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Sanctions may force Russia to raise taxes: PM

Russia may be forced to raise taxes in next year's budget to make up for the impact of Western sanctions imposed over Moscow's Ukraine policy, Prime Minister Dmitry Medvedev said on Tuesday (Aug 5).

MOSCOW: Russia may be forced to raise taxes in next year's budget to make up for the impact of Western sanctions imposed over Moscow's Ukraine policy, Prime Minister Dmitry Medvedev said on Tuesday (Aug 5).

The budgets for 2015-2017 will "have to reflect the current situation in the Russian and global economies, including the negative consequences of sanctions launched against some of our companies and, in essence, against the whole country," he told a government meeting.

The United States and European Union, after months of wrangling, last month formally adopted broad economic sanctions designed to squeeze Moscow for its alleged role in supporting rebels in eastern Ukraine.

A first step limits access by Russian state-owned banks to Europe's financial markets, chief among them London, which will increase their cost of doing business and hinder their contribution to the economy. Sales of arms and dual-use technology are banned, along with sensitive technologies in the oil sector. But Europe has baulked at applying sanctions to Russia's gas industry, which supplies around a third of the EU's needs.

"Of course the conditions for foreign lending are not very good, foreign investment is also rather doubtful," said Medvedev, adding that Russia will have to "actively engage in import substitution" to make up for the shortfall in Western technology.

Moscow has been mostly dismissive of the sanctions, saying Russia can survive on its own, with some officials even suggesting sanctions will be beneficial for domestic manufacturers. Analysts, however, have cautioned that sanctions will likely push the country into recession.

The International Monetary Fund (IMF) last month said it now expects the Russian economy to grow by just 0.2 per cent this year, although Russian officials have stated they see an expansion of around 1 per cent.

In a sign that the budget is facing a crunch, Medvedev said Russia may also need to raise taxes to make up for the impact of the sanctions - a measure some analysts say could further hurt growth. "We have to analyse additional possibilities of mobilising income, including... even an increase of the tax burden, though this measure should be left for the last resort," Medvedev said.

The Vedomosti daily last week cited sources as saying that President Vladimir Putin is approving a measure allowing Russian regions to introduce a sales tax of three per cent. Russia currently has no sales tax but has an indirect value-added tax of 18 per cent. 

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