One of the Russian government’s top goals for 2026 is “bringing the national economy out of the shadows” to ensure a “significant increase in tax collection.” The mandate was included in President Vladimir Putin’s follow-up orders after a meeting of the Council for Strategic Development and National Projects held in early January.
Senior officials began talking in fall 2025 about targeting Russia’s shadow sector, and in December the government approved a “formalization” plan. Authorities say the measures should shrink the informal economy by 1.5 percentage points of GDP over three years (they put it at 10–12% of GDP now, while independent estimates reach up to 20%) and deliver up to 1 trillion rubles a year to budgets at all levels starting in 2027.
The government initially planned to move aggressively on the plan only at the end of 2026, but Putin urged officials to accelerate: “These are serious decisions; they will affect some sectors of the economy. If we’re going to adopt them, then let’s do it now—openly, directly, honestly. There’s nothing scary about it.”
With oil and gas revenues steadily falling and imbalances building in an economy entering its fourth year of war against Ukraine, the Kremlin has few options beyond squeezing more taxes from citizens and companies operating at home. Whether it can do that is far from certain.
The shadow, or informal, economy is hard to pin down. Depending on context, it may or may not include outright criminal activity, such as drug trafficking. The World Bank defines as “shadow” any economic activity whose income is hidden from the state - for example, to avoid taxes and social contributions or to circumvent labor laws.
At the council meeting, Deputy Prime Minister Alexander Novak said the government had identified six priority sectors to “bring into the open”: domestic trade and trade within the EAEU, the labor market, cash and cryptocurrency turnover, illegal lending, and tobacco sales.
Finance Minister Anton Siluanov and Economic Development Minister Maxim Reshetnikov have sketched out concrete steps: cut cash usage and tighten oversight of cryptocurrencies; monitor shipments from EAEU countries (“VAT is underreported in some cases, product descriptions don’t match the documents”) and their subsequent sale (“order must be restored—in both wholesale and retail markets”); and crack down on tax-optimization schemes, including classifying employees as self-employed.
Officials explicitly link the initiative to higher taxes. The heavier the tax burden, the more actively businesses and citizens move into the gray zone. That logic is captured by the “Laffer effect”: U.S. economist Arthur Laffer showed that beyond a certain point, raising rates can reduce, not increase, tax collection.
“When the tax burden goes up, when a tax is raised, there’s an immediate temptation to avoid paying it,” Putin said during his December “Direct Line,” echoing Laffer. “This has always been an issue, but now it’s even more relevant: we need to eliminate the shadow economy and the shift into the shadows, and the nonpayment of taxes.”
Russia began raising taxes in 2025, and the process continued in 2026. In 2025, a five-bracket personal income tax took effect, and the corporate profit tax rose from 20% to 25%. As of 2026, the base VAT rate increased from 20% to 22%. In addition, the revenue threshold for VAT exemption was lowered from 60 million to 20 million rubles. Most small and medium-sized businesses lost reduced social insurance contribution rates.
According to a recent survey by the Chamber of Commerce and Industry - a nonprofit representing small, medium and large businesses - 71% of Russian entrepreneurs say high taxes and excessive administrative pressure push businesses into the shadows. A significant rise in the tax burden in 2025 was reported by 51% of respondents; 34% said it was unchanged; just 15% reported a decrease.
Another recent study, by the Chamber and the analytical center “Analitika. Biznes. Pravo,” concludes that in several industries Russia’s tax hikes could trigger a Laffer-type effect: thin margins may push entrepreneurs either to evade taxes or to shut down. In retail, up to 30–40% of companies with annual revenue of 10–30 million rubles could go underground. Similar risks loom in real estate activities and private education (25–30%). The risk is lower for construction subcontractors and professional services (20–25%).
“If some see the gray zone as a way to earn more profit, others are forced to use ‘shadow’ mechanisms to keep the business afloat,” said Andrei Pokida of RANEPA in an interview with Expert magazine. With Russia’s economy barely growing (about 1% expected for 2025 and less than 1% in 2026), their ranks are likely to swell.
