A Moscow-area bakery owner gained national attention after making a desperate plea to Vladimir Putin during the Russian president’s December call-in program. Denis Maksimov, standing outside his bakery Mashenka — named for his eldest daughter — asked Putin via video to reconsider new tax policies that are crushing small business owners nationwide.
“We understand very well that it’s not an easy situation for the country. We understand that raising taxes is necessary,” Maksimov said. “We’re looking ahead without optimism, frankly speaking. Many (businesses) will close down.”
Nearly four years into Putin’s full-scale war against Ukraine, Russia’s economy is showing significant strain. Oil income is falling, the government’s budget shortfall is growing, and military expenditures that previously drove economic expansion have plateaued.
Moscow is now turning to consumers and small enterprises for additional funding. The government has increased the value-added tax by 2% and dramatically reduced the income thresholds that trigger businesses to pay these taxes.
Russian citizens are experiencing real hardship, according to business owners who spoke with The Associated Press. They report steadily declining customer demand, sudden cost increases as vendors adapt to the tax changes, and tax obligations that have multiplied by tens of times. Some entrepreneurs have reduced their operations to survive, while others have shut down completely.
Social media footage recently highlighted the economic damage: empty storefronts lining St. Petersburg’s famous Nevsky Prospekt, where numerous businesses have failed.
“I’ve never felt so scared as this year, so unprotected, so anxious,” said Darya Demchenko, who operates multiple beauty salons in Russia’s second-largest city.
Maksimov’s public appeal to Putin did not succeed in stopping the tax overhaul, which reduced the threshold requiring businesses to pay VAT from 60 million rubles ($783,000) in yearly sales to 20 million rubles ($261,000) this year, with further reductions to 10 million rubles ($130,500) planned by 2028.
Similar reductions affected the “patent taxation system,” where small businesses previously made fixed annual payments — typically only tens of thousands of rubles — rather than percentage-based taxes on income or profits. Now, those earning more than 20 million rubles must pay at least 6% tax on revenues plus 5% VAT.
During their televised conversation, Maksimov explained he had operated under the patent system for eight years. Putin acknowledged the need for tax reform to address “uncontrolled” illegal imports but promised to examine possible solutions.
Maksimov’s television appearance brought publicity and new customers to Mashenka, which operates three locations in the Moscow area. The bakery sent baked goods to the Kremlin and advertises on its website that Putin “tried our pies.”
Russian news outlets reported that Maksimov’s sales increased temporarily, but without tax policy changes, he considered shutting down.
Putin discussed Mashenka’s situation at a government meeting last month, and Economy Minister Maxim Reshetnikov suggested measures to exempt Maksimov’s business from VAT and reduce other taxes. Following this, the owner said he was no longer planning to close.
“I think we will grow, maybe slower than before, but no less confidently, I think,” Maksimov told AP this month. However, he acknowledged still waiting for officials to implement the proposed measures, with no clear timeline for when this might occur.
Maksimov’s case sparked outrage among other small and medium business owners. Through an online movement called “We Are Mashenka,” initiated by the Association of Beauty Industry Enterprises, entrepreneurs nationwide shared similar struggles, noting that unlike Maksimov, who gained Putin’s attention, they had no one to rescue them.
Demchenko, who participated in the campaign, told AP that she was forced to close one salon and sell another from her four-location chain — three owned and one franchised — to survive the dramatically higher taxes, increased costs, and reduced demand.
The tax changes disqualified her from the patent system, requiring much higher tax payments and the hiring of a full-time accountant for paperwork, she explained. Her expenses — including rent, supplies, security, and banking — jumped 30%, with suppliers raising prices far beyond the 2% VAT increase.
Customer demand for beauty services has been declining for months.
Russia’s restrictions on social media and messaging platforms eliminated her access to affordable advertising and easy client communication, Demchenko noted.
The beauty industry survived the COVID-19 pandemic with government assistance including tax relief, payment deferrals, and opportunities to negotiate rent waivers with landlords, she said.
“This year, we haven’t felt any support at all. We feel like they want to shut us down,” she said.
Lyalya Sadykova, president of the Association of Beauty Industry Enterprises, reported that approximately 10% of St. Petersburg’s beauty businesses closed and another 10% sold their companies in December and January. She expects additional closures this spring.
“People will do the math. The first deadline for taxes is in April, and people will see that they have nothing to pay with, and that’s when the collapse will begin,” she said. “I think there will be bankruptcies, and mass exodus from the market, because now it seems to me that not everyone has done the math and understood it.”
When the tax reforms were enacted last year, pastry shop owners Ilsiya Gizatullina and Railya Shayhieva decided to close their Kazan business. Like Demchenko, they cited massive tax increases, rising expenses, and declining demand.
The decision was extremely difficult, “like cutting off a body part. Because we lived there, it was our life, 24/7,” Gizatullina told AP.
They launched their business in 2020 and weathered the pandemic, which Gizatullina noted was temporary. The new tax structure is permanent.
“We understand very well that it won’t be abolished the day after tomorrow, and there will likely be an even higher tax burden in the future,” Gizatullina said.
Under the reforms, additional businesses will face increased taxes in 2027 and 2028, as changes will impact those with even smaller revenues.
Small and medium businesses represent just over 20% of Russia’s economy, but remain significant, according to Chris Weafer, CEO of Macro-Advisory Ltd. Consultancy. Expanding VAT application to these businesses will generate “a meaningful amount” of government revenue.
This represents “a deliberate strategy by the Finance Ministry to create more stable, predictable sources of income” during a period of reduced oil revenues and increased budget deficits, Weafer explained.
Small and medium enterprises have faced pressure since 2014, when Russia encountered sanctions over its illegal Crimean Peninsula annexation, and the government focused support on large corporations. The new tax regulations intensify this pressure, Weafer said, and while unlikely to destroy the economy, will hinder growth after the war concludes.
“The one engine of expansion and growth and innovation that you need in an economy is the sector that has suffered most in the last four years and is continuing to suffer today,” he said.
