Moscow Driving Ever More Firms into Shadow Economy or into Bankruptcy, Official Statistics Show

Paul Goble

            Staunton, February 5 – The Russian government has been making promises of a tax holiday to tempt unregistered Russian firms to come out of the shadow economy and eventually pay taxes to the state, but Moscow’s track record as far as keeping its promises means that very few firms have taken up its offer, official statistics show.

            And in addition, the Russian government has added not only to the financial burdens of being registered with the state but also introduced a large number of new and burdensome reporting requirements that mean firms operating outside of its purview feel they are better off to remain there.

            In short, Moscow commentator Vsevolod Istomin says, Moscow has succeeded in creating an extremely unwelcoming business climate, one in which firms that do try to play by official rules are increasingly likely to be bankrupted or driven right back into the shadow economy (versia.ru/v-rossii-proshhe-byt-v-teni-chem-na-vidu-u-gosudarstva).

            After trying for the last several years to get firms to register with the state by threatening them with enormous fines, the Russian government decided to try the carrot of promising a tax holiday. Duma deputies favor the idea but neither they nor the businesses affected trust the government to keep its word.

            As a result, despite these proffered incentives, Istomin says, only 936 firms chose to come out of the shadows, despite the fact that there are hundreds of thousands of such firms employing from 15 to 20 million people and supporting twice as many other Russians in addition.

            Even Tatiana Golikova, the head of the Accounting Chamber, acknowledges that “people do not believe” what the government is promising, and it is quite clear, the commentator says, that at the same time, “citizens don’t believe that the authorities are capable of forcing them to share their modest incomes” with the state whatever the threats the regime makes.

            Such businessmen can see that if they come out of the shadows, they will not only be required to pay more for insurance and the like but fill in a variety of burdensome reporting requirements. When firms thought they could come out of the shadows, they often discovered that within weeks, many of them had to declare bankruptcy.

            According to Istomin, the Russian government has created conditions which are as unfavorable to business activity as can be imagined. In 2010, there were 4.6 million small and mid-sized enterprises with 19 million workers. By the start of 2017, the 5.8 million firms employed only 15.8 million people.

            A year earlier, he continues, the number of firms forced out of business exceeded the number of new businesses created by almost a third of a million: 781,000 businesses ceased to exist, and only 498,600 were created. Still worse, the total number of firms disbanded was 2.4 times greater in 2016 than in 2015.

            If current projections prove true, the situation for small and mid-sized business in Russia will be even worse in the coming year, Istomin says; and those that choose to stay in the shadow sector may very well have a better chance to survive than those that agree to register with the state.