Just about every other worker in Russia has gone missing.
Uncounted by statisticians and invisible to tax collectors, a population the size of Texas’, or about 30 million people, ply their trade in the nooks and crannies of what has become known as the “garage economy.”
There, professions such as mechanics, builders, dentists and veterinarians conduct their businesses off-the-books and in cash.
Illustration: Yusha
Russian President Vladimir Putin is zeroing in on the phenomenon, two participants in a Kremlin meeting on economic policy said.
It is the cops, prosecutors and taxes driving them underground, Putin told a gathering of ministers, advisers and regional bureaucrats, said the people, who asked to remain unidentified because the discussion was not public.
Putin asked the “serious, bespectacled” lot in front of him to devise a way to ferret out the businesses and motivate them to legalize their operations, the people said.
The scale of this underworld, estimated at as much as a quarter of GDP, presents the Russian leader with a dilemma. For an economy that is struggling to shake off a recession in an era of cheap crude oil, the millions of undocumented workers could prove an unrivaled resource as government finances run dry, but by surviving and even prospering on the fringes, they have opened a safety valve amid Putin’s worst economic crisis as the state is increasingly forced to leave people to fend for themselves.
About 30 million, or 40 percent of the economically active population of 76.5 million, are part of the “shadow” labor market at various points throughout the year, according to a survey published this month by the Russian Presidential Academy of National Economy and Public Administration.
While the estimates are inexact, the size of the workforce has been stable since the research group began tracking the data in 2001, said Andrei Pokida, a sociologist who led the study.
For that reason, dismantling the “garages” is out of the question, said Vladimir Governor Svetlana Orlova, who complained at the meeting with Putin of the torment inflicted on small businesses.
“If you tinker with the garages, there will be a whole revolution,” Orlova said.
The scale of underground activities is among the key factors behind Russian illicit capital flows, according to Washington-based Global Financial Integrity. Crime, corruption and tax evasion spawned at least US$211.5 billion in illicit outflows between 1994 and 2011, with illegal transfers reaching US$552.9 billion, it said in a report.
SHADOW ECONOMY
The size of the shadow economy over the study period was estimated at 46 percent of GDP, according to the group, which researches cross-border money transfers. A separate report found that Russia was second only to China among developing nations for illicit inflows between 2004 and 2013.
Putin’s spokesman, Dmitry Peskov, did not reply to a request for comment on government discussions or Putin’s thinking about the underground economy.
The appeal of working off the grid is obvious for Alexander, a 36-year-old who moved near to Moscow after quitting his military career in the Far East. Doing a 30,000 rubles (US$475.47) factory job for five years, he found that his construction work on the side, laying tiles, proved more profitable.
Alexander said he quit and found a partner, another former military man who specializes in plumbing repairs. Their earnings might be uneven, but he now makes 80,000 rubles to 150,000 rubles per month, enough to buy a car and pay off a mortgage.
Shunning advertising and relying strictly on word of mouth for referrals, their order book is full for three months ahead, he said.
For Alexander, there is little incentive to pay into a system that returns so little in old age, with the average Russian pension about 12,000 rubles per month.
“To hell with it,” he said. “My wife’s working in a school. She’ll get two kopecks for retirement.”
Legalizing the shadow workforce alone would boost GDP by 1 percentage point, said Boris Titov, the Kremlin’s business ombudsman.
No longer limited to retail trade, Titov said it has becoming a hive of small-scale manufacturing, developing into an “economy of simple things.” Businesses can be tempted into the open if the government can ensure fewer regulatory checks and a patent system catering to the self-employed, he said.
OBSTACLES
The hurdles are many. While Russia has surged by 61 spots in the World Bank’s Ease of Doing Business Index since 2013 to 51st this year, dealing with construction permits still takes almost nine months. Its property rights, judicial independence and the burden of government regulation were all rated below 100th among 140 nations in the World Economic Forum’s 2015-2016 Global Competitiveness Report.
The government plans to adopt a law this fall freeing several categories of self-employment from taxes and easing their way to registration, leaving them to pay social levies only, Russian First Deputy Prime Minister Igor Shuvalov said in an interview.
“We understand that only the tax service will lead them out of the shadows,” Shuvalov said. “Now everything is being automated, financial discipline is increasing. I think that in a couple of years evading taxes will be extremely difficult.”
Among the most far-reaching ideas yet for nudging businesses out of the shadow economy is a proposal by the Russian Ministry of Finance to cut the payroll tax that employers pay on salaries, three officials familiar with the discussions said last month.
If a lower levy is accompanied by an increase in the value-added tax, the measures could help authorities collect about 30 percent of the amount of salaries companies pay in cash, which the ministry has estimated is costing the government as much as 2 trillion rubles a year in lost taxes.
The need to shrink the size of the shadow economy was the subject of a meeting held at the ministry on Tuesday last week, which discussed fighting under-the-table salaries to increase tax collection.
By creating the conditions that would motivate entrepreneurs to come clean, Russia might pave the way for a revival of small and medium-sized businesses, whom Putin sees as a foundation for the economy. Such companies employ a fifth of the workforce, far short of the government’s goal to raise the level to at least half the total.
Just by clearing the regulatory roadblocks, authorities could do wonders for an economy that has been in contraction since the start of last year. The World Bank has cited research showing that decreasing state inspections of small businesses in Russian regions brought a 12 percentage point increase in their annual sales growth.
“It is essential to give people freedom, if there is nothing else you can do for them,” said Sergey Dubinin, who was governor of the Russian central bank in 1998 during the government’s debt default. “It is a great fortune that there are people who are self-employed during a crisis period and lay no claim to getting assistance from the budget.”
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