Warning lights are flashing for Russia's economy, now in its fourth year of war with Ukraine. Powered by a rapid expansion of the munitions and defense industries, it has posted growth outpacing the European average, but assessments say the Russia economy, long reliant on wartime windfalls, has hit structural limits.
Recently, the burden on Russia's small business owners has risen sharply. After hiking corporate taxes and introducing a progressive tax on personal income, the Russian government also raised value-added taxes (VAT) to 22% from 20% starting in January this year. On top of that, various tax filing obligations have been tightened. With surging prices and high interest rates persisting, the added tax burden is further squeezing profitability.
On the 25th (local time), the French daily Le Monde reported that Denis Maksimov, who runs a bakery on the outskirts of Moscow, has emerged as a symbol of Russia's recent economic troubles. The hashtag "#IAmMachenka," named after his shop, is spreading on social media (SNS), resonating with small business owners.
Maksimov directly aired his grievances at President Vladimir Putin's annual news conference and "Direct Line" event in December last year, and avoided bankruptcy thanks to the president's intervention. But many small business owners are still suffering a triple blow of higher taxes and expenses, and weak consumption, Le Monde said. Across Russia, restaurants and cafes continue to close, and "for lease" notices at commercial properties are on the rise.
Behind the government's push to boost tax revenue is a surge in defense spending. According to Le Monde, Russia's defense budget for 2025–2027 will rise about 30%, accounting for roughly 40% of total spending. Military expenditure is estimated at about 7% of gross domestic product (GDP).
By contrast, oil and gas income—the core pillar of public finances—has been declining amid falling global prices and Western sanctions. Even when exports skirt sanctions, discounts are unavoidable, eroding revenue. Le Monde said Russia's fiscal deficit in 2026 is projected to reach 3.5%–4.4% of GDP.
In the early phase of the war, Russia's economy maintained high growth on the back of an expanded munitions industry. It grew about 4% in both 2023 and 2024, outpacing the eurozone average. But last year the growth rate slowed to 1%. The International Monetary Fund (IMF) cut its 2026 growth forecast for Russia to 0.8% and also raised the possibility of a technical recession in the first quarter.
A prolonged period of high interest rates is also seen as a burden. To rein in inflation, the Central Bank of Russia at one point lifted its benchmark rate to around 20%. It recently cut the rate to 15.5%, but borrowing costs for corporations and households remain high. With the lending rate reaching 18%–19% for typical loans, investment and a real estate market recovery are being constrained, Le Monde noted.
Consumer indicators are deteriorating as well. New car sales plunged 38% last year, and the decline has continued this year. Real consumption growth is effectively at zero. The official inflation rate is in the mid-5% range, but many say the perceived rate is higher. Experts said, "The war initially stimulated the economy, but as it drags on, it is instead eroding the foundation for growth."