western analysts, the cracks are beginning to show. The war in Ukraine is not just a military endeavor, it's an economic gamble that is increasingly being paid for by the Russian people.

The proposed VAT hike is more than just a fiscal policy, it's a reflection of the growing economic toll of Russia's war in Ukraine. As the Kremlin struggles to fund its military ambitions, the burden is falling on ordinary Russians, who are being asked to tighten their belts for a conflict that shows no signs of ending.

For Russia, the question is no longer just about military strategy it's about economic sustainability. How long can the Kremlin continue to fund its war effort without further straining its economy and its people?

The proposed tax hike may be a short-term solution, but it underscores a long-term problem. As the war drags on, the economic consequences will only deepen, leaving Russia to grapple with the true cost of its military ambitions.

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