By Darya Korsunskaya

Russia's Need for Increased Military Funding

MOSCOW (Reuters) – Russia will need to raise taxes further to fund its war in Ukraine, according to economists who say revenue-raising measures already announced will not be enough to fund the country's ballooning military spending.

Military Budget Allocation

Russia's draft 2025 budget allocates about one-third of total expenditure, or 6.3% of GDP, to the military – the highest level since the Cold War. For the first time, the share of spending on defense will be double that of social spending.

Economic Impact

The huge increase in military spending is generating inflationary pressure in Russia's economy. Interest rates have risen to their highest since 2003, and the rouble has slid to a one-year low against the dollar. With Western sanctions effectively barring Moscow from international bond markets, its fundraising options are limited.

Tax Reforms

The government has started raising taxes to fund its war, now in its third year. A major tax reform is expected to generate additional revenues worth 1.7% of GDP in 2025. Economists argue this will not be enough. Alexei Klimyuk from Alfa Wealth noted that the adjustment of domestic taxes will remain a constant focus for the authorities, suggesting potential amendments to tax legislation in 2025.

Oil Price Dependence

An expected fall in the price of oil, Russia's main export commodity, is also casting a shadow over the country's finances. The draft budget projects the oil price will decrease from $70 per barrel in 2024 to $65.5 per barrel in 2027, impacting state revenues. Natalia Orlova, chief economist at Alfa-Bank, cautioned that this structure keeps the budget heavily dependent on oil prices, indicating that revenue questions will arise soon.

Burden on Citizens

Finance Minister Anton Siluanov warned last year that if spending were not contained, the burden would fall on Russian citizens and businesses through inflation or higher taxes, both of which have occurred. Inflation is running at more than double the central bank's target, with the key interest rate at 21%.

Future Tax Increases

Starting in 2025, increases in corporate and personal income taxes, a new car recycling tax, and several smaller tax initiatives are expected to generate 14.7 trillion roubles over three years. Evgeny Nadorshin from PF Capital referred to the coming budget as one focused on higher taxes and geopolitical expenditures.

Spending Cuts

Other measures in 2025 include significant cuts in support for small businesses (11.6%) and funding for an education development program (11%). Subsidies to regional budgets for social benefits will decrease by 31%, while financing for a social services modernization program will drop by 35%.

Sergei Aleksashenko, a former deputy governor of the central bank, suggested that the 2025 budget indicates a necessity for spending cuts across most sectors to finance the war.

Fiscally Focused Budget

Deputy Finance Minister Vladimir Kolychev noted military spending has increased by 3.0-3.5% of GDP during the war years, while overall spending has only grown by 2%. This highlights a prioritization, with remaining spending reduced by 1-1.5% of GDP, reflecting significant fiscal consolidation.

Risks to National Projects

Funding for President Putin's "national projects"—development plans for critical areas—is also at risk, with some funding pushed to 2028-30. Economist Andrei Klepach expressed concerns about needing to find opportunities through undistributed funds and reserves to maintain consistency and stability in the future budgets.

($1 = 97.1500 roubles)