Russia’s small and medium-sized enterprises (SMEs) are facing their most difficult year since the invasion of Ukraine, squeezed by higher taxes, falling consumer demand, elevated borrowing costs and mounting disruption from state-imposed internet restrictions, according to data and interviews compiled by The Bell.

Business owners across sectors ranging from restaurants to beauty clinics say 2026 has become a struggle for survival as the wartime economy loses momentum after two years of state-driven expansion fuelled by military spending and labour shortages.

According to a survey by Opora Russia, 68.7% of micro, small and medium-sized businesses reported declining revenues in early 2026. Separate polling by FOM found that 31% of small business owners considered closing their businesses in the first quarter, the highest level since 2022.

“2026 will be a challenging year for Russian business,” Alexander Shokhin, head of the Russian Union of Industrialists and Entrepreneurs, warned at the start of the year. Since then, economic indicators have deteriorated sharply, particularly for smaller companies.

A sweeping tax overhaul introduced on January 1 adding two percentage points to VAT to 22% that has slowed the rate of falling inflation and added to costs. At the same time, the government sharply lowered the revenue threshold at which SMEs operating under the simplified tax regime become liable for VAT payments.

Previously, companies earning less than RUB60mn ($760,000) annually were exempt from VAT. Under the new rules, businesses generating more than RUB20mn ($253,000) a year must now pay the tax, substantially widening the burden on smaller enterprises. However, this initiative was partly introduced to stop the tax dodge many SMEs were using to fragment their businesses to keep the parts below the VAT threshold and so reduce their tax bill.

However, the rule hurts genuine SMEs. While preferential VAT rates of 5% and 7% were introduced for some smaller companies, businesses using those rates lose the ability to claim tax deductions, reducing the practical benefit of the concession.

Economic slowdown

The tax increases have coincided with a broader economic slowdown. Russia’s economy contracted in the first quarter of 2026 as high interest rates, weakening consumer confidence and slowing wage growth curtailed spending.

The Central Bank of Russia has kept interest rates in double digits in an attempt to contain inflation, as part of CBR governor Elvia Nabiullina’s unorthodox experiment to reduce inflation. Borrowing has become prohibitively expensive for many businesses as a result. At the same time, high deposit rates have encouraged households to save rather than spend, which in turn is knocking on to reduced consumption.

Official forecasts published by Russia’s Ministry of Economic Development in May showed a worsening outlook across much of the economy. The government lowered its GDP growth forecast for 2026 from 1.3% to 0.4%, while investment growth expectations fell deeper into negative territory. Inflation forecasts were revised higher and projected interest rates increased further.

Retailers and service-sector operators say the impact on consumer behaviour has been immediate. Russians are increasingly cutting discretionary spending, shifting away from restaurants and personal services towards cheaper alternatives and ready-made meals sold in supermarkets.

“It has become more difficult to operate and generate revenue following the lowering of the VAT registration threshold,” said the co-owner of a restaurant in the Moscow region interviewed by The Bell. “In addition to rising supplier prices, soaring costs for absolutely everything, and mandatory payments, we now have VAT to contend with as well.”

The restaurateur added: “2026 will be the true litmus test for the future of business: it will reveal how many new ventures open, and how many close down or go bankrupt.”

Businesses also face rising operational costs from changes to financial regulations. Russia this year removed a two-decade-old tax exemption covering banking services linked to card payment processing, meaning such services are now subject to 22% VAT. Banks have largely passed the additional costs on to customers through higher fees.

At the same time, intermittent internet shutdowns and restrictions linked to wartime security measures have disrupted operations for businesses dependent on digital payments and online communications.

The banking squeeze

The slowdown is also affecting banks, as companies cut back on borrowing and consumers prefer to squirrel their money away as savings.

Every fifth bank in Russia is now unprofitable, according to former National Bank of Ukraine governor Kyrylo Shevchenko. Just months ago there were 34 loss-making banks. By March 2026 that number had increased to 60.

“That’s nearly20% of the entire sector, the worst figure since the 2022 sanctions shock” Shevchenko said in a social media post. “This is the accumulated effect of harsh monetary policy.”

CentralBank has kept the key rate at a record 21% for over six months only began gradually cutting it from June 2025, bringing it down to the current 14.5%. Corporate defaults climbed above 11% while small and mid-sized banks, lacking the scale and state support of giants, are hit hardest. Even some larger players like Post Bank reported multi-billion losses. Banking profit is flowing only to the giants, while regions face creeping monopolization.

According to entrepreneurs and analysts cited by The Bell, internet outages in Moscow in March have caused widespread disruption for taxi services, couriers, retailers and medical clinics. Smaller businesses using mobile card terminals were among the hardest hit as payment systems stopped functioning during network restrictions and tests involving “whitelist” internet access systems.

Confidence down

Official data suggest business confidence has fallen to historic lows. Rosstat’s business confidence index for the retail sector dropped below minus eight, the weakest reading since records began two decades ago and lower than levels recorded during the Covid-19 pandemic.

The services sector also registered its lowest confidence reading since early 2023, while only manufacturing — heavily supported by military production — showed modest improvement.

The pain is being felt on the street. According to IntelliNews interlocutors, small shops and service outlets complain their turnover has been halved by the malaise that has settled over the country as a result of a hangover due to the war spending binge in 2023 and 2024. The race is on between Nabiullina’s rate cuts and falling inflation, but the situation is not expected to turn around for at least one more year, and possibly two. The spike in oil prices due to the war in Iran may accelerate that process, but so far the Ministry of Finance (MinFin) is being cautious about the size of the windfall it is expecting due to the higher oil prices.

In the meantime, another sign of mounting strain is the sharp rise in overdue payments between businesses. Rosstat data showed overdue accounts receivable reached RUB8.5tn ($108bn) in February, equivalent to around 4% of GDP and roughly double pre-war levels.

Experts told Russian media that slowing growth, weak consumer demand and tight credit conditions had left many companies struggling with liquidity. Shokhin said some businesses were deliberately delaying payments because high deposit rates made it more profitable to hold cash in banks.

Small businesses appear particularly vulnerable because they often lack the leverage to pursue unpaid debts through the courts, especially when dealing with larger corporate clients.