Russia is increasing taxes on small businesses and lowering the thresholds that trigger tax obligations, a move aimed at boosting wartime revenue but that business owners say is forcing them to close their doors. The value-added tax rose by 2 percentage points, and the revenue threshold requiring businesses to pay it was cut from 60 million rubles (approximately $783,000) to 20 million rubles ($261,000) this year, with further reductions planned through 2028.
Business owners across bakeries, beauty salons, and pastry shops report falling demand, sharply rising supplier costs, and tax bills that have surged to tens of times their previous amounts. In St. Petersburg, shop after shop on the main commercial street, Nevsky Prospekt, has gone out of business.
The Kremlin’s tax squeeze targets small and medium enterprises at a moment when Russia’s economy is under severe strain. Oil revenues are declining and military spending has leveled off as the four-year war in Ukraine drains the budget, prompting authorities to turn to small businesses and ordinary Russians for funds that larger, more politically connected companies have been better positioned to avoid.
The Kremlin’s Tax Squeeze
Denis Maksimov faced a choice that growing numbers of Russian business owners now confront: accept devastating tax bills or close his doors.
Maksimov owns Mashenka, a bakery chain in the Moscow region that had attracted attention after he appeared on President Vladimir Putin’s annual televised call-in show in December. Standing before his ovens, Maksimov pleaded with Putin to examine new tax reforms that were crushing small businesses.
“We understand very well that it’s not an easy situation for the country. We understand that raising taxes is necessary,” Maksimov said on air. “We’re looking ahead without optimism, frankly speaking. Many (businesses) will close down.”
Putin responded by raising the bakery owner’s case at a government meeting in January, and Economy Minister Maxim Reshetnikov proposed measures to exempt Maksimov from paying VAT while lowering other taxes. The business then saw increased customer traffic, and Maksimov told the Associated Press this month: “I think we will grow, maybe slower than before, but no less confidently, I think.”
But Maksimov acknowledged that he remains waiting for authorities to actually adopt the proposed measures. Without change, he said, he would have considered shutting down.
Most small business owners lack Maksimov’s access to the Kremlin. His case spurred an online campaign called “We Are Mashenka,” launched by the Association of Beauty Industry Enterprises, in which business owners across Russia described the same tax burden without anyone to intercede on their behalf.
The Tax Changes
The new tax policy raises the value-added tax by 2 percentage points and sharply lowers the revenue thresholds that trigger tax obligations. Businesses that previously paid VAT only if they exceeded 60 million rubles in annual sales (about $783,000) now must do so at 20 million rubles ($261,000), with thresholds dropping further to 10 million rubles by 2028.
The changes also affected the “patent taxation system,” which had allowed small businesses to make fixed annual payments instead of percentages of revenue. Businesses now exceeding 20 million rubles in revenue must pay at least 6 percent tax on revenues plus 5 percent VAT.
Darya Demchenko, who owns a chain of beauty salons in St. Petersburg, saw the tax changes disqualify her from the patent system. She now faces much higher tax obligations and must hire a full-time accountant to handle the paperwork.
“This year, we haven’t felt any support at all. We feel like they want to shut us down,” she told the Associated Press.
Her costs spiked 30 percent. Suppliers, facing the VAT increase themselves, raised prices well beyond the 2 percent tax hike. Demand for beauty services has fallen for months. Russia’s restrictions on social media platforms deprived her of inexpensive ways to advertise. To stay afloat, Demchenko closed one of her four family-oriented salons and sold another.
The Closures Mount
Lyalya Sadykova, president of the Association of Beauty Industry Enterprises, reported that about 10 percent of beauty industry businesses in St. Petersburg closed and another 10 percent sold their companies in December and January. She anticipates more closures to come.
“People will do the math. The first deadline for taxes is in April, and people will see that they have nothing to pay with, and that’s when the collapse will begin,” Sadykova said. “I think there will be bankruptcies, and mass exodus from the market, because now it seems to me that not everyone has done the math and understood it.”
The closures are visible. A social media video showed vacant commercial spaces on St. Petersburg’s main shopping street, Nevsky Prospekt, where shop after shop went out of business.
Ilsiya Gizatullina and Railya Shayhieva, who owned a pastry shop in Kazan, shut down their business when the tax reforms were adopted. They had survived the coronavirus pandemic, which was temporary, but viewed the new tax system as permanent.
“We understand very well that it won’t be abolished the day after tomorrow, and there will likely be an even higher tax burden in the future,” Gizatullina said.
The Strategy Behind the Squeeze
The Kremlin’s tax squeeze targets a vulnerable part of the economy at a moment when Russia faces severe fiscal pressure. Oil revenues are declining, the budget deficit is rising, and military spending fueled by the four-year war in Ukraine has leveled off.
Chris Weafer, CEO of Macro-Advisory consultancy, said the tax increases represent “a deliberate strategy by the Finance Ministry to create more stable, predictable sources of income.”
Small and medium enterprises account for just over 20 percent of Russia’s economy. Expanding VAT obligations to those businesses will extract “a meaningful amount” of money for the state budget, Weafer said.
The pressure on small businesses is not new. They have been under strain since 2014, when Russia was sanctioned for its annexation of Crimea, and the government directed most of its support to large companies. The new tax regulations add to that burden.
“The one engine of expansion and growth and innovation that you need in an economy is the sector that has suffered most in the last four years and is continuing to suffer today,” Weafer said.
The government has signaled that the pressure will intensify. More businesses will face increased taxes in 2027 and 2028 as thresholds continue to tighten.