As highlighted by one of the authors of the study SSE Riga Prof. Arnis Sauka: “For comparison with nearby countries, using the same approach, high levels of shadow economy are also found in Kyrgyzstan (44.5% of the GDP in 2018), Kosovo (39.5% of the GDP in 2018), Ukraine (38.2% of the GDP in 2018) and Romania (33.35% of the GDP in 2016), but considerably lower levels are found in the Baltic countries, especially Estonia (16.7% of the GDP in 2018).”

“Envelope wages and underreporting of business profits stand out as the two largest components of the Russian shadow economy. Underreporting of salaries or so called ‘envelope wages’ in Russia as a proportion of the true wage accounted for 38.7% on average in 2018, whereas underreporting of the business income (percentage of actual profits) was 33.8%. Underreporting of employees in Russia (percentage of the actual number of employees) is estimated at 28.2% in 2018,” highlights Prof. Sauka.

Some companies in Russia, rather than simply concealing part of the income or employees, are completely unregistered and therefore also contribute to the shadow economy. “We estimate that such companies make up 6.1% of all enterprises in Russia,” says Prof. Sauka.

Findings of this study also suggests that there is very high level of bribery in Russia: the magnitude of bribery (percentage of revenue spent on ‘getting things done’) is found to be 26.4%, whereas percentage of the contract value that firms typically offer as a bribe to secure a contract with the government in Russia is 20.6% in 2018. “More than one-third of companies in Russia pay in bribes more than 25% of the revenue or contract value,” highlights Prof. Sauka.

 

According to the findings, the highest levels of shadow economy are observed in Nizhny Novgorod region, reaching 64% of the GDP, followed by Moscow (47.1%) and Voronezh (41.1%). Study also shows that the size of the shadow economy in all sectors is close to 40% with somewhat higher levels in the construction and wholesale sectors, controlling for other factors.

 

“We find that entrepreneurs that view tax evasion as a tolerated behaviour tend to engage in more informal activity, as do entrepreneurs that are more dissatisfied with the tax system and the government. This result offers some insights into why the size of the shadow economy in Russia is so large – it is at least in part due to relatively high dissatisfaction of entrepreneurs with the business legislation and the government’s tax policy. We also find some evidence that higher perceived detection probabilities and, in particular, more severe penalties for tax evasion reduce the level of tax evasion, suggesting increased penalties and better detection methods as possible policy tools for reducing the size of the shadow economy,” highlight authors of the study.

Finally, while firms of all sizes participate in the shadow economy, findings of this study suggest that younger firms tend to do so to a greater extent than older firms.  The results support the notion that young firms use tax evasion as a means of being competitive against larger and more established competitors. Authors conclude that: “Our results highlight the need for serious reforms and actions that combat the shadow economy in Russia.”

"Shadow Economy Index in Russia 2017- 2018” was presented by SSE Riga Prof. Arnis Sauka on 30 January 2020 at the Higher School of Economics in Moscow.

About the study:

The aim of the Shadow Economy Index is to measure the size of the shadow economies, as well as to explore the main factors that influence participation in the shadow economy. We use the term “shadow economy” to refer to all legal production of goods and services produced by registered firms that is deliberately concealed from public authorities.

The Shadow Economy Index for Russia draws on methodology developed by Putnins and Sauka (published in Journal of Comparative Economics, 2015) using information from entrepreneurs. It combines business income that has been concealed from authorities, unregistered or hidden employees, and ‘envelope’ wages to estimate the size of the shadow economy as a proportion of GDP.  Index approach to calculate the amount and determinants of the shadow economy has been applied to numerous countries including Latvia, Lithuania, and Estonia (annual study since 2010), Ukraine, Kyrgyzstan Moldova, Romania, Poland and Kosovo to provide policy makers with information for policy decisions, as well as to foster a deeper understanding of entrepreneurship processes. Findings of the Index approach are largely consistent with other less direct approaches for estimating the size of the shadow economies, such as Schneider. An advantage of this approach is that it is able to provide more detailed information on the components of the shadow economy.

The survey in Russia was conducted during February - March 2019 and contains questions about shadow activity during 2018 and 2017. We use random stratified sampling to construct samples that are representative of the population of firms in Russia drawing on the official company register and covering all territory of Russia. 500 phone interviews were conducted with owners, directors and managers of companies in Russia.  We use same methodology to collect data in other countries, which we compare with Russia in this report, conducting minimum 500 interviews in each country.

This research was supported by a Marie Curie Research and Innovation Staff Exchange scheme within the H2020 Programme (grant acronym: SHADOW, no: 778118).

Link to the full report of the Shadow Economy Index for Russia https://www.sseriga.edu/shadow-economy-index-russia