Publication: Prism Volume: 3 Issue: 2

How the Shuttle Traders Save Russia

By Lidia Lukyanova

Economists say that "shuttle trading" is a unique Russian invention. In the course of their business, the shuttle traders criss-cross the country. Some import goods into Russia from abroad; others get their goods in Moscow and the big port cities and sell them in the hinterland. And still others make trips to the "near abroad," the former Soviet republics, for the most part, delivering Russian automobiles there to be sold.

For a normal economy, the "shuttle" business, i.e., buying goods from abroad to sell in wholesale markets and getting goods from shuttle traders in the cities to sell at a markup in the provinces, would be an absurd phenomenon, but in the ruined Russian economy, it is a form of independent individual entrepreneurial activity. In the last few years, the public attitude has warmed towards shuttle traders; they are no longer called "damned speculators." People see that the shuttle traders’ goods are the same as the ones in the shop windows of the beautiful stores, while their prices are significantly lower.

It is no secret that "shuttle traders" work by the sweat of their brow, making trips to countries where it is possible to buy consumer goods, including food, cheaply. They go as "tourists." Travel agencies in Russia live off of shopping trips to Turkey, Greece, the United Arab Emirates, India, openly recruiting those who are interested in the shuttle business.

The rumor that the shuttle business is actually run by commercial structures which masquerade as travel agencies, and that the shuttle traders are really their hired employees, can neither be proven nor disproven. It really doesn’t matter. If an activity isn’t forbidden by law, it’s legal.

Or rather, was legal. In August 1996, Decree No. 808 of the Russian government, "On the transportation of goods, not intended for production or other commercial activity, across the border by physical persons" went into effect. It introduced such serious changes in the way consumer goods are imported, and in the payment of import (and export) duties, that it threatened the very existence of the shuttle business.

At a session of the Federation Council, Moscow mayor Yuri Luzhkov rose to defend the shuttle traders from the new customs "extortion" in the form of the norms established in Decree No. 808. He said that, with the economy in its present state, the country’s population cannot be fed and clothed without the help of these "shuttle traders." "The shuttle traders… trade at prices which are affordable to low-income Russians. The family budgets of more than half of our country’s population cannot afford the outrageous prices in the stores."

How do these new regulations "smother" the shuttle business?

The value of goods which can be imported into Russia duty-free has been cut in half: from $2,000 to $1,000. A weight limitation has been introduced (50 kilograms), which never existed before. These limitations will lead to a decrease in the volume of goods imported, which will force shuttle traders to buy more expensive goods, which the customers at wholesale markets are not interested in. Demand will fall.

The income of the shuttle business will also fall, since their costs, according to experts’ estimates, are rising by 25-30 percent. They will not be able to cover those costs by raising prices, because the authors of the decree have also reduced the number of pieces that can be imported duty-free. For example, instead of 13 leather jackets, you now can bring in only six. Instead of 133 pairs of shoes, 62. Instead of 200 pairs of jeans, 100. And with socks, they got carried away: the former limit of 4,000 pairs has been cut to 1,666.

"Why that number? What sort of calculation led them to it?" the experts wonder. Do 1,666 pairs of different sorts of socks really always add up to the 50 kilograms that are not subject to import duties? All socks are not created equal, after all.

The decree introduced a single thirty-percent rate for customs duties on all sorts of goods. This significantly increases the duty which must be paid for many goods.

The new demand that each shuttle trader must register himself as an individual entrepreneur is also bewildering. Unfortunately, a shuttle trader’s profits are not given any favorable treatment by the tax code. Experts predict that many shuttle traders will simply get out of legal business to save themselves from these ruinous taxes. And in the final analysis, the population will suffer; prices will soar and the government will not be able to collect its taxes.

According to Aleksandr Ioffe, the Moscow mayor’s advisor on small business and the chairman of the board of the Russian Association for the Development of Small Business [RARMP,] the cause of this confusion is in the way that the Finance Ministry and the Economics Ministry work. They issue decrees which affect virtually the country’s entire population, without even consulting business structures.

These bureaucrats’ intentions, as always, are good: they want to reduce the amount of goods that can be imported duty-free, in order to bring more money into the treasury. But in experts’ estimates, the shuttle traders will not pour out the "shower of gold" that the Finance Ministry is expecting. It would be more realistic to expect prices on consumer goods, which the shuttle traders bring to the market, to soar. By August, right after the decree was issued, the prices in the Moscow markets jumped up by 25-30 percent, and in October, by roughly the same amount. One may also expect a storm of indignation from customers, since 80 percent of the country’s population is fed and clothed by these wholesale markets. The rise in prices at these wholesale markets will lead to a fall in the population’s standard of living.

But the consequences do not end here. More than 10 million Russians are involved in the shuttle business. If you take into account the members of their families (and shuttling is a family business), the lives of 30 to 40 million citizens depend on a business which the state is reluctant to recognize officially as part of the private sector of the economy.

The limits will lead to an approximately $15 million drop in the enormous market for cheap consumer goods. This will cut down the shuttle business as a social phenomenon as well. In the regions, experts predict that the number of shuttle traders will fall, in some places by 40, in others, by 70 percent. These people will be left unemployed and money from the state budget will be required to support them. Did anyone calculate whether the increase in customs duties would cover these costs before the decree was issued?

For many Muscovites and residents of large cities, especially seaports, the collapse of the shuttle business or its drastic curtailment will lead to the loss of the most profitable, although illegal, way of earning money that is available to them — renting apartments or rooms to those who are running wholesale markets. For most people, this income is what keeps them above the poverty line. If they are deprived of this extra money, then these families will have to be subsidized, at least up to the poverty line, again, at the government’s expense.

The shuttle traders, in their struggle for existence, will be forced to look for roundabout ways to stay in business and to avoid the ruinous import duties. And this will increase the amount of corruption and bribe-taking, above all, in the Customs Service, which isn’t exactly known for being honest now. On the average, customs officials at the Sheremetevo-2 international airport last no longer than three months. The main cause for dismissal — being caught accepting bribes.

The fathers of the new decree also explain the toughening of the customs regime by their desire to prevent Russia from being flooded with cheap imports. But the fate of Russian industry depends not on customs duties but on a far-sighted government policy: on a restructuring of industry, and a lowering of the tax burden on producers.

Andrei Podenok, the chairman of the Union of Russian Businessmen, called the increase in import duties a "boomerang," which will come back to hurt the budget it was intended to fill.

The shuttle traders themselves see the government’s decree as the next step towards the non-enforcement of the presidential decree and law on state assistance to small business. And even as a step towards breaking the promises Boris Yeltsin made during the presidential campaign.

Experts from the RARMP have appealed to Yuri Luzhkov, calling on him to ask the Federation Council to repeal government decree No. 808. It has not been sufficiently thought out. It would also make sense to hold hearings in the Duma on problems connected with the "shuttle" business. After all, it feeds and clothes 80 percent of Russia’s population.

Translated by Mark Eckert