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“...WHILE MOSCOW HAS THE MOST B I L L I ONAIRES IN THE WOR L D, 25% OF THE CITY L I V E B ELOW TH E MINIMUM WAGE. . .”

There are two Moscows, one which is official and the other, in the shadows and hidden from view. One could argue that Moscow is governed with acute awareness of the reality of what the city actually is; recognising the the official Moscow, whilst ignoring and missing out on the opportunity of taking account of the ‘other’ Moscow.

On December 15, 2010, Moscow police could barely contain the race riots organized by Russian Nationalist (Neo-Nazi) organizations when they broke out on Manezhnaya Square, in the centre of Moscow and adjacent to Red Square and The Kremlin (Economist, 2010). The riots were in response to the suspected murder of an ethnic Russian football fan by a group of migrants from the North Caucasus regions, and were evidence of a broader crisis in the city: an exacerbated social inequality within Moscow’s city limits.

Whilst the 2011 census recorded 11.5m people, unofficial statistics place the true population of the city at close to 18m (Federal State Statistics Service 2011). Put simply, there is no definitive figure on the population of Moscow. The differences between those officially registered as Muscovites and those who are not span a broad range of social benefits from housing provision, transportation, pensions, and employment opportunities; this means that while up to 18 million people contribute to the city’s economy, only a fraction of those are properly accounted for and aided by the state. No matter what the true population of Moscow is, one thing is clear: the way the city is currently managed is inadequate to achieve social cohesion which could be realized when equal economic opportunities were offered to all who operate in the city. The reluctance of Moscow to take account and deal with the true economic situation and social complexities have resulted in a city where inequality amongst its citizens constantly threatens to reach the point of breaking. Thus, while the race-riots of 2010 can be seen as racial and ethnic tensions, to view it purely as such belies a broader reading revealing a growing dissatisfaction with the economic and social opportunities in the city

In many ways, this event was a manifestation of the ‘boiling over’ of simmering social tensions prevalent in Russia over the 20 years following the break-up of the Soviet Union. While the official population of Russia has declined by 6m people since 1991 (Rosstat 2011), due to an influx of migration both attracted by the continued economic strength of Moscow and repelled from Russia’s hinterland and other neighbouring countries due to a decline in industry and employment (Light 2010), Moscow has continued to grow in size to become the largest city in Europe (and incidentally Europe’s only megacity!) In many ways, the riots of late-2010,while in this case flared by racial tensions, were far more representative of a range of other social and economic contributing factors (Economist 2010). Since 1991, with a series of rash privatizations and shock-therapy liberalization propelling the city into disarray (Stiglitz 2003) , Moscow has experienced a sharp reduction in its public sector. The subsequent social and economic deficits of liberalization have left Moscow in a state unable (and perhaps even unwilling) to adequately manage the full complexities and problems facing it today.

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MOSCOW TWO

The two faces of Moscow. Top: Moscow’s annual Millionaires Fair Bottom: One of Moscow’s many migrant construction workers. Credit: AFP

Moscow Two


(or lack thereof ) (Economist 2012). Moscow is not just a city divided between the ‘haves’ and have not’s,’ it is also marked by a schizophrenia of rules and regulations, dividing its citizens further into ‘cans and cannots.’ When we look at the data, Moscow’s deficits are disturbing; revealing an alarming inequality in both wealth and opportunity. Whilst Russia’s GINI coefficient (a measure by which the higher the number, the more unequal income is distributed) is 42.5, almost the same as the USA (41.0) Moscow’s is far higher at 62.5, which means that if Moscow were a city-state, it would rate as the fourth most unequal in the world (World Bank 2011). In real terms this means that while the city boasts the most number of billionaires in the world (Forbes 2012) (and a resultant escalation in the cost-of-living) a quarter of the city lives below the minimum wage (of 10,000rub per month) (Kommersant 2007). Likewise, the richest 10% of income earners control over 40% of Moscow’s wealth, and the same richest 10% earn on average 40 times more than the poorest 10% (8 times higher than the EU average) (Kommersant 2007). Furthermore, whilst officially Moscow’s average income is triple the national average (Rosstat 2011), 40% of people have not experienced a rise in their real incomes (adjusted for inflation) since 1991 (Parfitt 2011). Predictably, this disparity shows itself in a number of areas. In healthcare, while in 1991 only 10% of healthcare was private (ie: individually paid for), today this figure hovers around 60% (IISP 2007). The World Health Organization reports that in Moscow, “out of pocket payments for health care services have become a condition for getting adequate health care of full scope and of desired quality” (IISP 2007). Moscow is undoubtedly Russia’s economic powerhouse, contributing 24% of the country’s annual GDP (Rosstat 2011). However, as a consequence of Moscow’s immense economic power, Moscow’s economic climate also reflects it’s inequality. Fluctuations in the economy further reflect and are reinforced by the unequal distribution of wealth The heavy influence of the oil and gas

“...TH E R I C HEST 10% OF INCO M E E A RNERS CONTROL OVER 40% OF MOSCOW’S WEA LTH ...” sector means that Moscow’s economy is lop-sided with very large businesses dominating the economy. 60% of Moscow’s GDP is generated by the largest 100 companies, of which 33% is generated by two companies, Lukoil and Gasprom (Liuhto and Vahtra 2009). While the oil and gas is not produced in Moscow, it’s financial flows certainly pass through the city’s economic register, and thus much of the remainder of the economy is generated by services to the resources industry (Liuhto and Vahtra 2009). In addition to the economic classifications which divide the city, Moscow is a physically divided city; the current state of inequality is even further exacerbated by time and energy spent addressing transportation challenges. Whilst the transportation problems of the city are well documented (ranking as one of the most problem riddled cities on the IBM commuter pain index) (IBM 2011), it is often not mentioned that a lack of social mobility is also a consequence of a lack of physical mobility. Official employment is highly concentrated in the centre of Moscow with 60% of contracts contained within the Sadovoye ring (Mosstat 2011). At the same time, a ‘booming property market’ has driven up the cost of housing in the centre (the average price of a house rising by 600% since 2000) (Blackwood 2011). Furthermore, the unclear and haste reallocation of land stock in Moscow, bureaucratic difficulties of construction, and near-zero taxation on land have meant an increase in land speculation while the development potential within the city limits is squandered. All this has forced a long-distance commuter culture where citizens live far from their work, adding even further to the physical discrepancies facing Moscow. Simultaneously, whilst state spending on public transport is very low (at 45eur per person, compared to 900eur in London) (Cervero

2007) and the costs of building infrastructure is notoriously high (construction of roads per km in Moscow costs almost ten times more than in the EU) (RIA Novosti 2011). At an end-point, the result is a city continually trapped in gridlock with a public transport system at near-bursting point. In many cases, inequalities exist due to predisposed circumstances, or physical barriers, but in some cases there is an administrative body ensuring that these inequalities remain. It is certainly a cliché to say that Russia has a reputation for “informalities in bureaucracy”, or in less euphemistic terms, corruption. To conduct business in Moscow, one has to deal with informal practices which have more or less become engrained in the bureaucratic process. At the small scale, street merchants report paying ‘krysha’ (protection) money to police so regularly that they factor it in as a regular expense, akin to an informal tax. At the larger end, businesses involved in construction work in Sochi for the Winter Olympics of 2014 report having to pay kickbacks of more than fifty per cent of the construction cost (Ioffe 2011). Russia consistently ranks at the bottom-end of Transparency International’s annual corruption perception index. Currently, Out of a 182 countries surveyed in 2011, Russia ranks a 143, on par with Azerbaijan, Nigeria, Togo and Uganda (Transparency International 2011). However as consequence to the breakdown in the public sector and the social deficits of liberalization, the processes by which the city ‘actually operates’ has become distinct what is “official”. In Moscow, whose legislative environment is called by Hugh Barnes as “hyperlegalism” (Barnes 2011), overarching and inoperable rules and regulations actually give rise to anarchy. This project seeks to examine the informal sector in Moscow; whereby an institutionalized flouting of “the rules” and lazzaire-faire acceptance of informal dealings is actually the system in which the city is able to function. We find that Moscow is home to a proliferation of the types of firms and economic spaces which some may consider ‘backward’ and unconnected to the advanced service economy (of which Moscow aspires to belong to). To mention a few: street trade, sexwork, bootleg alcoholic production, gypsy taxis, unauthorized garbage disposal, underground casinos. Although the individual firms that make up this sector are small in scale, as an aggregate, the informal sector in Moscow extremely large and is vital to the proper functioning of the city; yet denied the benefits of belonging to the formal economy. Through an investigation of the informal sector, we reveal that full extents of Moscow’s economic prowess are not being adequately accounted for; where a huge potential for economic diversification and social equalization is laying dormant because of reluctance by the authorities to realize and incorporate the true realities and complexities of the city.


BUSINESS It’s now a cliché to say that Moscow’s economy is heavily influenced by large businesses, typically in the oil and gas sector and often owned (or at least under the heavy influence) of the state. As well as being the political centre of Russia, it is also the economic heart, contributing 24% of the country’s annual GDP. The heavy influence of the oil and gas sector has meant that Moscow’s economy is lop-sided with very large businesses dominating the economy. 60% of Moscow’s GDP is generated by the largest 100 companies of which 33% is generated by two companies, Lukoil and Gasprom. However, as a consequence of or perhaps due to the complacency of strong resource-driven growth rates over the past 10 years, Moscow’s business climate also reflects its inequality and difficulties of entry. Russia is one of the few countries in the world to fall steadily in a number of business rankings. Out of a hundred and seventy-eight countries surveyed in 2011, in the Forbes ‘Best Countries for Business’, Russia ranks a 102, immediately below Pakistan, Bangladesh and Nigeria. It also ranks in the bottom quartile in the World Economic Forum “Global Competitive Index 2011” and the World Bank’s “Ease of Doing Business Index 2011.” In a state decree, “On Priority Measures for the Development and State Support of Small Enterprises in the Russian Federation”, issued in 1993, small enterprise development was described as “one of the most important directions of economic reforms, contributing to the development of competition, supplying the consumer market with products and services, creating new jobs, and formatting a wide stratum of owners and entrepreneurs.” (Bain 2007). However, on paper, the level of entrepreneurship in Russia has remained notoriously low. Whilst for every 1000 people in Russia there are 6 SMEs (Small to medium enterprises of less than 100 employees), there are 45 in the EU and 75 in the USA. A key contributor to the stagnation for formalized small business growth is the enormous amount of regulations and the accompanying schizophrenic processes with which prospective entrepreneurs have to navigate. To officially register a business involves 9 procedures taking a total of 50 days and costing aprox $200 usd (over half of the minimum monthly wage), which is double the OECD average time and cost (IFC 2011).

Russia’s red tape is perhaps best symbolized by procedures in dealing with construction permits. Officially obtaining a construction permit in Moscow involves 51 procedures taking a total of 704 days and $18500 (almost double the annual per capita income) three times the average OECD time and four times the cost (IFC 2011). The most time-consuming procedure is requesting and obtaining the development plan for a land plot at the Moscow Architecture and City Planning Committee (180 days). Officially, this particular procedure is free but according to an interview conducted with a construction company manger, “unofficial costs are typically involved in “expediting” a 180-day process”.

“...SCHIZOPHRENIC P R O C ESS ES W H I C H WO U L D - B E ENTREPRENEURS H AV E TO N AVI GATE . . .” In 2004, a study on the formation of small businesses in Russia found that there were approximately 30,000 state documents (not including the laws) regulating enterprise activities (Bain 2007). As a consequence to excessive and difficult rules and regulations, operators are often forced into conducting business off the books and into the realms of the informal sector.

Russia 120 out of 183

Ease of Doing Business Index (World Bank Group) < 70

70-90

90-120

120-140

140-160

160-183

Data N.A

International Finance Corporation (World Bank Group) “Doing Business: Measuring Business Ratings - Russia,” June 2011

Moscow Two


GLOBAL COMPETITIVE INDEX 2011 - WORLD ECONOMIC FORUM

EASE OF DOING BUSINESS INDEX 2011 - THE WORLD BANK

BEST COUNTRIES FOR BUSINESS 2011 - FORBES

INDEX OF ECONOMIC FREEDOM 2012 - WALL STREET JOURNAL

62

IRAN, IRA RAN N, IISLAMIC SLAM SL AMIC AM IC R REP EP

116 11 6

PALAU PALA PA LAU LA U

98

MADAGASCAR M ADAG AD AGAS AG ASCA AS CAR CA R

140 140

ALGERIA ALGE AL GERI GE RIA RI A

63

URUGUAY URU RUGU GUAY GU AY

117 11 7

KOSOVO KOSO KO SOVO SO VO

99

PAKISTAN PAK AKIS ISTA IS TAN TA N

141 141

GUINEA GUIN GU INEA IN EA

64

LATVIA LAT ATVI VIA VI A

118 11 8

NICARAGUA NICA NI CARA CA RAGU RA GUA GU A

100 100

BANGLADESH BANG BA NGLA NG LADE LA DESH DE SH

142 142

HAITI HAIT HA ITII IT

65

VIETNAM V IETN IE TNAM TN AM

119 11 9

CAPE CAPE VERDE VER ERDE DE

101 101

NIGERIA NIGE NI GERI GE RIA RI A

143 143

MICRONESIA MICR MI CRON CR ONES ON ESIA ES IA

66

RUSSIAN FEDERATION

120

RUSSIAN FEDERATION

102

RUSSIAN FEDERATION

144

RUSSIAN FEDERATION

67

PERU PER ERU U

1211 12

COSTA COST CO STA ST A RI RICA CA

103 103

KENYA KENY KE NYA NY A

145 145

CENTRAL AFRICAN REP. CENT CE NTRA NT RAL RA L AF AFRI RICA RI CAN CA N RE REP P. P.

68

COLOMBIA COL OLOM OMBI OM BIA BI A

122 12 2

BANGLADESH BANG BA NGLA NG LADE LA DESH DE SH

104 104

CAMBODIA CAMB CA MBOD MB ODIA OD IA

146 146

BOLIVIA BOLI BO LIVI LI VIA VI A

69

SLOVAK REPUBLIC SLO LOVA VAK VA K RE REPU PUBL PU BLIC BL IC

123 12 3

UGANDA UGAN UG ANDA AN DA

105 105

UKRAINE UKRA UK RAIN RA INE IN E

147 147

NEPAL NEPA NE PAL PA L

70

RWANDA RWA WAND NDA ND A

124 12 4

SWAZILAND SWAZ SW AZIL AZ ILAN IL AND AN D

106 106

YEMEN YEME YE MEN ME N

148 148

SÃO TOMÉ AND PRÍNCIPE SÃ ÃO TO MÉ ÉA ND P RÍNC RÍ ÍNC NCIP IPE IP E

71

JORDAN JOR ORDA DAN DA N

125 12 5

BOSNIA AND BOSN BO SNIA SN IA A ND HERZEGOVINA HER ERZE ZEGO ZE GOVI GO VINA VI NA

107 107

UGANDA UGAN UG ANDA AN DA

149 149

GUINEA-BISSAU GUIN GU INEA IN EA-B BIS ISSA SAU SA U

Officially obtaining a construction permit in Moscow involves 51 procedures taking a total of 704 days and $18500 (almost double the annual per capita income).

To obtain an electricity connection for a newly constructed building in Moscow it takes 10 procedures & 281 days & $174,000 (180 times the average wage)

three times the average OECD time and four times the cost.

th hr times the average OECD time me three and two-hundred times the cost. and an

It takes 10 days and $1,800 to complete every official procedure to import one container into Russia by ocean transport.

It takes 36 days and $1,850 to complete every official procedure to export one container into Russia by ocean transport.

Double the OECD cost, and triple the time

Double the OECD cost, and triple the time

In 2004, a study on the formation of small businesses in Russia found that there were approximately 30,000 state documents (not including the laws) regulating enterprise activities

103 business activities require licences to operate. Including: bread-making and operating an antique shop.


1922

1934

1939

1960

1978

1985

2012 (?)

EXPAN S I ON

Although in the past Moscow has expanded to its infrastructural boundaries radially (firstly from the Boulevard Ring to MKAD ring road in 1961), the new administrative region of Moscow city will not expand to the next ring road (the CKAD; currently under construction); nor have the authorities proposed to merge Moscow City with Moscow Region. Instead,new boundaries were drawn to new borders to the southwest of the existing Moscow City territory. According to the Moscow City Government website, the southern and southwestern outskirts were chosen in part because they comprise “a relatively weakly urbanised sector of the Moscow region” (Moscow City Government 2011), counting some 250,000 people. Essentially, the redrawn borders were

“... T H E E X PANDED TERRITO RY IS TO B E P R ECISELY IN THE AREA W H I C H MAKES THE LEAST CO N TRIBUTION TO THE P R O B L EMS WHICH AN EXPA N S I O N COULD ACTUAL LY RELI EVE ...” chosen to include the least amount of people into Moscow Federal District, or in other words, to exclude the most amounts of people from gaining the benefits of which a Moscow Citizen currently receives. The borders were later revealed to be drawn by the Ministry of Finance; with the aim that the taxrevenues receied from the addition of the new territory would be lower than that which would have to be paid out to the “new Muscovites” which would be captured by the expansion. In making a decision of exclusion, the redrawn territorial borders do take into account the economic contribution to Moscow of those who either currently reside outside and commute into the city or those who are not yet registered as official residents of Moscow City. The expanded territory is to be precisely in the area of the Oblast which makes the least contribution to the problems which an expansion could actually relieve. In the press-conference to announce the expansion, Mayor Sobyanin proclaimed proudly that “We are not only going to keep the present social policy standards in the capital, but improve them annually, and this includes

the handicapped. This is because one of our basic programs is the provision of social support to Muscovites” (Adamova 2011). Consequently in January 2012, the Department of Social Security of Moscow City Government announced that “from July 1 2012, social benefit recipients residing in areas that are to become part of Greater Moscow will be entitled to all benefits currently paid in Moscow City”. The new territory would pick up an additional 250,000 extra social benefit recipients which, based on an average social benefit spendings of $1600 USD per month (as opposed to $800 USD in Moscow Region), would add approximately $400m USD in additional social expenditure per year (Moscow City Government 2012). However, this spending is offset by the project $1bn tax revenue to be captured when the region is incorporated into Moscow City. Thus, the Moscow budget receives a windfall surplus revenue of $600m

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Apparently, Moscow is expanding. On June 17, 2011 Dmitry Medvedev proposed to expand Moscow’s borders and to create a new Moscow federal district (Al-Jazerra 2011). Shortly after, Moscow Mayor Sergei Sobyanin announced that the city’s territory would be expanded by more than two times (by 144,000 hectares or 356,000 acres). In August 2011, a draft proposal for Moscow’s expanded borders was released, and in January of 2012 the contestants announced of an international competition to propose a development concept for the new federal district (Al Jazerra 2011). This decision – in essence, an attempt to find a tabula rasa to build a ‘new city’ – is declared publically to be aimed at easing the dependency on the core of central Moscow (relieving the center of the city) by creating new financial and moving governmental functions in the new territory as incentives for the development of workplaces.

Moscow has traditionally expanded its city boundaries on its infrastructural borders - from the Kremlin walls, to the boulevard Ring, to MKAD. The next logical step is expanding the city to CKAD, the currently under construction new ring road.

Whilst if Moscow City were to be expanded to merge with the territory of the CKAD, then an extra $4bn in taxation revenue will be captured. However, by the same calculations, an extra 5m Muscovites have to be eligble for the same social spending, increasing spending to $8bn USD. This leaves a budget deficit of an extra $4bn in extra spending for the CKAD expansion; a significant cost over the SW zone expansion. Furthermore, due to an aging population, calculations by Renaissance Capital project that unless the retirement age is raised, spending on pensions will need to expand by a third in real terms over 20112030 (Tong 2011). As social support is currently the second largest expenditure (after transport infrastructure) in Moscow’s budget, the decision to the draw new borders borders in the SW zone to include as little extra persons as possible, appears to be driven, at least in part, to mitigate the added burden of an increased social security expenditure. The decision to expand Moscow to a new territorial zone which deliberately excludes the most amount of additional citizens implies a short-term decision making goal within the Moscow authorities to limit the amount of social expenditure in order to cut-costs. However, by limiting the expansion zone, it is also limiting its responsibility and scope to deal with effectively the full extents of economic contribution to Moscow, again adding to the Moscow’s inherent inequality.

Moscow Two


SW Expansion

CKAD

100,000 People 50km Population Distribution, Credit: Rosstat

-$4BN

Captured tax revenue = +$4bn

Captured tax revenue = +$1bn

5m new Moscovites @ -$1,600 per year = -$8bn extra spending social benefits to be paid

250,000 new Moscovites @ -$1,600 per year = -$400m extra spending social benefits to be paid

Projected spending deficit = -$4bn

Projected income = +$600m

$

600m


I NFORM A L ECO N O M Y S ECTO R S The following section does not aim to provide an exhaustive scientific empirical study of the complete size of the informal economy in Moscow. Rather, by selecting various informal activities which are well known to Muscovites and showing their size, the aim is to reveal their importance to how the city functions.

Gypsy Taxi

Shuttle Trading (челноки)

Markets

There are aproximately 50,000 taxis in Moscow, of which 40,000 are not licenced (Kostina 2011). Average monthly revenues per car range from $1000 $3000 p.m. (from interviews).

Shuttle trading accounts for aprox. 1/4 of Moscow’s imports of goods (Yakovlev 2006). Total imports of goods 2011 $115.5bn. Shuttle traders report revenues of ~30% of value of imported goods.

There are 50 semi-regulated markets which contribute an estimated 18% of Moscow annual retail turnover (Cherkizon 2009).

Total Annual Revenues

$ 1B N

Total Annual Revenues

$ 11 .4 B N

Total Annual Revenues

$ 8 .1 B N

Sex Work

Bootleg Alcohol

Casino

There are aproximately 200,000 sex workers in Moscow, ranging from highclass escort services to street-workers. Each earn around $2000 per month (some more and some less) (Sky 2011).

Illegally produced alcohol acconts for aprox. 60% of total sales. Average alcohol consumption per person per year 18lt. Minimum price standards at $3/lt. (Time 2009)

July 2009, Federal Gov. bans all casinos across Russia (except 4 provinces). Reports that up to 80% all gambling has moved underground. 2008 the legal gambing industry was $1.8m. (Ria Novosti 2011)

Total Annual Revenues

$ 4 .8 B N

Total Annual Revenues

$ 0 .4 B N

Total Annual Revenues

$ 1. 1B N

Moscow Two


Waste Disposal

Illegal Construction

Pornography

Moscow produces 39m tonnes of waste per year of which only 50% is properly accounted for (Wikileaks 2008). The rest is dumped in illegal landfills. The aproximate ‘cost’ for illegal dumping is $200 per tonne

Whilst likely to be understated, 431,200sqm of illegal construction activity was reported in 2011 with an average cost of (housing) construction at $2000 psm (Rosstat 2011).

S.242[2] Russian criminal code: “prohibiting sale and distribution of pornographic materials.” Estimates are that the Moscow porn industry generates $100m in revenues per month (Der Spigel 2011).

Total Annual Revenues

$2BN

Total Annual Revenues

$ 0 .8 B N

Total Annual Revenues

$ 1. 2 B N

Illegal Billboards

Informal Microfinance

Kiosks

80% of all outdoor advertising is illegally placed. 2011 total outdoor advertising value, $380m (Moscow News 2011).

UNDP estimates external informal finance equivalent to 1.8% of Moscow GDP ($495bn). (UNDP 2011)

There are aproximately 20,000 kiosks in Moscow, of which only 20% have the proper operating licences. The average annual turnover is aproximately $330,000 depending on location. (Moscow News 2011)

Total Annual Revenues

$ 0 .4 B N

Total Annual Revenues

$ 8 .9 B N

Total Annual Revenues

$7BN


Whilst the above sectors are not a fully scientific study of the informal economy in Moscow, they all represent conservative estimates of what each sector could be. Taken as an aggregate, they represent a $47bn industry sector, which would be the largest non-resource based company in Russia. Whilst it is obvious that these sectors are already productive, the operators who are in the informal sphere are caught in a trap that places boundaries on how a business can develop. Although informal systems provide a means for enterprise survival, they do not support the growth of enterprises in a legitimate way and by remaining informal they inherantly remove capital from the formal economy impeeding the ability of the state to provide proper services to its citizens. While this paper attempts to show that informal economy in Moscow is already a very large and productive informal sector, it should not be mistaken for an argument for further unbridled liberalization. Working in the informal economy means that the operators are working outside a proper regulatory legal frame work, and hence are unable to fix and record assets in order for entrepreneurs to access credit to grow their businesses. The majority of operators in the informal economy cannot make the market work to their advantage because they are fragmented in non–specialized groups where “labor cannot be divided efficiently and where they lack the means to define, benefit from or enforce economic rights” (De Soto 2000). In Moscow’s “extralegal world,” only the elite are able to create wealth, thereby generating frustration among those outside the “system” (Bain 2007). Despite liberal economic theory that envisions the market as eliminating biases in the allocation of resources, due to the hasty liberalisation process; discriminatory extra market forces have operated, restricting access to resources. For those working outside of the law, informal, or extralegal assets become dead capital when cannot be used effectively for economic transactions, guarantees, contributions or compensations (De Soto 2000). For operators in the informal economy, a lack of proper accounting processes, transactional recording, legal working conditions create a climate where informal operators are unable to access credit or external capital in order to grow their businesses (De Soto 2000). The effects of instability in the Russian economy has increased the risk to banks and financial institutions of loaning money; substantial collateral is demanded in order to receive credit and has resulted in significant interest rates charged, ranging from 20-25% p.a from Nikoil bank and the National Development Bank (Bain 2007). Correspondingly, Among newly established firms, only one in ten manages to get bank loans, and five times as many borrow from private sources. one in ten start-ups to get bank loans, and

R U S S I A

RU

1

five times as many borrow from private sources (Polishchuk 2002) Significantly however, demands of a proper registration and residency permit are an impediment to many merchants in the informal

“ . . .W H E N WO R K I N G O U TS IDE OF T H E L AW, I N FO R M A L , ASSETS B ECO M E D E A D CA P I TA L WHEN T H EY CA N N OT B E U S E D E F F ECT I V E LY FO R C R E D I T CO L L AT E RA L , G UA RA N T EES, CO N T R I B U T I O N S O R CO M P E N SAT I O N S. . .” economy – hence, only one third of Muscovites (who work in the non-government sector) have a bank account (Pravda 2004). Consequently, we see the rise of many microfinance options, of which flyers litter many metro station entrances. These services are provided by individuals who have the necessary requirements to borrow money from a legitimate bank, after which the money is subsequently lent to the final borrower. A call to a micro-lender asking for a $2000 loan revealed that the terms were that $4000 would have to be paid-back after 6 months. Viable credit is not available to entrepreneurs who operate in the shadow economy, consequently they will always be excluded from opportunities to develop a fully legitimate enterprise (De Soto 2000).

Top 15 Non-Resource Companies Company

Sector

Sales volume in 2010 ($ million)

Moscow Informal Sector (Sample)

Diversified holdings (Transport, Retail, Construction Infrastructure, Media, Leisure)

$47.1bn

2

РЖД (Railways)

Transport

$43.9bn

3

Sberbank of Russia

Banks

$31.7bn

4

AFK System

Diversified holdings

$28.0bn

5

Transneft

Transport

$14.7bn

6

VTB Group

Banks

$12.4bn

7

X5 Retail Group

Tetail trade

$11.2bn

8

Vimpelcom

Telecommunications

$9.5bn

9

The Svyazinvest

Telecommunications

$9.2bn

10

Magnit

Retail trade

$7.7bn

11

Megafon

Telecommunications

$7.1bn

12

OPK Oboronprom

Engineering

$5.9bn $5.8bn

13

Auchan

Retail trade

14

Stroygazmontazh

Infrastructure

$5.1bn

15

METRO

Retail

$4.3bn

< If calculated as an aggregate, the sample taken in this report would represent the largest non-resources company in Moscow. Source: Forbes 2011

Moscow Two


TRACKI N G M ON EY F LOWS As a closer examination into the micro-economy of firms in the informal sector, the Russian phenomenon of shuttle trade (or челноки) was closer examined. Aproxmately 50% of the price of a product sold in a market is due to bribes to circumvent inoperable laws.

the cost of buying goods, includes the following items: payment for the “shop-tour”, cost of transportation of goods, rental for a retail outlet, wages paid to a hired salesperson include travel expenses and cargo agents.

Coinciding with the liberalisation of the Russian economy, the rise of smallscale wholesale open-air markets was closely related to the phenomenon of “shuttle” imports of consumer goods, which emerged on a massive scale in Russia in the early and mid-1990s. Shuttle trade is the phenomenon of traders who shuttle back and forth between major port cities (outside of Russia) buying goods from cheap sources and selling them back in Russia.

Travel Expense. Shuttle traders typically pay a fixed cost for a ‘shuttle tour,’ who arranges the trip. Usually a fixed ammount aproximately $300-$400 for a single 3-4 day trip (Yakovlev 2006). Naturally, depending on starting and end point.

Whilst its peak was in the mid-90s, it still happens to an extent. According to some estimations, up to 10 million Russians were engaged in shuttle business at all its stages (Yakovlev 2006). It is estimated that the size of shuttle trading is equivalent to 1/3 of Russian imports (IMF 2007).

Cargo Agents. Though in mid-90s there still remained traders who carried their cargo in-flight, today, typically the mechandise is offloaded to cargo ‘agents’ who pay-off custom’s officials to underreport cargo and thus avoid excess customs-tariffs. Typically 20% of worth. (Yakovlev 2006)

In the 90s, permission to import goods for up to $5000 duty-free was given to physical persons and made the legal base for this success. Whilst shuttle trade were blamed practices leading to taxation payments and customs duties not reaching state finances, due to the inherantly long supply chain, it is also recognised for the economic and social benefits which it provides to a number of participants. The practice of shuttle trading not just provides economic benefits to the traders themselves but also the organisation of shop tours, transportation, storage and sale of goods at wholesale markets and in retail trade. While on a field trip to Izmaylovo market and The All-Russia Exhibition Centre, several of the traders confirmed that their goods were supplied by shuttle traders, with the goods many Moscow originating from a key transit point from Laleli market in Turkey. The reason that Laleli market appears to have gained prominence is due to two factors; a relatively easy visa-on-arrival availiable to Russian citizens, and its proximity to Moscow. While, traders were not more forthcoming or knowledgeable, this initial observation is backed by a report (Yakolev 2003), which follows money flow through various supply chains (illustration below).

In 2006, customs were further restricted that only $2000 worth of goods were allowed to be brought in to discourage shuttle trade. Whilst this had the effect of slightly reducing the amount of shuttle trade, Yakolev (2003) claims that this merely increased the payments made to custom’s officials in under-reporting.

Traditional structure of business expenditures in the “shuttle business”, aside of

Consumer

100%

25%

Krysha

10%

Rental

(Retail) Market Sellers

50%

Authorities

50%

Krysha

>

Whilst taxes are not paid (or the less than full ammount paid when underdeclaring goods), a significant ammount of the product costs is associated with circumventing the law (shown in red). At the mark ets, krysha is paid to ensure that local police do not hassle traders, and for taxation officials not to investigate. Cargo agents pay customs officials to under-declare the goods imported. (Yakovlev 2006).

Infrastructure of Russian “Shuttle” Business (челноки). Funds paid to circumvent laws shown in red. Source: Yakolev 2004

50%

Authorities

20%

Authorities

40%

Factories

40% Cargo Agents

Ismayevo

50%

Shuttle Traders

30%

Laleli Market Shops

10% Travel ‘Tour’


Lam Le Nguen. Moscow Two