Economic Strain on Small Businesses in Russia Amid Tax Reforms

As Russia marks the fourth anniversary of its full-scale invasion of Ukraine, the economic landscape for small and medium enterprises (SMEs) is increasingly precarious. The Kremlin's recent tax reforms, aimed at addressing a growing budget deficit and dwindling oil revenues, have significantly raised the financial burden on these businesses. The value-added tax (VAT) has been increased by 2%, and the revenue thresholds for VAT obligations have been drastically lowered, prompting widespread concern among business owners.

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Denis Maksimov, owner of the Mashenka bakery in Moscow, highlighted the challenges faced by small businesses during a televised call with President Vladimir Putin. The threshold for VAT liability was reduced from 60 million rubles (approximately $783,000) to 20 million rubles ($261,000) this year, with plans to lower it further to 10 million rubles ($130,500) by 2028. This change has forced many businesses to reconsider their operations, with some owners reporting a tax burden that has increased exponentially.

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Maksimov's plea for relief has not resulted in immediate changes, although Economy Minister Maxim Reshetnikov proposed potential tax exemptions for his bakery. Despite a temporary boost in sales following Maksimov's televised appearance, he remains uncertain about the future without concrete policy changes.

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The tax reforms have sparked an outcry among other entrepreneurs, leading to the formation of the online campaign "We Are Mashenka." Darya Demchenko, who operates a chain of beauty salons, reported having to close one location and sell another due to rising costs and declining demand. She noted that her operational costs surged by 30%, exacerbated by the new tax structure and a lack of effective advertising channels due to social media restrictions.

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Lyalya Sadykova, president of the Association of Beauty Industry Enterprises, indicated that approximately 10% of beauty businesses in St. Petersburg have closed, with further closures anticipated as tax deadlines approach. She warned of potential bankruptcies and a mass exit from the market as businesses grapple with unsustainable financial pressures.

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The ongoing tax reforms are part of a broader strategy by the Russian Finance Ministry to stabilize state revenue amid declining oil profits. Chris Weafer, CEO of Macro-Advisory Ltd., emphasized that while these measures may not lead to an immediate economic collapse, they will hinder growth prospects for SMEs, which constitute over 20% of Russia's economy. The cumulative effect of these pressures could stifle innovation and expansion in the sector, particularly as the war continues.

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While some business owners like Maksimov express cautious optimism about potential government support, many others feel abandoned. The lack of assistance during the current economic crisis contrasts sharply with the support provided during the COVID-19 pandemic, leading to a sense of vulnerability among small business owners.

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• “We understand very well that it’s not an easy situation for the country. We understand that raising taxes is necessary,” — Denis Maksimov, Bakery Owner

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• “This year, we haven’t felt any support at all. We feel like they want to shut us down,” — Darya Demchenko, Beauty Salon Owner

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• “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,” — Lyalya Sadykova, President of the Association of Beauty Industry Enterprises

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• “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,” — Chris Weafer, CEO of Macro-Advisory Ltd.

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