By Darya Korsunskaya and Gleb Bryanski
MOSCOW (Reuters) -Russia's finance ministry proposed raising the rate of value-added tax on Wednesday to 22% from 20% in 2026 to fund military spending in what would be the fifth year of the war in Ukraine.
The proposal comes as U.S. President Donald Trump called Russia a "paper tiger" for "fighting aimlessly for three-and-a-half years" and said that President Vladimir Putin and Russia were in "big economic trouble".
Putin signalled last week that he was open to raising certain taxes to make financial ends meet during the war, noting that the United States had raised taxes on wealthy people during the Vietnam and Korean wars.
Russia is due to unveil its updated economic estimates for this year and 2026, with the economic growth rate expected to plummet to around 1% from 4.3% last year.
TAX HIKE PRIMARILY TO FUND 'DEFENCE AND SECURITY'
The proposal is in line with a Reuters report last week. VAT accounted for 37% of federal budget revenues in 2024 and analysts estimate that the increase would generate about 1 trillion roubles ($11.9 billion) in additional revenue.
The finance ministry said the tax hikes would be "aimed primarily at financing defence and security." It proposed other tax increases, including on gambling businesses, and the elimination of tax breaks on small businesses.
The proposal will spur inflation, which has been receding in recent months, and make more key rate cuts more difficult for the central bank, which said it will take into account the effects of the VAT increase on inflation expectations.
A two percentage point 2019 VAT hike contributed 0.6 percentage points to inflation that year, according to the central bank, which has pledged to halve it from current levels and return it to its 4% target in 2026.
T-Bank analyst Sofya Donets estimated that in 2026 the tax hike will boost inflation by 1.5 percentage points, making the central bank's job more difficult when it navigates between worsening inflation and a further economic slowdown.
The head of Russia's main business lobby, Alexander Shokhin, was quoted by state news agency TASS on September 21 as saying that the VAT hike will be "unpleasant" for businesses and the population.
The rouble was flat at 83.60 to the U.S. dollar on Wednesday, with analysts saying that a slower pace of key rate cuts supported the Russian currency.
Putin had pledged no major changes to the tax system before 2030 following the tax hikes introduced in 2025. He asked the government on September 5 to increase revenues through higher productivity, not taxes.
After meeting Ukrainian President Volodymyr Zelenskiy on the sidelines of the U.N. General Assembly in New York, Trump posted on his Truth Social platform: "Putin and Russia are in BIG Economic trouble, and this is the time for Ukraine to act".
The U.S. president's tone was in stark contrast to his red-carpet treatment for Putin at a summit in Alaska last month, part of an ostensible push to expedite an end to the war.
'NO SUCH THING AS A PAPER BEAR'
Kremlin spokesman Dmitry Peskov told RBC radio on Wednesday that there were statements about the Russian economy collapsing before, but said that the economy had adapted to the "special military operation" in Ukraine.
Brushing off Trump's "paper tiger" comment, Peskov said Russia was a bear, not a tiger, and "there is no such thing as a paper bear", while adding Putin valued Trump's efforts to resolve the conflict.
The finance ministry said the draft 2026 budget was "balanced and sustainable". The ministry has so far not released the key figures in the draft budget nor estimates of how much its proposal would generate in revenues.
"The strategic priority is to provide financial support for the country's defence and security needs and social support for families of participants in the special military operation," it said in a statement.
"The resources planned in the budget will make it possible to equip the armed forces with the necessary weapons and military equipment, pay salaries to military personnel and support their families, and modernise defence industry enterprises."($1 = 83.7500 roubles)
(Editing by Andrew Osborn and Alex Richardson, Sharon Singleton)
