Russia’s Finance Minister, Anton Siluanov, has announced a 2% increase in the country’s value added tax (VAT) to reduce the budget deficit and curb inflation. The standard VAT rate will rise from 20% to 22%, with critical goods such as food and medicines remaining taxed at a flat 10% to protect low-income households. This decision was made in lieu of government borrowing, which would have led to further inflation and a subsequent interest rate hike.

The move is part of a draft budget for 2026-2028 submitted to the Russian parliament. Siluanov stated that a balanced budget is essential for economic growth, as it provides a foundation for slowing inflation, achieving macroeconomic stability, and easing monetary policy. The increased revenue will be allocated towards defense against emerging threats, such as Ukrainian drones and cyberattacks, as well as the protection of key infrastructure.

The Bank of Russia recently lowered its key interest rate to 17% in an effort to curb inflation, which has been impacted by Western sanctions over the Ukraine conflict. Despite this, economic growth in Russia has slowed, with a projected growth of over 1.5% of GDP, significantly lower than the 4.3% growth recorded last year. The Russian parliament is set to review the proposed national budget next month.

Siluanov emphasized that the decision to balance the budget through tax increases will give the central bank room to ease monetary policy. The finance minister also briefed Russian President Vladimir Putin on the state of the economy, citing the “fairly tough” monetary policy as a contributing factor to the slowdown in growth. The increased VAT rate is expected to have a less negative impact on the economy compared to alternative measures, such as government borrowing.