Two hundred years ago, the famous Russian historian Nikolai Karamzinappraised the situation in Russia in one capacious sentence: "They allsteal here." Little has changed in the country since Karamzin made thatobservation in a letter he wrote to the tsar. Everybody steals, from highranking government officials (recall the World Bank’s coal loan worth $550million that mysteriously vanished) to drunken storekeepers or workersin a collective farm. In 1998, the Russian Tax Ministry discovered 208,977individual businessmen who operated without any license or registrationand did not pay taxes. According to sources close to the federal tax police,tax evaders deprived the state of $450 million. And according to experts,these figures represent only the tip of the iceberg.

RUSSIAN IN THE SHADOWS

A shadow economy can be described as a pyramid with overtly criminalstructures on the top, shadow businessmen in the middle and salaried employeesat the bottom. The Academy of Economics and Enterprise estimates this pyramidto comprise approximately 30 million Russian citizens. According to theState Statistics Committee, the shadow segment of the economy accountsfor some 20 percent of Russia’s GDP (10 to 11 percent in industry, 50 percentin agriculture and over 60 percent in sales and trade). These figures donot include illegal activities such as drug dealing, prostitution or smuggling.In reality, the shadow economy accounts for some 40 percent of Russia’seconomic output. It is no secret that economic crime is running rampant.According to the Prosecutor General’s office, the rate of economic crimeincreased 15 percent in 1998 vs. 1997 and 445 white-collar criminal gangshave been discovered. The recent tragedy in Samara, where a major firecompletely destroyed the police department building and claimed the livesof 57 people, has attracted public attention to the fact that at leastseveral regions in the country are fully or partially controlled by organizedcrime. Three years ago, economic counterintelligence officers (specifically,Vladimir Sergeev, deputy head of the Federal Security Service’s EconomicCrime Department) warned that if economic crime progresses at its currentpace, Russia will have 20 to 40 percent of its GDP controlled by organizedcrime by the end of the century. In the mid 1990s, criminal revenues inRussia amounted to more than $15 billion a year.

CAPITAL FLIGHT

Russians steal from the state, from one another and from the countryas a whole. There are two different reports on Russia’s foreign trade turnoverin 1998. One was compiled by the State Customs Committee and another oneby the Central Bank. The State Customs Committee reports a surplus (Januarythrough November) of $22.8 billion; whereas the Central Bank reports asurplus (for the whole year) of only $17 billion. This means that Russianimporters transferred much more money abroad than the cost of goods actuallybrought into Russia, while Russian exporters supplied something unpaidfor. In early February, the Interior Ministry released a report sayingthat during the last two years, Russian exporters had run $12 billion shorton export contracts and Russian importers remitted an "extra" $7 billion.According to the Prosecutor General’s office, a total of about $9 billionhad been smuggled out of Russia in 1998. This is much more than the governmentis begging from the International Monetary Fund.

Western bank analysts say that the total amount of capital flightfrom Russia exceeded $70 billion within a short span of the last 10 years.That does not include the amounts hidden in offshore accounts by Russianbanks and state organizations to avoid creditor claims.

STICK AND CARROT

What is vitally important for Russia today is to dig up money fromthe shadows and make it work for the economy. Associate Member of the Academyof Economics and Enterprise Vladimir Ispravnikov says the legalizationof money that circulates in the shadows could bring dozens of billionsof dollars in investments into Russia’s economy. This only requires onedecisive move: to recognize the legality of money made during the lastdecade, even though some of it might have been made in far from legal ways.

The government has apparently recognized that it is facing a dilemma:Either it legalize shadow economy or use force to beat cash out of it.So far, a final choice has not been made. In the meantime, certain politiciansare callingfor a "merciless war against corruption." Community Party leaderGennadii Zyuganov declared at a recent press conference that reducing economiccrime can help double or even triple the budget’s revenue. "It is possibleto raise an additional $40 billion in revenues," Zyuganov stressed. PrimeMinister Evgenii Primakov is offering both stick and carrot, while attentivelywatching the responses of both the owners of "dirty money" and the generalpublic. A number of government officials, including Primakov, have morethan once hinted that an "amnesty of dirty money" could be declared. ActingProsecutor General Yuri Chaika announced recently that effective measuresshould be taken to promote "repatriation of Russian capital." Chaika suggestedthat those who volunteer to repatriate smuggled capital and turn it overto the state could be pardoned from criminal prosecution. As an alternative,Chaika proposed to apply the existing provision of the Russian CriminalCode according to which those who have confessed and repented can be pardoned"as per a change of the situation."

But while some are calling for amnesty, the government has launcheda campaign of pressure on the shadow economy. Speaking at a recent meetingof the Council on Foreign Policy and Defense, Prime Minister Primakov announcedthat the government plans to declare an amnesty that will vacate 90,000prison cells to make room for economic criminals.

"Struggle against economic crime" is among the key provisions ofthe social appeasement agreement currently being prepared. "It is necessaryto take the economy out of the criminal context," Primakov told the meeting.Later in his speech, he supported his point with specific examples: "Anumber of companies have sold construction-grade sand for several yearswithout paying VAT on it. AvtoVAZ alone owes $100 million to the budget.If we eliminate this scam, we will attract 20 billion rubles ($860 million)to the budget," he said.

Apparently, recent searches of the Moscow office of Sibneft (a Siberianoil company controlled by CIS Executive Secretary and tycoon Boris Berezovskii)were part of an "anti-corruption" campaign. The prime minister said a "guerillawar" against the shadow economy is gaining momentum in the country. Hecited workers of the West Siberian Metallurgical Combine who "cleared theirenterprise of crime, and within the next four months the enterprise repaidall delayed wages, paid 70 percent their taxes and constructed a new blastfurnace."

"This was a fight against those who wanted to rob the enterpriseand smuggle the money out of Russia," Primakov said.

In early February, the Interior Ministry approached the law enforcementagencies of France and Finland requesting information on major money transfers(both cash and non-cash) made by Russian corporate entities and individuals.

In the meantime, the government approved a draft program to combatorganized crime and corruption. Interior Minister Sergei Stepashin saidthe program provides for sequestration, confiscation and repatriation ofcapital made in criminal or illegal ways and deposited in foreign bankaccounts.

Many believe that crime is something that cannot be rooted out; henceit is only necessary to keep it under control and see to it that criminalsdo not spoil the lives of law-abiding citizens. Following this approach,it is easier to deal with "white collar bandits" who are dressed in suitsand sit in offices than with the predictable inhabitants of criminal dens.

PROBLEMS

The government has quite a few obstacles to overcome in order topull the Russian economy out of the shadows.

To begin with, corruption has penetrated deep into the power structures.How can the government ask its citizens to pay taxes in a situation whenlarge parts of budget funds are mis-appropriated? The second problem isthat a campaign to combat economic crime may be used to mask a new re-divisionof property and struggle against political rivals.

Moscow Mayor Yuri Luzhkov has more than once (for example, duringhis recent tour around the Altai Territory) proposed to cancel the resultsof privatization carried out in the early 1990s within the framework of"anti-crime efforts." Besides, the "rid the country of thieves" sloganhas been widely used by left-radical forces recently, and it is not inthe interests of the government to allow the Communists to lead workersin their "guerilla war" against crime. Something like that already happenedin Russia in 1917.

And finally, there is a very banal problem: a strong and sustainedcampaign against crime also requires financing.

Initially, 59.8 billion rubles ($2.6 billion) was allocated to financethe program of combating organized crime until the year 2001.

Later, following consultation with the Finance Ministry, the allocationwas cut to 3.3 billion rubles ($143 million).