Battered by slowdown Russian economy may go ‘gray’

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By Marina Romanova

0521rublesRussian economy, battered by sanctions and the devaluation of the ruble increasingly dwindle down to the underground zone, better-known in Russia as a ‘gray’ or illegal economy. According to a survey released by the state-run Russian Public Opinion Center (VTsIOM) polling company this week, more than one third of Russian working population receive their salary off the books.

VTsIOM held its poll on May 28-29, 2016 in 130 populated areas in 46 Russian regions of nine federal districts. From 69 percent and 75 percent of economically active citizens say they receive officially shown wages. The salary of 13 percent of respondents comprise both an officially declared pay and wages “in envelopes” compared to 17 percent of those combined salaries year ago in May 2015. This helps companies significantly reduce their tax burden.

Employed Russians currently pay 13 percent income tax. 30 percent social insurance premium is paid by employers into the government’s accounts on top of employees’ earnings. Private entrepreneurs (craftsmen, freelancers) pay income tax with variable rates and insurance premiums.

It’s typical for small Russian enterprises to hire workers without contracts. There is a huge incentive for employers to pay cash salaries without the extra 30 percent tax in the form of social insurance premiums for workers. Many employees do not mind, as long as they have a job and get paid. Workers also benefit by avoiding 13 percent personal income tax.

According to Rosstat, the national statistical agency, informal employment in Russia in 2015 has reached almost 15 million, or 21,2 percent of the workforce compare to 20,8 percent in 2014.

Informal employment isn’t a brand new economical phenomenon in Russia. Soon after the collapse of the Soviet Union gray wages amounted to 20 percent of the official wages as of in 1993, Rosstat data says. In 1996-1998 this proportion had increased to 45-46 percent.

Unlike Rosstat, Russian ministry of labor has estimated ‘gray’ labor market at about 23 percent of the workforce. Illegal labor relations, according to the ministry, can be most commonly seen in the construction sector, agriculture, retail, and service sectors, where goods and services are paid for in cash.

Global Financial Integrity, a nonprofit that tracks underground economies, says that Russian underground economy annually produces goods and services worth more than 40 percent of the country’s official GDP. Although other estimates put the number as high as 60 percent.

When Russians go ‘gray’ they simply trying to avoid dealing with the state by hiding their business as much as possible. As economists asserts, the existence of ‘gray’ economies is common in inefficient state capitalism, since the formal economy is so difficult for entrepreneur’s.

Anders Aslund, Swedish economist who also serves as a senior fellow at the Atlantic council in Washington, writes in his study about Russian start-ups, “from December 2012 to April 2013, the number of individual entrepreneurs in Russia falls slumped by 367,000 because of increasingly hostile business environment”.

Only 46 million of 86 million of Russian working population were working legally, Olga Golodets, Russian deputy prime minister for social affairs said to journalists in April 2013.

That data suggests, that it is not current crisis conditions, neither lower energy prices, nor sanctions what let ‘gray’ economy to grow but broader institutional, structural, and legal weakness of the Russian state capitalism as such.

For all that, unemployment is rising slowly in the Russian regions. Official statistics put it at only to a negligible 5.7 percent in late 2015. Natalia Zubarevich, expert on Russian regional economies and head of the Independent Institute for Social Policy, attributes law unemployment to country’s unusual labor market.

“In place of layoffs, employees are given fewer work days per week, go on forced leave or simply stand idle. Business owners understand they can be punished for shutting down enterprises. They know it is better to keep their doors open,” she writes in her article for The Moscow Times.

Avtovaz, which is Russia’s largest auto manufacturer and is controlled by French car maker Renault SA and Japan’s Nissan Motor Co., is among those large firms under strict instructions not to lay people off. anymore.

Last week Avtovaz announced so-called “window of opportunity ” for the employees who are willing to leave the company in exchange to five average salaries company offer to pay if an employee voluntarily quit the job within two weeks starting from June 1st, 2016.

Russian market for passenger cars and light-commercial vehicles was about 3 million units — dropped by half within three years since beginning of 2013. Overall demand for cars in Russia decreased by 10 percent in 2014, and decline by another 19 percent in 2015.

In 2014 Avtovaz already slashed its workforce by 12,000 to its then current level of around 50,000. Another 9,000 people were cut in 2015. Earlier this February car manufacturer introduced part-time mode for the initial period of six months.

Avtovaz’s losses tripled to an eye-watering 74 billion rubles (US$1.2 billion) last year and revenue dropped 8 percent to 176 billion rubles (US$2.7 billion) — less than operating costs. In January, a study by a leading Moscow university ranked Tolyatti, home for Avtovaz, which has a population of over 700,000, as Russia’s poorest city and vulnerable to outbreaks of social unrest.

High inflation, which peaked at 12.9 percent last year, has squeezed millions of Russians. According to the Russian Independent Institute for Social Policy, unlike minimal 5.7 percent of unemployment, real wages in the country plummeted by around 10 percent in 2015, real income dropped by 4,7 percent, real pensions – by 3,1 percent, while number of Russian living below poverty line increased by 3,1 million. The World Bank predicts another 1.1 million will enter poverty in 2016, pushing the total number above 20 million — one out of every seven people. In dollar terms the average monthly salary in the year to January 2015 fell from US$850 to US$450.

work_10_êîíâåðò_previewThe minimum monthly wage in Russia will be 7500 rubles (about US$110) starting from July 1, 2016.

Not only unusual labor market, but demographic factors also influence low unemployment statistics, Zubarevich asserts. According to her data, much more people are reaching retirement age and leaving the labor market than there are young people coming of age and entering it.

“With the decline in construction, migrant workers that composed the greater part of those work crews are returning home and, as non-Russian citizens, were never included in official employment statistics,” she says.