Key Points and Summary – Russia’s war economy is starting to show strain. As Ukraine’s drones hit targets deep inside Russia, the Kremlin is scrambling to plug mounting fiscal gaps with VAT hikes, new excise taxes and shrinking enlistment bonuses.
-Oil and gas revenues, a quarter of GDP, are falling under tighter U.S. sanctions and quiet pressure on buyers in China and India.
-A niche Chinese supplier now dominates key additives for tyres and lubricants, creating a potential choke point.
-Growth is stalling, inflation is high and regions are in deficit. Western policymakers must decide whether to exploit these weaknesses or accept Putin’s story of endless endurance.
Putin’s War Tax: How Sanctions and Bonuses Are Bleeding Russia at Home
Russia’s economy has endured better than many thought it would, but is time running out for its war-heavy strategy?
As President Vladimir Putin’s invasion of Ukraine gears up for a fourth winter, average Russians are facing a double blow: a war that creeps ever closer to their front door, while the bill for it steadily grows.
Putin Back in 2020. Image Credit: Creative Commons.
Ukraine’s increasingly sophisticated drones and occasional missiles are routinely striking energy facilities and residential buildings deep inside Russia, forcing air-raid sirens and blackouts on regions that once felt remote from the front.
The broader economic picture is darker still. After years of pumping trillions of rubles into the war effort, the Kremlin is running up against fiscal limits.
Oil and gas revenues, which now make up a quarter of Russia’s GDP, have fallen sharply as Washington tightens sanctions on Rosneft, Lukoil and their subsidiaries, and leans on China and India with secondary measures.
Russian fossil-fuel income dropped about a quarter year-on-year this autumn, even before the latest US package took full effect.
That pressure is now being passed directly to citizens.
Lawmakers have approved a rise in value-added tax from 20% to 22%, and drastically lowered the turnover threshold at which small firms must collect it, a change expected to drag thousands of previously exempt businesses into the net and raise up to 1 trillion rubles in extra revenue.
Excise hikes on alcohol, tobacco and tech imports are also in the pipeline.
At the same time, the Kremlin’s manpower strategy is becoming harder to finance. Enlistment bonuses for contract soldiers have reached around 2 million rubles (roughly $20,000) in some regions.
Under strain, more than two dozen areas have slipped into deficit and are quietly cutting those payments back towards the federal minimum, undermining the incentive system that underpins Russia’s “volunteer” war model.
A new report by US group Dekleptocracy points to Russia’s dependence on imported chemical additives for lubricants and military-grade tyres.
With most Western suppliers gone, a single Chinese firm, Xinxiang Richful, now covers a large share of Russia’s needs.
Targeted sanctions on that niche trade, analysts argue, could hurt the war machine more than yet another broad statement about oil.
For now, Russia can still finance its fighting. Moscow’s hefty defence budget props up headline GDP and its sovereign wealth fund retains liquid assets.
Russia’s domestic borrowing is also relatively low by international standards. But the cracks have been visible for a while.
Growth has slumped to almost 1%, and inflation sits at near 8%. Interest rates are high, and business surveys suggest private-sector activity is decreasing.
Western governments, debating peace plans that lean heavily on Ukrainian concessions, must decide whether to believe Putin’s narrative of infinite endurance – or to recognise that Russia is already paying a real price, and push harder on its weak points in the hope of pressuring for peace.
About the Author: Georgia Gilholy
Georgia Gilholy is a journalist based in the United Kingdom who has been published in Newsweek, The Times of Israel, and the Spectator. Gilholy writes about international politics, culture, and education. You can follow her on X: @llggeorgia.
