Russia Enacts 2026 Federal Budget Mandating Sustained War Economy Shift

In the final days of November 2025, President Vladimir Putin formally enacted the Federal Budget Law for 2026 and the subsequent three-year fiscal period, cementing a profound structural realignment of the Russian economy toward a sustained military footing. This legislative action formalizes a strategy that significantly elevates defense allocations while simultaneously imposing cuts across social programs and national economic support, with new tax measures serving as a primary funding mechanism.

The budget outlines total planned expenditures reaching 44.06 trillion rubles, projecting a deficit of 3.78 trillion rubles, equivalent to 1.6% of the Gross Domestic Product (GDP). The most pronounced feature of the new fiscal architecture is the overwhelming priority given to defense and security, which will command 16.84 trillion rubles, constituting 38% of the entire budget. This 38% share represents a 1.6-fold increase when benchmarked against the pre-war year of 2021, when security spending accounted for 24% of the budget. Expenditures dedicated to the army and weapons procurement are set to consume 12.93 trillion rubles, marking the highest proportion since the Soviet Union era, with defense spending alone slated to surpass the combined allocations for health, education, and welfare.

To finance this elevated defense posture, the government is implementing substantial tax adjustments. A key component is the increase of the standard Value-Added Tax (VAT) rate from 20% to 22%, effective January 1, 2026, a measure anticipated to generate approximately 1.2 trillion rubles in revenue for 2026 alone. This hike places Russia's VAT rate among the highest of major economies, surpassing nations like France and the United Kingdom, both at 20%. Finance Minister Anton Siluanov noted the VAT increase is crucial for revenue generation, as projected oil and gas revenues for the coming year are only expected to reach 8.9 trillion rubles, following a 20% drop in the current year.

Conversely, the budget signals a contraction in civilian support, with the share allocated to social spending decreasing to 25.1% (down from 38.1% pre-war), and support for the national economy dropping to 10.9% (down from 17.6% pre-war). These figures represent the lowest levels recorded in the twenty years of available statistics from the Russian Ministry of Finance. Further impacting the business landscape, the threshold for small businesses to become liable for VAT under the simplified taxation system is being drastically lowered from 60 million rubles to 10 million rubles. While the 10% preferential VAT rate remains for essential items like food and medicine, some dairy products are now excluded and will be subject to the 22% rate.

The State Duma previously passed the budget and tax bills, with lawmakers highlighting domestic allocations, including over 10 trillion rubles for family support measures. The structural shift, formalized in late 2025, indicates a commitment to this resource-reallocation model well into the future, despite forecasts suggesting a slowdown in GDP growth to 1.3% in 2026. The Ministry of Finance data underpinning these statistics was prepared in collaboration with several federal services, including the Federal Treasury and the Federal Tax Service.