These words, are no less true than when Gogol wrote them in 1842, even if it was in the fanaticlaly motivated second volume of Dead Souls. I was reminded of these words when I had a conversation with a very wise friend of mine back in the U.S., and I realized how little is generally know about Russia’s transition to a capitalist economy back in the United States. Most educated people have this hazy idea that some problems exist, but I think very few are aware of how seriously these problems effect the growth of the Russian economy and what makes it such a difficult market in which to operate.
We read in the paper every day here in Moscow, and most days in the U.S. as well, about the trial of Mikhail Khodorkovsky and his partners. The charges, most people hear, are for tax evasion. Yet, one only realizes how ludicrous these charges are when one realizes that, for the most part, in the realm of business, law is a mere triviality where it does exist and the tax police are a highly questionable political tool at best and mere extortionists at worst.
Stephen Kotkin, in his book Armageddon Averted, which provides a good introduction into the genesis of Russia’s problems today, labels Russia not as corrupt but as pre-corrupt because in order to have corruption, one must have laws.
In the 90s when Khodorkovsky made his billions this was especially true. Yeltsin and his entourage permitted the wholesale looting of the state, which was given into the hands of the communist powerful and some other ruthless businessmen such as Khodorkovsky. In fact, since communism fell apart in chunks and pieces, one had to operate illegally in order to make a profit. Yet, these people foresaw that the system was going to change and that many of their actions would allow them to get to the top of the heap after a capitalist system had been implemented.
Russia, the saying goes, must be so rich to have been looted so many times and still have something left. Many are enjoying the fruits they have reaped. I recently went to a friend’s dacha next to the second dacha of the regional Moscow prosecutor. The prosecutor’s dacha was several thousand square feet in the classic French style, and this was is third home in Russia! Khodorkovsky, like the prosecutor, was simply playing by the rules of the game as they were defined at that time. Russia, in effect, is just beginning to have some kind of law—but just barely—and it is only being enforced widely against people who cross the president in the political arena.
This is certainly true in the realm of taxes. Most Russian companies only play very minimal taxes, whereas international companies are left to bear their heavy tax burden. * The tax codes here are impossible and are still paid wholly by the business, not by every individual (though this is changing), and taxes are prohibitively high. Therefore, most companies simply declare a very small percentage of their income, pay their workers minimum wage legally and slip them the rest in cash under the table.
A friend, of mine, for example, works for company that imports Latvian china and silverware. The company, like most, is run by a former member of the KGB, who cashed in on their connections in the government to start businesses when capitalism bame around. My friend’s declared salary is 1,700 rubles, or about 60 dollars a month. The other part—more than a thousand dollars—is given to him in cash under the table. "It’s not bad," my friend says with a shrug. “I’ll have a very small pension when I get older.” Most people in Russia, as a result of both the cradle to grave support of the Communist regime and the political instability, do not live for the future. Why not wear one and a half inch heels and smoke cigarettes? It looks good, right? “Live fast, die young,” my students say.
I wondered when I first got here why there were so many exchange bureaux all over the city, and why everybody knew the prices of everything in dollars. The answer is simple: Russia is a cash economy that operates in dollars. It is estimated that Russians have over 40 billion dollars squirreled away under their pillows. I personally would believe it was at least three times that.
After the bank default in ’98, the few Russians that had put their faith in the banks, lost it. There is no FDIC here, and people merely lost thousands of dollars as banks went under. In addition, foreign banks are not allowed to operate branches in Russia, so foreign banks accounts are out of reach for almost everyonne. Meanwhile, even today nobody knows who owns most Russian banks, and while the government is trying to crack down on them, it’s hard to tell what’s for real and what’s political motivation as in the most recent case of Sodbiznesbank.
I was in the travel agent's the other day, where of course you can’t buy your ticket from the travel agent, but you have to go up to the ubiquitous касса (Kassa) and pay. There was a long line, and I watched everybody fork over money for their plane tickets only in cash. Everybody in the line was buying 800-dollar plane tickets in cash. Not a single person used a credit card. A student of mine, whose favorite hobby is to window shop for cars she can’t afford told me that she goes by a BMW dealership here and sees people buying seven series in cash. No 0% APR, no factory rebate, just cold hard (and probably cocaine dusted) cash.
This is also true for Moscow outrageously priced real estate. The concept of a mortgage as only widely become known in the last couple of years, and since even those people who make enough to qualify for a mortgage, cannot because there salary is paid under the table. Hey, why not buy a 100,000-dollar flat an old Stalinist communal building in cash? It’s better than under your mattress, and with the average cost of real estate in Moscow (let’s not even talk about the center) well over 1,000 dollars a square meter, it’s a great investment, right? That, is unless the city government, which retains the rights to the land on which your property lies, decides to bulldoze your building. Either way, At least you don’t have to pay interest on your mortgage.
For anybody who has taken macroeconomics one realizes that the lack of trust I the banking systems makes the size of the monetary base very similar to the size of the money supply. In effect, currency is not circulating properly throughout the economy, and the only way to circulate more currency is to print more, which often as many deleterious side effects.
This, interestingly, has led to partnerships with Russian and international companies whereby Russian companies, who know how to do Biznes in Russia simply run a franchise in Russia. This, in my opinion is bad news, because it lends and air of law-flouting the reputation of the company. This happened in the case of Reebok, as reported by the Moscow Times.
Posted by Aaron at June 14, 2004 12:18 PM