^{Photo: The Jamestown Foundation}

Russia’s fragile wartime economy is showing cracks as the government rolls out its 2026 draft budget, which reveals how heavily the Kremlin is leaning on ordinary Russians to finance its prolonged war against Ukraine.

Tax Hikes to Fund Military Spending

The Finance Ministry unveiled proposals that would raise taxes on both consumers and businesses, presenting them as necessary to cover defense and security costs while limiting borrowing. Officials are planning to increase value-added tax (VAT) from 20% to 22% and dramatically lower the threshold at which small businesses are required to pay VAT—from 60 million rubles (about $738,000) to just 10 million rubles (around $123,000). In addition, a new 5% gambling tax has been proposed.

These measures, the ministry argues, will help contain Russia’s budget deficit, which is projected at 1.6% of GDP in 2026. Finance Minister Anton Siluanov defended the hikes, saying they would allow the government to manage debt levels and reduce inflationary pressure.

Slowing Growth and Rising Costs

The new budget forecasts economic growth of just 1.3% in 2026, a steep decline from the 4.1% expansion recorded in 2024. Earlier estimates had suggested growth of 2.5% this year and 2.4% in 2025, but momentum is clearly faltering.

Defense spending is slated to edge down slightly from a record 13.5 trillion rubles this year to 13 trillion rubles in 2026, but analysts stress that this apparent cut is misleading. Spending on “national security and law enforcement” will rise from 3.46 trillion to 3.91 trillion rubles—an increase of 13%—reflecting the Kremlin’s intent to shift resources toward internal security and enforcement rather than reducing its war effort.

Russian Citizens Footing the Bill

For analysts, the message is clear: Russian households and small businesses are being asked to shoulder the financial costs of war. Higher VAT and inflation already stretching family budgets mean consumers are facing higher prices for everyday goods. Inflation stood at 8.1% in August, while the central bank’s benchmark interest rate sits at a punishing 17%, raising borrowing costs and further weighing on economic activity.

Alexander Kolyandr, senior fellow at the Center for European Policy Analysis, argued that Moscow has reached the end of its capacity to boost growth with stimulus. “The Kremlin is embracing austerity, which will choke off civilian economic activity while protecting military spending,” he said.

Analysts at the Carnegie Russia Eurasia Center echoed this, stressing that while headline defense spending may look smaller, the broader picture shows security-related expenditures remain extremely high. “It is the Russian public who will pay the bill through tax hikes and reduced living standards,” said Alexandra Prokopenko.

Inflation, Sanctions, and Strains Ahead

Russia’s war-driven economy has been fueled by heavy state spending, but sanctions, labor shortages, and rising wages have pushed inflation higher. Consumers are already facing price surges on basic staples like butter and meat. For many families, the double blow of higher taxes and rising living costs is becoming harder to absorb.

Siluanov suggested that new allocations would also target non-military security needs, including counter-drone systems, cybersecurity, and infrastructure protection. But these investments will do little to ease the pressure on households, who face the consequences of a wartime budget strategy that prioritizes military and security resilience over civilian prosperity.

A War Economy With No End in Sight

Although defense spending is projected to dip slightly in 2026, analysts caution this is not a signal that the Kremlin intends to wind down its war. Instead, the shift reflects a redistribution of resources within the state’s security apparatus. With growth slowing, inflation elevated, and borrowing tightly controlled, the government has little choice but to lean harder on its citizens to sustain its war economy.

For Russia’s people, the message is blunt: the financial burden of the Ukraine conflict is no longer hidden—it is being passed directly onto households and businesses, even as the war shows no sign of ending.