Russia proposes extending electricity VAT relief in annexed territories through 2036

Ministry seeks longer tax exemption

Russia’s Energy Ministry has proposed extending until 2036 a value-added tax exemption connected with electricity supplies to the Donetsk and Luhansk regions and parts of the Zaporizhzhia and Kherson regions, territories that Russia claims as its own. The proposal was reported by Izvestia.

The relief currently applies until the beginning of 2028. It covers funds received by the Unified Purchaser to compensate for revenue it does not collect because electricity is sold in the territories at regulated tariffs below the company’s acquisition cost.

Extending the exemption would keep the existing financing mechanism in place while electricity tariffs in the affected territories are changed gradually. The source material does not specify when the proposal could be adopted, the expected fiscal cost or the volume of electricity covered.

State support closes the price gap

The Unified Purchaser buys electricity on Russia’s wholesale market and resells it in the territories at tariffs below the wholesale purchase price. State support compensates the company for the resulting shortfall. Exempting that compensation from VAT prevents part of the public funding from returning to the budget as tax and leaves more of it available to cover the gap between procurement costs and regulated revenue.

For the power supplier, continuation of the relief would provide greater certainty over the tax treatment of compensation beyond 2028. Without an extension, VAT could increase the amount of state funding required to preserve the same level of support or add pressure to accelerate tariff increases. The proposal therefore concerns both the supplier’s cash flow and the affordability of electricity for customers in the territories.

The mechanism also highlights the difference between wholesale electricity costs and local regulated prices. As long as the resale tariff remains below the purchase price, the system depends on budget support. Gradual tariff changes may narrow that difference, but the proposed 2036 end date indicates that the ministry expects the compensation framework to remain relevant for several years.

Implications for tariffs and public finances

For households and businesses, maintaining the VAT exemption could help limit abrupt tariff adjustments by preserving the subsidy structure during the transition. Electricity-intensive companies would also benefit from a more predictable pace of price changes, although the source provides no details on tariffs for individual consumer groups.

For public finances, the exemption represents forgone VAT revenue, but it may also reduce the gross compensation that the state must provide to the Unified Purchaser. The net budget effect cannot be calculated from the available information because neither the compensation amount nor the applicable electricity volumes were disclosed.

Market participants will need to watch the final duration and scope of the measure, as well as any tariff schedule accompanying it. The central issue is whether regulated prices can move closer to wholesale procurement costs before 2036 without creating sharp increases for consumers or persistent losses for the supplier.