Russia’s Small Businesses Rebel Against Tax Hikes in Wartime Economy

Russia’s new wave of tax increases — introduced to raise funds for its war in Ukraine — is set to hit one in ten small business owners. Many warn they may have no choice but to shut down or move into the shadow economy to survive.

Since 2023, Moscow has been gradually raising domestic taxes — including personal income and corporate profit levies — to keep pace with soaring military spending, now at its highest level since the Cold War.

The latest proposal, awaiting parliamentary approval, would slash the annual revenue threshold for small businesses to qualify for VAT exemption from 60 million rubles to just 10 million rubles (about $123,000). The measure is scheduled to take effect in 2026.

“This is a shock for all small businesses,” said Sergei Borisov, head of the Opora small business association, one of several groups that wrote to both houses of parliament last week urging lawmakers to block the plan.

Under the proposal, firms earning between 10 million and 250 million rubles a year — which are currently exempt from VAT — would have to pay up to 5% VAT and hire accountants to manage the added paperwork.

According to Opora, the reform would affect about 700,000 entrepreneurs, roughly one-tenth of Russia’s small business sector. In a survey of 11,000 business owners, one-third said they would likely shut down, while another third said they would be forced into the informal economy to avoid paying taxes altogether.

“Until now, we’ve operated under a simple and transparent system,” said Sergei Pakhomov, who runs a small grocery store in central Moscow. “Now our costs will rise, and I honestly don’t know how we’ll survive.”

A Blow to Small Business Employment

The move follows an earlier proposal to raise the general VAT rate from 20% to 22%, expected to generate around one trillion rubles to help fund military expenses and reduce the widening budget deficit.

According to the latest data from the Economy Ministry, small and medium-sized enterprises (SMEs) account for about one-fifth of Russia’s GDP and employ roughly 31 million people, or nearly 40% of the workforce.

The government expects the new tax measures to raise 200 billion rubles ($2.5 billion) in additional revenue. But Opora estimates that compliance and administrative costs for businesses could reach 420 billion rubles ($5.2 billion) — more than double the expected fiscal gain.

While business groups have proposed setting the VAT threshold at 30 million rubles instead of 10 million, the Finance Ministry has so far resisted.

“No one disputes the need to strengthen the federal budget for national defense,” the letter from the business lobby said. “But it is critical to acknowledge the devastating impact this will have on the microbusiness sector.”

Facing growing criticism, Finance Minister Anton Siluanov told parliament on Wednesday that he was open to revising the proposal, though he offered no details.

“Tax the Big Sharks, Not Us”

Russia’s small business sector has already benefited from state support in the form of tax breaks, subsidized loans, office rent assistance, and startup grants — policies credited with helping many firms survive the COVID-19 pandemic and the economic fallout of war.

The Finance Ministry argues that the reforms are meant to curb tax evasion schemes, where large corporations split into smaller units to qualify for low-tax regimes. Lowering the threshold, it says, will make such tactics “economically pointless.”

But small business owners insist they will bear the brunt of the change.

“Take money from the big sharks, not from us,” said Irina Pankratova, who runs the Artel tailor shop in Moscow. “I’m stunned. They’re already squeezing us dry.”

Anna Slavutina, a jewelry designer who founded her business in 2003 and now co-owns three shops with her husband, said one of their two stores in St. Petersburg has been running at a loss for a year.

“Our customers keep asking if we’re going to close,” she said. “What can I tell them? We’ll see. But if we shut down, the state loses our taxes too.”

Economists Warn of a “Tax Spiral”

Economist Sofya Donets, chief economist at Tinkoff Bank, warned that the reforms could backfire, pushing the economy into a “tax spiral” — where revenue gains are offset by a shrinking tax base.

“This is going to be a real-life experiment on living people,” Donets said. “We’ll likely see more businesses quietly shutting down — not through bankruptcy, but simply saying, ‘to hell with it all.’”

She and other economists noted that recent hikes in corporate and income taxes have failed to meet revenue expectations, suggesting the government could face a similar shortfall in 2026.

With weak demand, rising competition, and soaring input costs, small firms will struggle to pass higher taxes on to consumers. Many may simply go underground.

Economist Evgeny Kogan put it bluntly: “The government won’t collect much more money — but it may unleash a wave of social problems. If you want a cow to produce more milk, you have to feed it well and let it graze on green pastures.”