Key Tax Changes at a Glance
The Finance Ministry has released the main parameters of the draft federal budget for 2026–2028. The most significant changes are as follows: the value-added tax (VAT) will increase from 20% to 22% (the 10% rate for socially important goods is retained); under the simplified taxation system, the revenue threshold for VAT exemption will be reduced from RUB 60 million to RUB 10 million. An increase in the recycling (utilization) fee has also been factored in, which should partially offset budget expenditures. At the same time, funding has been preserved for all social commitments and for new benefits within the national projects. Nevertheless, the government has been forced to take the difficult decision to strengthen the fiscal burden under external pressures, since the executive branch cannot control or set monetary policy due to the Central Bank of Russia’s special status.
Why the Deficit Is Widening
The growth of the federal budget deficit—estimated at RUB 7–7.5 trillion in 2025 (up by RUB 4 trillion from the planned RUB 3.9 trillion), with the negative effect carrying over into subsequent years—is attributed to the regulator’s long-standing policy and its failures in forecasting key macroeconomic indicators. These forecasts are the basis on which the government draws up three-year strategic plans and implements national projects. In its “Main Guidelines of the Unified State Monetary Policy for 2023–2025,” the Bank of Russia projected a 2025 key rate of 5–6%. On that basis, the executive branch drafted strategic plans, and the legislature approved them.
Forecast Misses and the Cost to the Budget
In reality, the key rate in 2025 deviated from the projected 6% by an average of 14 percentage points, not counting the cumulative dynamics of previous years. According to calculations by academic institutes and independent experts, each percentage-point increase in the key rate adds roughly RUB 250 billion in compensatory expenditures to the budget. For this reason, while preserving the core parameters of strategic planning, the 2025 budget incurred about RUB 3.5 trillion in additional costs. This figure almost exactly matches the widening of the budget deficit—from RUB 3.9 trillion to RUB 7–7.5 trillion. Notably, while the Central Bank denies that a high key rate influences the dynamics of the budget deficit and attributes the gap to increased defense spending, this argument is contradicted by the fact that physical output increased by 3–6%, whereas value output—because of the rising cost of borrowed funds—fell by 8–12% or more.
Two Paths the Government Considered
In this situation, the executive branch outlined two main options to narrow the gap between revenues and expenditures, in order to avoid disruptions to balanced economic development and to limit social strain:
- Increase public debt through additional OFZ (federal bond) issuance;
- Engineer a controlled depreciation of the exchange rate (a measure the Central Bank has repeatedly used in the interests of large corporations).
Each method has drawbacks, but under current conditions they appear preferable to raising taxes or cutting funding for strategic goals and the technological development of the real sector.
Clash with the Central Bank
These executive-branch initiatives—including proposals from Presidential aide for economic affairs Maxim Oreshkin—were reportedly rejected outright by Elvira Nabiullina at a meeting with the President. She stated that the only way to increase budget revenues is to raise taxes on households and businesses. Moreover, she added that if the government chose other options, the Central Bank would raise the key rate to 22% (in line, she said, with contractual obligations to the IMF).
A Vicious Circle
The result is a stalemate—a vicious circle: because of the regulator’s stance, the budget deficit cannot be addressed effectively, while the existence of the deficit gives the Central Bank grounds to maintain a high key rate, which in turn drives expenditures higher. The confrontation between the executive branch and the regulator reflects a deeper contradiction between an emerging new technological paradigm and an archaic monetary policy.
