Record Optimism Set the Stage for a Slowing Year In December 2024, surveys showed record-high optimism for personal well-being and the country in 2025. Expectations drove households and firms to spend and invest more. Yet the realized outcomes appear weaker than hoped, with growth momentum fading. The gap between hopes and results now shapes the outlook.
2026 Emerges as a Year of Spent Growth Resources Recent growth leaned on a finite set of supports that are now depleted or nearly so. The economy continues down an inertial tunnel, slowing steadily. Without new engines or timely policy responses, deceleration could culminate in crisis. Preventing that outcome will demand capable tools and restraint.
Tax Hikes Plug Holes but Slow the Economy Higher taxes reallocate income from consumers and businesses to the state, dampening growth. Public spending is generally less efficient than private use of funds, so reallocation drags output. Deficits may shrink, but they also signal a state that has outgrown what the economy can sustain. Large shortfalls add inflationary pressure.
Stagflation Risk from Persistent Inflation and Slower Output Growth has been cooling even as inflation stays above the central bank’s target. With a sizable budget deficit, inflation tends to rise while expansion weakens. This combination makes a stagflationary path plausible. Managing both sides at once becomes harder.
Narrow, State-Driven Growth Masks Broader Weakness The modest growth now comes mostly from sectors tied to public demand and military production. Many other industries are stagnant or declining. There is no guarantee the slowdown halts at zero rather than slipping into contraction. A broader base of private demand is lacking.
Ending the Conflict Brings Inertia Before Relief War-related outlays cannot be cut instantly, as inventories must be rebuilt and consequences remedied. Elevated spending will persist for a time due to inertia. Over time, potential emerges to reduce expenditures, improve expectations, and lift growth. The path to relief is gradual, not immediate.
A Two-Point VAT Hike Has Modest, Diffuse Effects A 2 percentage point increase in VAT implies a small extra inflation impulse, roughly around half a percentage point. The burden splits between firms and consumers depending on market structure. Anticipation pulls some purchases forward, smoothing the impact over months. The overall effect is limited and spread out.
Tightening Simplified Tax Regimes Triggers Mixed Adjustments Shrinking eligibility for simplified taxation pushes a notable share of small businesses to choose. Some will formalize operations and bear higher compliance costs. Others will scale back or exit activities they can’t profitably run under new rules. A large shift into deep shadow is unlikely given digitalized domestic tax controls, though opacity grows in external transactions.
Small Business as Social Support Faces Policy Headwinds Official labor data miss much of small-firm dynamics, obscuring stress among millions of workers. In many regions, small enterprises function as community support as much as profit-seeking ventures. Heavier burdens risk draining purpose and energy from this fabric. The loss would be social as well as economic.
Everyday Informality Is Service, Not Crime Much “shadow” activity is ordinary help that shades into commerce—garage repairs, tutoring, and small services. Registration can be costly and unnecessary at micro scale. These exchanges are not inherently criminal but naturally evade formal tax systems. Even with digitization, such social transactions will persist.
Keep Self-Employment Stable to Avoid Backsliding The self-employment framework coaxed many out of the shadows. Raising its burden yields little fiscal relief while pushing people back informal. For now, authorities refrain, but fiscal strain could revive the idea. Stability here supports gradual formalization.
The Budget Gap Reveals an Oversized State The current tax base cannot finance today’s state without help from now-diminished oil and gas rents. Spending swelled during boom years and now strains the economy’s capacity. Choices narrow to either shrinking the state or broadening the tax take. The deficit is the visible symptom of this mismatch.
More Tax Changes Are Inevitable, Including PIT When the books don’t balance, taxes rise sooner or later. Small increases in personal income tax are manageable for most, though harder on the poor and briefly inflationary. Some taxpayers already face higher progressive rates. Arithmetic, not preference, drives the trajectory.
Households Ultimately Pay Every Tax Regardless of where a levy is imposed, the end payer is the population. Borrowing, sales of assets, or accounting maneuvers only delay settlement. Eventually the bill arrives through higher taxes or prices. Fiscal consolidation falls on people.
The Recycling Fee Distorts Markets Without Delivering The car recycling levy is volatile as revenue and clumsy as protection, unless finely tuned. Sudden jumps push fees into hundreds of thousands of rubles for some models, enraging buyers and stranding cars at borders. Consumer choice already narrowed after foreign plants closed, and workarounds flourish. The budget seeks sums like 1.6 trillion rubles, yet this tool disappoints on both goals.
Budget Consolidation Requires a Smaller State The durable cure for persistent deficits is to spend less on government itself. Shrinking the scope of state activities creates room to manage and reduce debt. Many countries have been forced down this path when the state outgrew the economy. It is rare and difficult, but ultimately necessary when financing becomes unsustainable.
Post-Conflict Transition May Bring a Recession When extraordinary outlays fall, the economy receives less money, a typical setup for a postwar recession. Inertia in policies and behaviors delays adjustment. New threats and demands will emerge as flows realign. Life outside the “tunnel” is no longer familiar.
Shrinking Oil Rent Shifts the Burden to Citizens Non-oil taxes—profit tax, PIT, VAT, and the recycling fee—rose, lifting their budget share. Losing Europe’s premium energy market slashed steady rent that once funded the state at low social cost. Now what rent once covered is taken from people and non-oil businesses. There is no automatic joy in “getting off the oil needle.”
Oil Price Hedges Vanish as the Ruble Decouples The historical cushion—oil down, ruble down—kept ruble revenues stable. Now oil prices fall while the ruble strengthens, removing that hedge. The budget confronts both weaker oil and a stronger currency. This break in linkage is the year’s pivotal budget shock.
A Strong Ruble Is an Anomaly of a Warped System Expulsion of “toxic” currencies, capital controls, warped trade, and very high rates inflated ruble returns. Such outsized ruble yields exceed inflation and growth, signaling a mispricing. An overshoot today invites an overshoot tomorrow in the other direction. The economy runs on skewed proportions that will not last.
An Overstrong Ruble Chokes Exports and Tilts Trade Exporters face thinner margins under longer Asian routes and a firmer currency. If import channels widen, purchasing power will pull in more foreign goods. A move toward trade deficit would mark a weaker configuration. For an export-heavy economy, a strong ruble is a heavy blow.
Trade Can’t Be Liberalized Overnight Even if restrictions eased, pipelines, contracts, and financial plumbing take time to restore. Trust, insurance, credit lines, and settlement systems must be rebuilt. Imports can rebound faster than exports, worsening balances. Caution is required while domestic FX markets and confidence are reconstructed.
FX Management Is Constrained by Lost Reserves The central bank’s foreign reserves are largely inaccessible, limiting intervention capacity. Capital controls and trade regulations cannot be dropped at once without risking instability. Domestic FX market infrastructure must be rebuilt alongside trust. Policymakers can cajole exporters, but effective levers are thin.
Calls to Weaken the Ruble Go Unanswered Exporters and banks suffer under a strong ruble, yet no decisive move weakens it. Authorities appear to lack either the will or the instruments to shift the rate. Even if achieved, devaluation could lift inflation, raise rates, and increase debt-service and subsidy costs, making fiscal effects ambiguous. Waiting for self-correction has not worked.
Sectoral Tax Raids Erode Policy Credibility Beyond taxing clear resource rents, ad hoc levies on banks or large exporters unsettle planning. Governments skim windfalls but do not insure losses, creating one-sided risk. Stable, universal rules beat episodic “tweaks” that must later be reversed. Consistency matters more than opportunism.
High Rates Swell Banks, Then Strain Them Years of high policy rates and subsidized lending shifted national income toward banks, swelling their value-added share. As rates bite, borrower quality worsens, provisions rise, and profits compress. Credit supply tightens as defaults loom and capital buffers are needed. Taxing banks now could undermine resilience.
Inflation Will Do the Heavy Lifting on Global Debts Since 2008 and the pandemic, governments bridged crises with debt they could only raise quickly on markets. Default is destructive, and tax hikes meet political resistance. That leaves inflation to erode debts by keeping real yields negative. The world is entering an era of higher inflation and rates that sit below it.
Freezing Deposits Would Be a Fatal Error Undermining bank deposits would trigger runs and collapse finance, the economy, and politics. Even talk of freezing savings is unprofessional and dangerous. Stability rests on safeguarding depositors’ confidence. Such measures must remain off the table.