Russia’s Shadow Economy Large, Diverse And Disputed – OpEd

Keeping track of the size of economic activity intended by those who engage in it t be off the books is not easy in any country, and it is especially difficult in Russia where, in many cases, senior officials are actively involved in or dependent on it and thus have a vested interest in keeping its true dimensions hidden.

The RBC news agency regularly keeps track of what figures there are, highlighting both the size of this portion of the Russian economy and its enormous diversity as well as the differences of reporting by the various government agencies involved in monitoring what is going on.

In the latest such report, Yuliya Starostina says that Rosstat says that in 2017, what it call the shadow economy and informal production (such as gardens producing food for personal use) accounted for 12.7 percent of Russia’s GDP — or about 11.7 trillion rubles (200 billion US dollars)  (rbc.ru/economics/29/08/2019/5d651ed89a79474a0d725030?from=from_main).

According to Aleksey Ponmarenko, the share that the shadow economy forms of Russia’s GDP has been declining in recent years but the absolute size as calculated according to market prices has remained more or less constant. Russians are still seeking t avid taxes and regulations and thus engage in off-the-books work.

Another expert, Ilya Zharsky of the Veta Group says that “the large shadow economy in Russia is the result of the absence of stable laws in the economic sphere, in particular about taxes and fees. Because businesses and individuals can’t count on predictability within the legal sphere, they seek to get it by shifting “into the shadows.”

Their opportunities to do so vary widely sector to sector.  Property transactions, including rentals and sales, account for more than half of the shadow economy at present.  The share in the food industry and in construction is far less. And that in the government is zero, Starostina says experts report.

Ponomarenko adds that “a significant portion of Russians continue to be involved in informal production in agriculture and fishing. “In Western Europe or the United States,” he says, “it wouldn’t dawn on anyone to raise potatoes for himself because such actions would be economically baseless: it is possible to buy them in a store and earn money elsewhere.”

“But in Russia, the entire rural population and half of urban residents raise food for themselves.”

Rosstat also reports that at the end of 2018, approximately 14 million Russians, 19.3 percent of the economically active population, were involved in informal or shadow activity, Staorstina says. The statistical agency divides such off-the-books activity into three categories, two of which it monitors and one of which it doesn’t.

The first is “shadow (concealed) production,” which is legal activity that is “intentionally concealed from the state” to avoid regulations and taxes; the second is “informal activity” which is also legal but is not registered such as the sale in markets of food produced in family gardens mostly for personal consumption.

These can be measured indirectly, Rosstat officials say. But it does not even attempt to include the third kind of informal or shadow economic activity in its statistics. That is illegal activity such as the production and sale of drugs and arms, prostitution, pornography, and similar businesses, many of which in Russia are quite large.

Other Russian agencies do attempt to include such activities and their figures for the shadow economy are much higher. The Russian Financial Monitoring Agency, for example, says that in 2017, the shadow economy made up not the 12 percent Rosstat says but rather 20.5 percent of Russia’s GDP – some 18.9 trillion rubles (300 billion US dollars).

That is 50 percent more than the Rosstat figure.