Russia has announced a series of tax increases targeting foreign companies from so-called “unfriendly” countries, as well as certain domestic businesses and individuals, in an effort to address a growing budget shortfall exacerbated by its ongoing conflict in Ukraine. The measures, included in the government’s draft budget law published recently, focus on companies originating from countries that condemned Russia’s invasion, including the European Union, the United Kingdom, and the United States.

Among the key proposals is a significant hike in the tax rate on dividends paid into “C” accounts, which are designated accounts used to hold payments owed to foreign investors. The tax on these dividends would rise from 15 percent to 35 percent. Funds in these accounts can only be used for a limited range of domestic operations unless special permission is granted for international transfers. This move effectively tightens restrictions on foreign capital already largely trapped within Russia.

In addition to the measures aimed at foreign entities, the draft budget introduces windfall taxes of 20 percent on gold producers and 30 percent on metals producers. These levies come amid a period of elevated bullion prices. Russia is the world’s second-largest producer of gold, making this an important source of additional government revenue. For individual taxpayers, the draft law proposes increased taxation on passive income streams such as interest on deposits and proceeds from the sale of shares.

The tax increases coincide with Russia entering the fifth year of its full-scale invasion of Ukraine, a conflict that has placed mounting pressure on public finances. The Russian finance ministry stated that the budget would prioritize “national defence and security” as well as “social support” for soldiers deployed on the front lines. The country’s economy has been strained by sustained military expenditures, fluctuations and sanctions affecting oil and gas revenues, and a domestic economic sector that continues to contribute the majority of state income but is becoming increasingly exhausted.

The announcement comes shortly after the ruling United Russia party, led by President Vladimir Putin, secured a majority in recent parliamentary elections. The party won 58 percent of the vote, a result seen by analysts as solidifying Putin’s political dominance and providing the Kremlin with the backing to implement these tax hikes despite earlier commitments to avoid increasing the tax burden.

Since the beginning of the conflict, Russia has already increased taxes, including instituting a progressive personal income tax with a top rate of 22 percent, raising value-added tax (VAT), and lowering the VAT threshold for small and medium-sized enterprises. The latter has resulted in the closure of hundreds of smaller businesses. Despite these measures, government revenue is projected to fall short of spending by approximately 2 percent of gross domestic product annually over the next three years, with the potential for wider deficits if military expenditures rise beyond current estimates.