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 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
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
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

 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

 (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

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