The Real Russian Economy

In a developing economy, one expects a certain amount of graft, bribery, and corruption in the transit of daily life. In Russia, an organization called INDEM estimates that all those came to the tune of $310 billion last year.

Now, you can believe that number or not. On the one hand, it seems a bit ridiculous - $310 billion is about 45% of GDP in 2004. On the other hand, huge amounts of economic activity just aren’t captured in official statistics. In either case, it’s some sort of staggering number – and represents a huge transfer payment from the private to the public sector in lieu of cash taxes.

I have two stories to illustrate the point, but first a little background. As resident foreigners, we have to register our passports with the government periodically. They keep the passport for a few days, and give it back with official stamps. In the meantime, you have a slip of paper to show that they have your documents. It gets a little complicated, however, in that the police routinely stop people on the street to look at their registrations. If your papers aren’t in order, well…

My colleague Jim was headed home one night after a business dinner that turned into late drinks. The police asked for his papers on the street, and then hauled him down to the station. Everyone was polite and happy to see him. When he questioned why he was being held, the captain indicated that he was illegally in the country – that is, his registration had expired moments before at midnight.

Jim had to pull out all the stops and started spinning a yarn about how he was a consultant to the owners of Alfa Bank. The coup de grace was when he insisted on the correct spelling of the captain’s name – so he could relay the information to Putin when he met him next week. The captain suddenly had no problems with the recently expired registration, and handed Jim back over to the arresting officers. He still wasn’t being released, though, and proposed a bottle of vodka to bury the hatchet. They accepted, drove him to the liquor store, and after the handoff of a $15 bottle of vodka - let him continue on his way home.

My colleague Jeff was coming home in the early evening after a trip to the grocery store. Two policemen crossed the street and asked for his documents - which were at the registration office. The policemen weren’t going to let something like that pass, no matter how normal or legal it may be. Now, Jeff’s normal tactic is to hide his cash behind his passport in its case – lest a greedy policeman see the cash horde and clean him out. Well, since the passport was gone there was a 1000 ruble note in clear view. So the cops quickly stated that 1000 rubles – about $35 – was about enough to make the problem go away. Even in the sticky fingered world of Russian bribes, that’s a fortune for a routine stop on the street. But poor Jeff had just returned from one of the most expensive grocery stores in Moscow and was carrying a bag emblazoned with a Finnish logo and, in effect, his socio-economic status. While he protested the size of the “fine”, the second policeman took his groceries, looked inside, and said to the other cop, “Here’s dinner.” The other cop handed back the passport case and the two of them walked off with all of Jeff’s groceries.

So the problem is that many such state employees aren’t paid anywhere near a decent salary. Taxes are artificially low as a result, but these same people have to eat – so they resort to using their positions to gather what they need. You can call it a bribe – a “vzyatka” - or what ever you like, but back home I guess we prefer paying taxes directly and providing public sector employees with living wages.