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Krisha in Russian means roof

 The surge in the share of the shadow economy and its impact on the national economy of the Russian Federation surprised greatly the enthusi...

 The surge in the share of the shadow economy and its impact on the national economy of the Russian Federation surprised greatly the enthusiasts of market reforms. Before market reforms, it was thought that the shadow economy during the Soviet period was the result of distortions created by the centrally planned economy and that with the economic liberalization and the introduction of free market principles, it would fade away. On the contrary, during the transition period, the shadow economy has reached sizes unimaginable in the Soviet Union. It has become closely intertwined with the legal economy and accepted by the Russians as a part of capitalism in the Russian Federation. According to the Ministry of Internal Affairs of the Russian Federation, in 1990-1991, the shadow economy produced 10-11 per cent of GDP; in 1993, 27 per cent; in 1994, 39 per cent; in 1995, 45 per cent; and in 1996, 46 per cent. According to the same source, 58-60 million people are employed in the shadow economy. Goskomstat (the State Statistical Office) gives more modest numbers: the share of the shadow economy reaching 9-10 per cent of GDP in 1992-1994, 

20 per cent in 1995, and 23 per cent in 1996.30 The nature of the shadow economy in the capitalist Russian Federation is different from the underground activities of the Soviet period. During communist days, anything produced without direct supervision or planned instructions could be considered shadow economy. It included outputs exceeding planned figures, which were usually for sale to non-assigned enterprises, various barter transactions, moonlighting, i.e., anything beyond centrally planned assignments. Additionally, according to some classifications, various criminal activities, such as corruption, theft and fraud were also counted as a part of the shadow economy. However, it is commonly acknowledged that the primary reasons for the shadow economy included market distortions created by the rigid planning figures and instructions and the need for people to explore their entrepreneurial skills. Thus, to a great extent, the role of the shadow economy was to fill the gaps of the centrally planned economy in meeting supply and demand and as such it became an integral part of the Russian Federation’s economic and social life. With the introduction of market reforms, many activities classified as criminal immediately became legal and many endeavours, such as entrepreneurship, were promoted. However, neither the authorities nor the population could immediately define what should be criminal and what should be legal in the new society. Even when they were able to define this, they could not immediately create new legal or institutional frameworks to regulate these new activities or the process of change itself. Those benefiting from the lack of transparent and uniform laws perhaps played a part in prolonging such a period. Lack of appropriate legal provisions meant limitless opportunities for various manipulations for personal gain. Meanwhile, the State has largely withdrawn its law enforcement capacities, as the State was considered too big, too powerful and too oppressive. During the early years of reforms, law enforcement actions by the State against economic crimes (many of which were not even defined as crimes at the time) could be easily hampered by the offenders, who would declare these actions to be counter-market assaults of former communists or apparatchiks. The lack of norms defining the new role and functions of public institutions contributed to the corruption of government offices. Vagueness about the responsibilities of government officials encouraged the so-called privatization of government posts. Government officials increasingly fulfilled their duties only to meet their personal economic interests. Personal networks or bribes became more effective than official procedures. As a result, people began to resent any government rules or procedures, considering them redundant. Taxation is particularly resented because it produces virtually a system of double taxation as public services are “purchased” individually anyway. Hence, with the introduction of market reforms in the Russian Federation, the shadow economy not only 10 Russian capitalism and money-laundering survived but transformed into an even more critical segment of the economy. The transition process prompted the authorities to establish temporary arrangements or institutions (authorized offices with various powers), which often become the subject of misuse of powers for personal gain. The preservation of some features of the planned economy, such as State subsidies to some industries, also creates opportunities for various illegal activities.

 The drastic social consequences of the transition period, such as the unprecedented rise in poverty associated with the loss of jobs, savings and decent salaries and wages, are also an important factor in the growth of the shadow economy. In order to survive, people have to look for various sources of income through activities not licensed or registered. This includes their activities at work used for purposes other than the work they were hired for. The problem of payment arrears led the enterprises to come up with various forms of non-cash transactions. The use of barter transactions has increased dramatically since the beginning of the transition period, peaking at over 50 per cent of sales in mid-1998.31 Easier to misreport or not to report at all, barter transactions form a significant part of the shadow economy. To handle their payments or mostly their payment arrears, 

big enterprises also use forms of promissory notes. Some Russian enterprises were reported to be issuing quasi-money to pay their expenditure arrears and others to be using nonmonetary wage payments. However, it is also believed that enterprises starve themselves of cash in order to negotiate tax breaks. This assumption applies to the enterprises that decide to legally minimize their tax obligations. Many others simply do not pay taxes at all. With a badly organized State administration and with few experts to enforce the rules, there are numerous opportunities for small businesses to escape into the underground. There appear to be no compelling reasons for them to become legal. Therefore, a large share of the activities of a shadow economy is legal in nature and includes activities that are permitted by law (as opposed to criminal activities), but conducted without official permits or registration. According to some estimates, 3

5 per cent of Russian businesses do not pay taxes at all, and over 50 per cent pay taxes only occasionally. Many believe that the complexity of tax laws and their repressive nature encourages tax evasion. According to some estimates, businesses are expected to pay as much as 60 to 80 per cent of their profits as taxes. This is in conditions where most businesses thought that 28 per cent of the profits was a fair level of taxation they could bear.32 More pervasive than tax evasion is the problem of tax arrears which contributes to the failure of the Russian authorities to reverse the sharp reduction in revenues that has taken place since the beginning of transition. The tax arrears have reached such levels that their damage can be equated to tax evasion. The tax police reports that it brings about 40 per cent of tax revenues to the Government which means that the Government has to use force to get nearly half of its tax revenues. Considering the limited capacities of this hazardous service, one can assume that a large portion of taxes remain not paid at all. The problem of non-payment and tax arrears led to the use of non-monetary fiscal operations or tax offset schemes that have been criticized for opening new opportunities for fraud.33 Under the scheme, the Government began accepting goods and services in lieu of taxes. This method not only led to the decline in expected tax revenues (it was estimated that only 50- 75 per cent of face value was collected through this method), but more importantly it further promoted corruption and fraud, particularly at the regional and municipal levels. The discretionary use of this method allowed businesses to accumulate arrears in order to force the Government to purchase their goods. The schemes effectively operated as a tax amnesty, which has had an adverse impact on tax payment discipline. Moreover, fraud was often embedded in the programmes, as prices were set or the quality of goods supplied were set at higher than their actual levels, increasing artificially the size of tax payments. It was often reported that local officials were thoroughly compensated personally (through bribes) for the loss of Government tax revenue. The scheme turned out to be another mechanism for extracting State assets. The existence of a sizeable shadow economy and tax evasion practices contribute to the flourishing of “krishas”

 (krisha in Russian means roof)—informal or criminal groups which control the respective market segments. The need to conceal their activities or to ensure the continuation of business activities often makes businesses turn to krishas. The economic sense of krisha is to support the earning of profits by limiting the number of those with access to the market controlled. Part of these protected profits go to those who enforce krisha— mostly organized crime groups. It is common for krishas to use physical force against those who do not comply (do not pay protection fees), and it is becoming even more common for them to use the State structures, including police or tax police, as their tools. For example, it is safe and easy to report the rebellious business to the local tax police, which would conveniently raid and destroy it. Even if the tax police is not a part of the “krisha” the likelihood of the tax police to find tax non-compliance is so high that the raid damages seriously the business anyway.

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