Russia seizes German retailer Metro unit, takes war fund contribution
Russia’s parliament is set to take up a 2027-2029 state budget Thursday that pairs large military spending with new taxes on mining companies and better-off citizens, as President Vladimir Putin’s government reaches for cash to fund the nearly five-year war in Ukraine. The federal deficit reached 5.8 trillion rubles ($72 billion) through August, almost 50% higher than last year’s figure and above the revised target of 4.8 trillion rubles, according to the Kyiv School of Economics.
The budget package follows a string of tax hikes announced after the September parliamentary elections. Last year the Kremlin went for a broad tax increase, raising value-added taxes at the cash register and making more small businesses pay VAT. This year’s measures hit a narrower segment: mining companies and better-off citizens with investment income, property sales and bank accounts.
The deficit has swelled beyond forecasts because of large military spending and slow economic growth, compounded by sanctions, high interest rates for non-military companies, labor shortages and Ukrainian strikes on oil refineries and export terminals.
The government proposes a 20%-30% windfall profits tax on mining companies that have benefited from prices that have risen since last year, a measure that will hit companies producing iron ore, nickel and gold. Another measure imposes higher rates of 13% to 22% on income from interest, dividends and proceeds from selling property. Such income is currently taxed at 13% for amounts under 2.4 million rubles ($29,800) and 15% above that.
Other proposals to take effect Jan. 1 include a 100-ruble per parcel charge and 22% VAT on formerly tax-free foreign goods worth less than 200 euros that are bought online. There is also a 35% tax on dividends paid into restricted accounts for foreign investors from “unfriendly countries.”
On the streets of Moscow, people asked about taxes and finances responded with a mix of complaints and resignation. “They need money for state coffers, they need to collect more from people, from ordinary people,” said Denis Bystrov, 39. “What can you do?” said Nelly Godunova, 92. “I’ve got four university degrees, they were all free, you know? True, I’ve given plenty to this country. But no matter… If you earned something, you’ve got to give back.”
“Everyone knows perfectly well that the money’s going for the military operation, right?” said Sergei Sukachev, who gave his age as “almost 70.” “I’ve suffered a little as a businessman, to be honest, but I clearly understand, it’s best to hang on and to get our way.”
Chris Weafer, CEO of consultancy Macro-Advisory Ltd., said Russia has enough financing available to cover the deficit in 2027 and probably 2028. “But that is at the expense of raising taxes, of increasing costs for households as well as business,” he said. “And it means that there is much less money available for normal economic development or infrastructure. Basically, the budget is now moving to a phase where it is primarily funding the military and the military operation.”
“So the economy is now becoming very skewed,” Weafer said. “While there’s still modest positive growth, it is coming from the state spending into these … state-linked industries, whereas the rest of the economy is struggling badly or even failing.”
Russia’s search for cash has extended to foreign companies. A subsidiary of German retailer Metro was seized under a law permitting the temporary administration of firms from “unfriendly countries” and tapped for a billion-ruble ($12 million) contribution to the war effort. Metro AG headquarters in Germany said it had no role in the donation, which “does not reflect our position or the way we run our business.” Metro Russia, no longer under the control of headquarters, said the contribution to the “National Front - Everything for Victory” fund would buy vehicles, communications devices and anti-drone equipment for soldiers in what Russia calls its “special military operation” in Ukraine.
Weafer said Russia may be seizing control of foreign companies in anticipation of a deal to secure Russian assets frozen abroad. He said the forced donation also raises the risk that the Finance Ministry may see foreign companies as sources of windfall revenue.
On the surface, Russia’s economic numbers don’t look that bad. The government predicts growth this year of 0.6% of GDP, not great but not a recession either. Unemployment is at a record low, and the government carries very little debt. Earnings from oil exports have held up thanks to higher global prices caused by the war in Iran. Finance Minister Anton Siluanov has said the revised deficit for this year will come in around 3% of GDP, more than the 1.6% achieved last year but smaller than in many other countries. The United States booked 5.8% of GDP last year; Russia is roughly equal to the EU average of 3.1%.
The underlying picture is tighter. Because sanctions forbid banks and investors from dealing with Russia, the Kremlin cannot tap international bond markets, and domestic financial resources have already been extensively drawn down. One option — borrowing from Russian banks through bond sales — came under stress this summer when banks balked at the low interest rate; sales resumed after the government offered better terms. The government has also tapped the banking system by having banks fund the war with loans to defense companies, shifting the true costs of the war off the federal budget and onto the balance sheets of banks and state-controlled companies, according to the Kyiv School of Economics.
Another pot is the National Wealth Fund, a reserve built up from oil and gas export earnings. Its liquid assets available for spending, such as Chinese currency and gold, have dwindled to 1.7% of GDP.
The Kyiv School of Economics says Russia’s finances are stable — for the moment. But “the room for maneuver is limited: an adverse shock such as a drop in global energy prices or an erosion of confidence in the financial system could quickly destabilize the fragile equilibrium.”