Death and Taxes
High inflation and death rates portend a grim outlook for Russia's war in 2026.
The War in Ukraine hit a major milestone this past week. After Nazi-Germany launched Operation Barbarossa, its surprise invasion of Russia that opened the bloodiest fighting of WWII, 1,418 days passed before the Third Reich admitted defeat to Stalinist Russia. Ukrainian defenders have now held back Putin’s aggression for longer.
More than its symbolic value, the comparison offers another an important reminder: Russia’s War in Ukraine has been a long war. Its intensity, scale, and duration are now comparable to the World Wars. Just a few days ago, NATO secretary general Mark Rutte estimated that 20,000 - 25,000 Russian servicemen die every month. As comparison, during the 47 days of the Meuse-Argonne offensive, 26,000 US soldiers died in battle. In other words, Russian battle deaths last month likely exceeded the rate of the most sanguinary US campaign in WW1.
Against the backdrop of costly Russian losses, Ukraine has forced Putin to choose from a bad set of options. Russia increased its value-added tax from 20% to 22% at the beginning of 2026.
Inflation measures how much prices rise over a period of time. Imagine you go to the market on January 1 and the price of groceries for your family is $100.00. If at the end of the month, on January 31, you return to the market and the exact same bundle costs $101.23, then prices would have risen 1.23% — equaling Russia’s inflation rate for January 2025.
Only in 2026, between January 1-12, prices in Russia rose 1.26%. Compare this to January 2025, when people saw prices rise by only 1.23%. Or to 0.86% in January 2024, or 0.84% in January 2023.
What economic mechanism is actually causing such a dramatic spike in inflation? Let me explain how a VAT works.
VAT “is a consumption tax that is levied on the value added at each stage of a product’s production and distribution.” In practice, a farmer grows apples and sells them for $1.00 per pound to a wholesaler but must factor in the VAT ($1.00 * 0.22 = $1.22), so the wholesaler pays $1.22 for each pound. The farmer sends $0.22 to the government.
Looking for his own payout, the wholesaler drives to town and sells the apples to the grocery store for $1.50 per pound but must also account for the VAT. The grocery store is charged the VAT ($1.50 *0.22 = $0.33) and buys the fruit for $1.83 per pound. The wholesaler charged $0.33 in VAT and paid $0.22 in VAT so they remit ($0.33 - $0.22 = $0.11) to the government. This makes the total revenue from the tax $0.33.
But the apples still haven’t reached the customer. At the grocery store, the customer buys apples for $2.00 per pound, pays the extra VAT ($2.00 * 0.22 = $0.44), for a total of $2.44. The grocery store remits $0.11 ($0.44 - $0.33) to the government, which has now received $0.44 in taxes as the apple passed from producer to consumer. Comparatively, a 20% VAT would result in the grocer selling apples to the customer at $2.40 per pound, generating $0.40 in tax revenue. The actual price increase was $0.04 ($2.44 - $2.40), which is less than 2%, while the increase to government revenue is 10% ($0.40 to $0.44).
Bringing this back to Russia’s economy where prices have already jumped by over 1% in a couple of weeks. It is possible that prices stabilize, the markets acknowledging a one-time increase in the VAT, and Russians might not have anything to worry about.
However, if sellers raise their prices and workers demand higher wages to preserve their standard-of-living, the shock of a sudden VAT tax hike—applied systematically at multiple points in the production process—could cause an inflationary spiral. In such a scenario, the government loses the extra value gained in tax revenue, and the purchasing power of government payouts to the families of dead Russian occupiers and maimed veterans will decrease. The cost of cars, drones, weapons, and ammunition rise. An inflationary spiral is one of the few things that can destroy the Kremlin’s ability to finance its War in Ukraine.
Rosenberg’s reporting is just an early data point hinting at the larger macroeconomic phenomena brewing inside Russia’s unstable economy. It is too early to tell what full effect the tax hike will have. The broader point is that bad choices add up, and Putin will only face tough decisions going forward: Russia is already losing as many soldiers as are entering its ranks, so the Kremlin will need to pay higher incentives, forcibly mobilize Russians to fight, or the military will begin to shrink.
Which is why now is an excellent time to remember a famous example of when an unstable country led by an unstable dictator watched its armies and economy die, losing a bitter war in only 1418 days.