Small businesses in Russia are facing a severe financial squeeze, with new taxes designed to bolster the nation's wartime economy inadvertently crushing the very enterprises that form its backbone.
Denis Maksimov, a bakery owner in Moscow, found himself in the national spotlight after a heartfelt plea to President Vladimir Putin during a televised call-in. His bakery, affectionately named Mashenka after his daughter, became a symbol of the struggles faced by small businesses. Maksimov, standing before his ovens, voiced his understanding of the country's difficult situation and the necessity of tax increases, but confessed to a profound lack of optimism for the future, predicting widespread closures.
As Russia's full-scale invasion of Ukraine enters its fourth year, the economic strain is becoming increasingly apparent. Declining oil revenues, a widening budget deficit, and a plateau in military spending, which had previously fueled economic growth, have forced the Kremlin to seek new revenue streams. This has led to a significant increase in the tax burden on consumers and, crucially, on small businesses. The value-added tax (VAT) has seen a 2% hike, and more alarmingly, the revenue thresholds for businesses to be subject to VAT have been drastically lowered.
Ordinary Russians are feeling the pinch. Business owners have reported a noticeable drop in demand for their products and services. On top of this, suppliers are adjusting their prices in response to the tax reforms, leading to a sudden surge in operational costs. For many, the tax burden has escalated to levels tens of times higher than before. Some entrepreneurs have been forced to downsize their operations simply to survive, while others have had to close their doors entirely.
But here's where it gets controversial... While the government's intention might be to strengthen the war effort, the unintended consequence is a potential weakening of the domestic economy's foundation. A stark visual of this economic fallout has emerged on St. Petersburg's Nevsky Prospekt, where a social media video revealed a disheartening number of vacant storefronts, a testament to businesses succumbing to the pressure.
Darya Demchenko, who manages a chain of beauty salons in Russia's second-largest city, shared her profound anxiety: "I've never felt so scared as this year, so unprotected, so anxious."
A Plea That Fell on Deaf Ears (Initially)
Maksimov's direct appeal to Putin, unfortunately, did not immediately halt the tax reform. The new regulations have significantly reduced the annual sales revenue threshold for VAT. Previously, businesses with revenues up to 60 million rubles (approximately $783,000) were exempt. This year, that threshold has dropped to 20 million rubles ($261,000), with plans to further decrease it to 10 million rubles ($130,500) by 2028. A similar reduction has impacted those utilizing the "patent taxation system," a simplified tax regime for small businesses. Previously, these businesses paid a fixed annual sum, often in the tens of thousands of rubles. Now, businesses exceeding 20 million rubles in revenue are subject to at least a 6% tax on their revenue and at least a 5% VAT.
During their televised exchange, Maksimov explained his reliance on the patent system for eight years. Putin, in response, emphasized the need for tax reform to combat "uncontrolled" illegal imports and pledged to investigate the matter. Maksimov's appearance did generate a temporary surge in customers for Mashenka, even leading to a boast on their website that Putin had "tried our pies." Despite a brief sales increase, Maksimov remained concerned about the future without a policy change.
Putin did raise Maksimov's case at a government meeting, and the Economy Minister proposed measures to exempt his business from VAT and reduce other taxes. Following this, Maksimov expressed that he was no longer considering closing his bakeries. "I think we will grow, maybe slower than before, but no less confidently, I think," he told AP. However, he admitted that the proposed measures were still awaiting official adoption, leaving the timeline uncertain.
And this is the part most people miss... While Maksimov's situation received high-level attention, the vast majority of small business owners lack such direct access to the President.
Others Follow Suit, Facing a Bleak Reality
Mashkenka's plight resonated deeply with other small and medium-sized entrepreneurs. An online campaign, "We Are Mashenka," was launched by the Association of Beauty Industry Enterprises, highlighting similar struggles across Russia. Business owners pointed out that unlike Maksimov, they had no recourse or high-profile advocate.
Darya Demchenko, a supporter of the campaign, shared her difficult decisions. Of her four beauty salons, she had to close one and sell another to stay financially viable. The dramatically increased taxes, coupled with rising costs and declining demand, made it impossible to continue. The tax reforms meant she was no longer eligible for the patent system, facing significantly higher tax obligations and the necessity of hiring a full-time accountant to manage the complex paperwork. Her operational costs, including rent, supplies, security, and banking services, had skyrocketed by 30%, with suppliers increasing their prices well beyond the initial 2% VAT hike.
Adding to the pressure, demand for beauty services had been steadily declining for months. Demchenko also lamented the impact of Russia's restrictions on social media and messaging platforms, which had eliminated affordable advertising channels and easy client communication methods. She contrasted the current situation with the COVID-19 pandemic, during which beauty businesses received government support like tax breaks and rent deferrals. "This year, we haven’t felt any support at all. We feel like they want to shut us down," she stated.
Shuttered Businesses: A Growing Trend
Lyalya Sadykova, president of the Association of Beauty Industry Enterprises, reported that approximately 10% of beauty businesses in St. Petersburg had closed, and another 10% had sold their companies in December and January. She anticipates a further wave of closures in the spring. "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," she warned. "I think there will be bankruptcies, and mass exodus from the market, because now it seems to me that not everyone has done the math and understood it."
In Kazan, pastry shop owners Ilsiya Gizatullina and Railya Shayhieva made the difficult decision to close their business following the tax reforms. Like Demchenko, they cited the substantial tax increases, escalating costs, and dwindling demand. "It was an incredibly hard decision, 'like cutting off a body part. Because we lived there, it was our life, 24/7,'" Gizatullina shared. They had opened in 2020 and successfully navigated the pandemic, which Gizatullina noted was a temporary challenge. The new tax system, however, is permanent.
"We understand very well that it won’t be abolished the day after tomorrow, and there will likely be an even higher tax burden in the future," Gizatullina added. Further reforms are planned, with more businesses facing increased taxes in 2027 and 2028 as revenue thresholds continue to be lowered.
Growing Pressure: The Economic Reality
Chris Weafer, CEO of Macro-Advisory Ltd. Consultancy, points out that while small and medium enterprises constitute just over 20% of Russia's economy, their contribution is still significant. Expanding VAT application to these businesses will generate a "meaningful amount" of revenue for the state budget. He describes this as a "deliberate strategy by the Finance Ministry to create more stable, predictable sources of income" amidst declining oil revenues and a rising budget deficit.
Weafer notes that small and medium enterprises have been under pressure since 2014, following sanctions imposed after Russia's annexation of Crimea, with government support largely directed towards larger corporations. The new tax regulations exacerbate this existing pressure. While these changes are unlikely to destabilize the entire economy, they will certainly hinder growth once the war concludes. "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," he concluded.
What do you think about this situation? Should governments prioritize wartime economic needs over the survival of small businesses? Share your thoughts in the comments below!
