Small businesses in Russia are reeling under the weight of new taxes designed to prop up the country’s wartime economy, and the fallout is both heartbreaking and alarming. Imagine pouring your heart and soul into building a business, only to watch it crumble under the weight of skyrocketing costs and plummeting demand. This is the stark reality for many entrepreneurs, like Denis Maksimov, whose bakery, Mashenka, became an overnight sensation after he pleaded with President Vladimir Putin during a televised call-in show in December. Standing in front of his bakery, named after his eldest daughter, Maksimov begged Putin to reconsider tax reforms that are crushing small businesses like his.
“We understand the country is in a tough spot, and raising taxes might be necessary,” Maksimov admitted. “But honestly, we’re not feeling optimistic. Many businesses will simply shut down.” His words echo the sentiment of countless others who are struggling to stay afloat as Russia’s economy shows signs of strain four years into its full-scale invasion of Ukraine. Oil revenues are shrinking, the budget deficit is widening, and military spending, once a driver of growth, has plateaued.
But here’s where it gets controversial: The Kremlin is now turning to consumers and small businesses to fill the financial gap. The value-added tax (VAT) has been hiked by 2%, and the revenue thresholds for businesses to pay it have been slashed dramatically. This means even smaller businesses are now on the hook for taxes they can barely afford. Ordinary Russians are feeling the pinch, with business owners reporting a steady drop in demand, sudden cost increases as suppliers adjust to the reforms, and tax burdens that have skyrocketed. Some have downsized to survive, while others have closed their doors for good.
A recent social media video captured the grim reality: St. Petersburg’s iconic Nevsky Prospekt, once bustling with shops, now lined with vacant storefronts. Darya Demchenko, owner of a beauty salon chain in Russia’s second-largest city, summed it up: “I’ve never felt so scared, so unprotected, so anxious as I do this year.”
Maksimov’s plea to Putin failed to reverse the reforms, which lowered the VAT threshold from 60 million rubles ($783,000) in annual sales to 20 million rubles ($261,000) this year, and will drop further to 10 million rubles ($130,500) by 2028. The patent taxation system, which allowed small businesses to pay fixed annual fees instead of a percentage of revenues, has also been tightened. Businesses exceeding 20 million rubles in revenue now face at least a 6% tax on revenues and a 5% VAT.
And this is the part most people miss: While Maksimov’s bakery gained attention and temporary relief after his televised plea—with Putin even promising to look into his case—most small business owners aren’t so lucky. An online campaign, “We Are Mashenka,” highlighted the plight of countless entrepreneurs who lack the platform to voice their struggles. Demchenko, who supported the campaign, had to close one of her four beauty salons and sell another to stay afloat. The tax reforms disqualified her from the patent system, forcing her to pay higher taxes and hire a full-time accountant. Meanwhile, her costs—rent, supplies, security, and banking services—surged by 30%, far outpacing the 2% VAT increase.
Adding insult to injury, demand for beauty services has been declining for months, and Russia’s crackdown on social media platforms has stripped businesses of affordable advertising and easy ways to reach customers. “During the pandemic, we had government support—tax breaks, rent deferments,” Demchenko recalled. “This year, we feel like they want to shut us down.”
The beauty industry isn’t alone. Lyalya Sadykova, president of the Association of Beauty Industry Enterprises, reported that 10% of beauty businesses in St. Petersburg closed, and another 10% sold their companies in December and January. She predicts more closures this spring. “People will do the math when tax deadlines hit in April,” she warned. “That’s when the collapse will begin.”
Ilsiya Gizatullina and Railya Shayhieva, owners of a pastry shop in Kazan, made the agonizing decision to close their business due to soaring taxes, rising costs, and falling demand. “It was like cutting off a body part,” Gizatullina said. “Our shop was our life, 24/7.” Unlike the pandemic, which was temporary, the new tax system is here to stay, and they fear the burden will only grow heavier in the future.
Here’s the bigger picture: Small and medium enterprises (SMEs) make up just over 20% of Russia’s economy, but their role is vital. By expanding VAT to these businesses, the state aims to secure “a meaningful amount” of revenue, according to Chris Weafer, CEO of Macro-Advisory Ltd. Consultancy. It’s a deliberate strategy to stabilize income as oil revenues decline and the budget deficit grows. However, SMEs have been under pressure since 2014, when sanctions were imposed after Russia’s annexation of Crimea. The government prioritized big companies, leaving smaller businesses to fend for themselves. The new tax regulations only add to the strain, and while they may not cripple the economy, they will stifle growth when the war ends.
The question remains: Is this a sustainable strategy, or is the Kremlin sacrificing the backbone of its economy for short-term gains? What do you think? Are these tax reforms fair, or are they pushing small businesses to the brink? Share your thoughts in the comments—let’s spark a conversation.
