Small businesses in Russia are facing a challenging situation as new taxes are implemented to bolster the country's wartime economy. This move has sparked controversy and left many entrepreneurs feeling anxious about their future.
The Pain of Tax Reform
Denis Maksimov, a baker from Moscow, found himself in the spotlight after appearing on President Vladimir Putin's annual call-in show. Standing proudly in front of his bakery, Mashenka, named after his eldest daughter, Maksimov made a heartfelt plea to Putin to reconsider the recent tax reforms that are burdening small businesses.
"We understand the country's difficulties, and we know raising taxes is necessary," Maksimov said. "But the outlook is bleak. Many businesses will struggle to survive."
As Russia's invasion of Ukraine enters its fourth year, the economic consequences are becoming more apparent. Oil revenues are declining, the budget deficit is rising, and military spending, once a driver of growth, has plateaued. In response, the Kremlin is turning to small businesses and consumers for financial support.
The value-added tax (VAT) has been increased by 2%, and the revenue thresholds for businesses to pay VAT have been drastically reduced. This means that small businesses, like Maksimov's bakery, are now facing a significantly higher tax burden.
The Impact on Ordinary Russians
The effects of these tax reforms are being felt across the country. Business owners interviewed by The Associated Press described a steady decline in demand for their products and services, sudden cost increases from suppliers adjusting to the tax changes, and a tax burden that has skyrocketed.
Some businesses have had to downsize to stay afloat, while others have sadly had to close their doors altogether. A recent video on social media showcased the economic fallout, with vacant commercial spaces lining St. Petersburg's main street, Nevsky Prospekt.
Darya Demchenko, who owns a chain of beauty salons in Russia's second-largest city, shared her fears: "I've never felt so scared, so unprotected, and so anxious as I have this year."
A Failed Plea and the Aftermath
Maksimov's plea to Putin did not result in a reversal of the tax reform. The VAT threshold for businesses has been lowered from 60 million rubles ($783,000) to 20 million rubles ($261,000) this year and will further decrease to 10 million rubles ($130,500) by 2028. Similarly, the revenue threshold for the "patent taxation system," which allowed small businesses to make fixed annual payments, has been reduced.
During their televised exchange, Putin acknowledged the need for tax reform to address illegal imports but promised to explore potential solutions. Maksimov's appearance brought attention and new customers to Mashenka, but the tax policy remained unchanged.
Putin raised Maksimov's case at a government meeting, and Economy Minister Maxim Reshetnikov proposed measures to exempt Mashenka from paying VAT and reduce other taxes. Maksimov initially considered these measures a positive step, but he is still awaiting their implementation, and the timeline remains uncertain.
A Wave of Outrage
Maksimov's case sparked outrage among other small and medium-sized business owners. An online campaign, "We Are Mashenka," initiated by the Association of Beauty Industry Enterprises, saw business owners across Russia sharing similar stories. They highlighted the disparity between Maksimov, who had Putin's ear, and the lack of support for other struggling entrepreneurs.
Darya Demchenko, who supported the campaign, explained that she had to close one of her family-oriented beauty salons and sell another to stay afloat. The tax reforms meant she could no longer benefit from the patent system, and she faced significantly higher taxes and additional costs, such as hiring a full-time accountant.
"Demand for beauty services has been falling for months," Demchenko said. "The restrictions on social media and messaging platforms have made it harder to reach clients and advertise affordably."
The Future of Small Businesses
Lyalya Sadykova, president of the Association of Beauty Industry Enterprises, predicts more closures this spring. She believes many businesses will realize they cannot afford to pay their taxes when the first deadline arrives in April.
"People will do the math, and the collapse will begin," Sadykova said. "I anticipate bankruptcies and a mass exodus from the market."
Ilsiya Gizatullina and Railya Shayhieva, owners of a pastry shop in Kazan, decided to shut down their business due to the tax increases, rising costs, and falling demand. They described the decision as incredibly difficult, likening it to "cutting off a body part."
Chris Weafer, CEO of Macro-Advisory Ltd. Consultancy, explains that small and medium enterprises account for just over 20% of Russia's economy, and increasing VAT for these businesses will provide a significant boost to the state budget.
"It's a deliberate strategy by the Finance Ministry to create stable income sources," Weafer said. "While it won't wreck the economy, it will hinder growth post-war."
As more businesses face increased taxes in 2027 and 2028, the pressure on small and medium enterprises continues to grow. The question remains: How will these businesses navigate these challenges, and what does the future hold for Russia's economy?
And this is the part most people miss: What are your thoughts on the impact of these tax reforms? Do you think small businesses can survive this economic pressure? Share your insights in the comments below!
