Although the US-Russia diesel deal—an arrangement that appears to be “legalising” existing flows with minimal impact on markets—has attracted most political attention in recent weeks, the government’s latest reshuffle is a bad omen for 2027. Finance Minister Anton Siluanov has once again been appointed deputy prime minister, while Mikhail Mishustin’s right-hand administrator, Dmitry Grigorenko, is leaving the government. Siluanov is clearly being elevated with an eye to strengthening the state’s finances and his ministry’s control over spending priorities. Meanwhile, Elvira Nabiullina and the Bank of Russia’s decision to hold the key rate at 14%, coupled with a 2026 inflation forecast of 7.1−7.6% and an increase in the forecast average key rate for 2027 to 12.5−13.5%, underscore the effects of Ukraine’s refinery strikes and the war. Inflation is not falling as desired. The only remedy, then, is to tighten the state’s belt further: raise taxes and cut spending.
If fiscal policy is the only reliable instrument for restoring some degree of macroeconomic balance, the news for economic growth can only be bad. Siluanov and his associates may speak of “fair” tax increases, but the distributional consequences of the war are inherently unequal and unfair. Calling on regions to reduce their dependence on federal transfers, for instance, requires a growing volume of economic activity to tax in the first place—activity that is evidently not growing and, in many sectors, is stagnant at best or shrinking. Tax authorities are steadily increasing their scrutiny of large companies’ tax accounts, although the revenue impact has so far been relatively negligible. Officials want to impose a windfall tax on metals producers, taxing away 30% of the increase in incremental revenues resulting from higher prices relative to 2025, while offering mild relief to gold producers through a 20% target. Applying the 22% VAT to cross-border purchases would raise the cost of imports for consumers and push inflation higher, at least temporarily. Passive income from dividends and similar investments is now being taxed along the same progressive lines as earned income, while online marketplaces will pay 22%. Duma Speaker Vyacheslav Volodin has even backed tax increases on palm oil and oysters.
These tax increases fly in the face of pre-Duma-election talk of a new investment cycle intended to drive growth. Roughly 60% of investment in the real economy is financed by businesses from their own funds rather than through borrowing, given the prohibitive cost of capital. Even marginal increases in the effective tax rate paid by the private sector will therefore inevitably further reduce investment. Consumers, meanwhile, are clearly pulling back. Demand for tourism-related services is down 3.6% year to date compared with last year—an indication that spending cuts are spreading beyond economising on essentials. Business profits are now down 15.7% year to date in annualised terms. Setting aside real wage data, which are difficult to interpret and inflated by money flowing to poorer households through war-related bonuses, nearly 95% of Russians surveyed by FOM say that their material circumstances have worsened or remained unchanged this year compared with last year. There is no growth tailwind heading into 2027, and no sign of a reset in the investment cycle.
Since businesses’ own funds are driving capital investment and households are cutting consumption, the logical consequence of further spending cuts and belt-tightening would be a reduction in both. The Bank of Russia now forecasts GDP growth of 1−2% next year, but it is unclear what would be necessary to sustain even that level of growth given the absence of signs of economic dynamism. Aktion Finance, a service provider for financial managers, found that 38.5% of surveyed companies do not plan to replace employees who leave or are laid off, while just over 19% are actively planning layoffs. Directionally, the underlying trend is negative: low unemployment is coinciding with weakening consumer demand and business activity.
Normally, the “solution” would be to rely on fiscal stimulus to offset the loss of private-sector demand. That is not happening. The annual deficit proposed in the next three-year budget plan has been held at 2% of GDP—a level that had already ceased to stimulate growth by 2024, since the distribution of spending continues to favour the military, crowd out capital investment and services, and sustain social transfers that are under pressure from higher inflation. In short, maintaining stagnation may be the optimistic scenario, if it is achievable at all. Any external windfall from elevated commodity prices would instead translate into domestic inflation and affect the rouble. Businesses would prefer a weaker rouble to higher taxes, but would get neither in that scenario—harming investment once again.
Fiscal tightening is a near-constant feature of policy under the current regime. What distinguishes the present round of repeated calls for cuts, however, is the degree to which it will further destabilise an already tenuous macroeconomic balance held together with duct tape. When sales of low-alcohol drinks fall 58% for January-September compared with last year, and warehouse transactions fall 22%, one wonders what, exactly, among households and businesses suggests confidence that there will be any growth at all next year. Rather than tightening its own belt, the state is once again taking a belt to the public and hoping against hope that the economy weathers whatever comes next.
