Where Does The Road Paved with Tax Manoeuvres Lead? Increasing the tax burden in 2025 will not save the budget from a record deficit of 3% of GDP. Will it help in 2026?

The government’s attempt to reduce the 2025 budget deficit by raising taxes against a backdrop of falling oil prices and declining economic activity can already be described as a failure. Growth in non-oil and gas revenues began to shrink towards the end of the year, while shortfalls in oil and gas revenues increased. As a result, budget revenues were merely kept at last year’s level, which covers only 88% of actual spending this year.

New US sanctions against Rosneft and Lukoil, imposed at the end of October, will lead to at least a short-term fall in oil and gas revenues due to both reduced sales volumes and a widening discount on Russian oil. At the same time, the government is unlikely to be able to cut spending at the end of the year. This threatens to produce a record budget deficit, which may exceed the 3% of GDP threshold.

Despite the failure of the 2025 tax manoeuvre, the Russian authorities remain firmly committed to continuing along the path of increasing the fiscal burden under a new tax manoeuvre. However, experts warn that the returns from this new expansion of tax pressure will also be lower than expected.

The authorities are relying on their repressive instruments, which are supposed to prevent businesses from going into the shadows. But the result will be that a high fiscal burden suppresses the economy’s ability to turn towards growth, while still failing to solve the deficit problem. The need to finance the shortfall will increase the weight of expensive borrowing. In the end, the economy risks finding itself trapped in a vicious circle of chronic public-finance deficits and chronic private-sector stagnation.

Three budgets: lessons from the 2025 tax manoeuvre

In October 2025, after two months of surplus in the federal budget, a deficit of 403 billion roubles was recorded once again. As a result, the accumulated deficit for the first 10 months increased to 4.3 trillion roubles (1.9% of GDP).

The October deficit came as a surprise to analysts, who had previously confidently predicted a budget surplus for that month. These expectations had been strengthened by the government’s evident efforts to save on spending: in October 2025 expenditure amounted to just 88% of the October 2024 level, which is a major development after three and a half years of almost uninterrupted spending growth driven by the war. But this was not enough. Moreover, in addition to low oil and gas revenues, the main surprise came from non-oil and gas revenues: October receipts were lower than last year’s.

Back in the first half of 2024, against a backdrop of rising military expenditure, the Russian government, which is concerned about the rapid depletion of the reserve fund and a possible deterioration in external conditions, launched a tax manoeuvre. Despite multiple promises not to change the tax regime, it raised profit tax rates, introduced a progressive scale of personal income tax, lowered thresholds for preferential tax treatment, and increased several excise duties. Together with certain quasi-tax measures, these changes were supposed to bring the treasury around 4 trillion roubles in additional revenue and reduce the budget’s dependence on oil and gas income (→ Re:Russia: The Non-Victory Budget). The idea was that the Kremlin would thereby insure itself against potential sanctions escalations and falling oil prices. The October results allow preliminary conclusions to be drawn and suggest that the tax manoeuvre has largely failed.

According to the government's original plan (set out at the end of 2024 budget), non-oil and gas revenues in 2025 were expected to reach 29.4 trillion roubles, which is an increase of 3.8 trillion, or 15% compared with 2024. In the first half of the year, such targets appeared entirely attainable: in April the volume of non-oil and gas revenues was 14% higher than a year earlier. More than half of these revenues come from VAT on domestic production and imports. However, as the economy slowed, the dynamics of these receipts worsened: in the first quarter VAT revenues rose by 9.3% compared to last year, at the end of the first half of the year by 7.3%, and by the end of eight months by 6%.

Nevertheless, in August 2025 non-oil and gas revenues overall were 16% higher than in August 2024, and cumulative revenues for January–August were 14% above the previous year’s level and the same as in April. But in September their volume was only 106% of the September 2024 level, and in October it fell below October 2024 (to 96%). This was the result of a sharp economic slowdown and deteriorating business conditions. The cumulative increase in non-oil and gas revenues over 2024 levels shrank to 11%.

Chart 1. Dynamics of non-oil and gas revenues of the federal budget, 2023–2025, billion roubles

In fact, this proved sufficient to offset the decline in oil and gas revenues only at a minimal level. Average monthly oil and gas receipts in January–April were around 90% of their 2024 level, but from May to October they fell to an average of 70%. Over January–October, oil and gas revenues were 21% lower than in 2024. And since they currently account for roughly a quarter of all tax revenues, the 11% increase in non-oil and gas revenues covered their decline, resulting in only a symbolic rise (0.8%) in total budget revenues for January–October 2025 compared with the same period in 2024 (29.9 trillion roubles versus 29.7 trillion).

At the same time, budget spending over the first ten months exceeded last year’s figure by 15%. By the end of August, the increase had been nearly 20%, but the government’s efforts to rein in expenditure in September–October yielded some results. Nevertheless, budget revenues for the ten-month period cover only 88% of actual spending.

Chart 2. Dynamics of federal budget expenditures, 2023–2025, billion roubles

Given that planning oil and gas revenues has been a major challenge for the government this year, planning non-oil and gas revenues in light of higher taxes has proved no less difficult. In the initial plan, as already mentioned, the government intended to collect 29.4 trillion roubles (+3.8 trillion compared with 2024). In the revised spring version of the budget, this figure increased to an unrealistic 30.2 trillion (+4.6 trillion), while in the third, autumn version of the 2025 budget, which the president signed just 10 days ago, the plan is to collect 28.43 trillion (+2.85 trillion) from domestic sources.

This means that over the remaining two months, receipts from domestic taxes and excise duties must total 6 trillion roubles, which is even more than in the last two months of the previous year. In light of the trends seen in September–October, this target is beginning to look far from straightforward. However, given that the final month of the year includes receipts from the tax on bank deposits and the largest annual payments of progressive personal income tax, this target is likely to be met, notes economist Elena Akhmedova, author of the Telegram channel ‘Hard Figures’. Nevertheless, overall non-oil and gas revenues in 2025, even with a substantial increase in the fiscal burden, will exceed last year’s figure by roughly 10% or slightly more, while a significant part of this increase will in fact reflect general price rises in the economy (the GDP deflator will be around 4–5%, and the consumer price index around 8%). This modest outcome shows that the economic slowdown and deteriorating business conditions have a powerful impact on fiscal results, which cannot be offset by raising tax rates.

A post-mortem of the 2025 tax manoeuvre is particularly significant in the context of the new round of tax increases undertaken by the Russian authorities this year.

3% of GDP: budget adjustments are lagging behind reality

When it comes to oil and gas revenues, the swings in budget projections have been no less dramatic. Under the first version of the 2025 budget, they were expected to total 10.9 trillion roubles; under the spring revision, 8.3 trillion; and according to the third version of the budget for the almost-completed year, signed two weeks ago, 8.7 trillion.

For the moment, the overall level of oil and gas revenues corresponds to the baseline plan set out in the most recent revision and even slightly exceeds it, by 202 billion roubles. But this overshoot is due to revenues collected in January–April, when the shortfall in oil and gas receipts compared with last year was still small (10%). The third version of the 2025 budget was drafted and uncritically approved by the Duma before the introduction of new US sanctions against Russian oil giants Rosneft and Lukoil, and signed by Putin only afterwards. As a result, its relevance has once again been thrown into doubt.

Graph 3. Dynamics of oil and gas revenues in the federal budget, 2023–2025, billion roubles

The sanctions imposed on 22 October come into force on 21 November and have already led to significant changes in the market, namely, a reduction in purchases of Russian oil by its three largest buyers: China, India and Turkey. According to Bloomberg, five large Indian refineries, which account for two-thirds of Russian oil exports to that country, have not yet placed a single order for Russian oil for December. According to ship tracking systems, seaborne shipments of Russian oil to China and India last week amounted to 1.9 million barrels per day (mb/d), 60% below the level recorded in the final week before the restrictions were announced (3.05 mb/d). Meanwhile, total seaborne exports from Russia fell by only 9.7%, from 3.82 mb/d to 3.45 mb/d, due to a fourfold increase (to 1.3 mb/d) in shipments carried by tankers that do not disclose their final destination.

As we anticipated, the sanctions are having a twofold effect — a reduction in physical volumes due to the withdrawal of buyers sensitive to the threat of secondary sanctions, and a widening discount on all 'toxic' Russian crude (→ Re:Russia: Cutting Off The Tail Piece by Piece).Discounts on Urals relative to Brent have nearly doubled, from $11–12 to $19–20, market sources told Kommersant, citing Argus data. According to the Centre for Price Indices (CPI), market participants estimate the discount this week at $16–18 per barrel. According to the Ministry of Economic Development, the average Urals price in October fell by 5.5% to $53.68 per barrel, and dropped further to $50.3 last week, according to CPI data. Brent is currently trading at $63 per barrel, and with a maximum discount of $20, the price of Urals could fall to $43 per barrel. This is 26% less than the forecast ($58) included in the latest version of the 2025 budget.

Previously, restructuring logistics to route sales through traders not afraid of secondary sanctions – a shift that then allowed discounts on Urals to narrow – took around two months, analysts told Kommersant. The same is likely this time, but for the next couple of months a substantial decline in revenues from exports of oil and petroleum products is almost guaranteed. The double blow of lower volumes and deeper discounts could reduce receipts by 25% in total.

To meet the oil and gas revenue target in the latest budget version, the government needs to collect 1.2 trillion roubles in November–December, equal to 75% of the levels seen in November–December 2024. Achieving this through current receipts is impossible: as noted earlier, in the last six months prior to the new sanctions, oil and gas revenues were running at just 70% of last year’s levels, and will now fall further. However, the government will likely be able to meet the plan thanks to payments that oil companies make on quarterly and four-monthly schedules. But there is no chance of any additional revenues beyond the reduced third budget plan that might otherwise have helped narrow the deficit slightly.

And this threatens to widen it further. The government has already spent 80% of the expenditure planned for the year (34.1 trillion roubles out of 42.8 trillion) over January–October. Typically, around one-third of annual spending falls in the final quarter (in 2023–2024, October–December accounted for around 35% of total budget expenditure, according to the Accounts Chamber, and around a quarter falls in the final two months. This is due to final settlement of government contracts, debt-servicing payments, and the disbursement of salaries, allowances for civil servants, and pensions (including advance payments for January of the following year). To stay within the approved expenditure plan for 2025, the Ministry of Finance needs to cut end-of-year spending by 18% compared with November–December 2024.

This is ‘tough,’ notes the MMI Telegram channel, forecasting a deficit of around 6 trillion roubles for the year in this case (such an estimate of the expected deficit is becoming increasingly popular). In our view, this is not 'tough' but practically impossible, and the deficit will therefore be even larger, beyond 3% of GDP. As a result, the Duma will quite likely have to revise the 2025 budget for a fourth time. Unlike in a normal budget process, where legislators adopt the budget and the government implements it, in today’s Russian military despotism the order is reversed: the government implements the budget as required by military needs, and MPs ratify this retrospectively as the supposed plan.

Tax manoeuvre 2026: a loop, not a way out

Despite the tax manoeuvre, the budget deficit by year-end is highly likely to reach a record level. This is driven by continued growth in expenditure alongside falling oil and gas revenues and the inability to compensate for their decline through higher domestic taxes amid economic stagnation and a sharp slowdown in activity.

Meanwhile, the Russian government has decided to increase the tax burden even further to cope with looming budget problems in 2026. According to the Ministry of Finance, this will raise an additional 1.4 trillion roubles, providing almost half of the expected increase in non-oil and gas revenues next year, from 28.43 trillion to 31.36 trillion. These efforts, however, will cover only about a quarter of the deficit at current spending and revenue levels.

But even this result is far from guaranteed. As we have already noted, in conditions of stagnation or recession the returns from raising VAT may be much more modest, in line with the logic of the Laffer curve (→ Re:Russia: Military-style VAT). Experts at the Gaidar Institute reach the same conclusion: additional fiscal pressure will reduce demand, sales volumes, and ultimately tax collection. Their calculations, based on CIS countries’ data, indicate that, all things being equal, a 1 percentage-point increase in the VAT rate leads to a 2-percentage-point fall in VAT collection.

The 2026 budget draft foresees GDP growth of 1.3%, driven, according to the document, by a 'gradual cooling' of demand and the end of the recovery phase of economic growth. But the 'cooling' is already deeper than this benchmark, meaning a reversal would be required to meet the forecast. This looks highly unlikely amid continued downward pressure on the oil market, which will depress Russian oil and gas revenues. In a strict sanctions scenario, the decline could amount to around 15% relative to this year’s already low levels (→ Re:Russia: Cutting Off The Tail Piece by Piece). In addition to the fiscal effect, which will also be significant, this will affect the investment opportunities of the Russian economy and contribute to further suppression of its growth potential. The composite leading indices of the Centre for Macroeconomic Analysis and Short-Term Forecasting indicate a high risk of recession next year.

The current fiscal frenzy of the Russian authorities, inventing ever more quasi-tax exactions on Russian residents, including such specific measures as higher penalty rates and even the 'dekulakisation' of beneficiaries of earlier preferential regimes, is aligned with the regime’s repressive logic. That is, it assumes that even amid a critical collapse in profits, tax residents will not be able to go into the shadows. But economists warn that such an approach can provide only a short-term boost to revenues, followed by long-lasting negative consequences. Moreover, increasing the tax burden will not solve the deficit problem, forcing the government to expand domestic borrowing, which will be very costly. As a result, the economy risks falling into a vicious circle of chronic public-finance deficits and chronic private-sector stagnation.