Publication: Prism Volume: 5 Issue: 3


By Valery Virkunen

The debt which the Russian government owes to budget enterprises and organizations for salaries grows year after year and now totals, according to the State Committee for Statistics, 20 billion rubles–roughly US$1 billion. Doctors, teachers, scientists and soldiers go for months on end without receiving their salaries. There is no money for them in the treasury, and the reason is mass tax evasion, which seems to have become something of a national sport. According to the Russian Tax and Duty Ministry, only 16 percent of companies and organizations in Russia have not committed any serious infringements on their payments to the budget. As many as 34 percent of companies pay no taxes whatsoever and do not even submit returns to the tax authorities. The amount of money in the “hidden” economy is now equal to the country’s budget.


Tax evasion and nondisclosure of property and income are seen by financial authorities throughout the world as a serious crime against the foundations of the state. Indeed–how can a state implement policies if it has no funds? According to Russian Finance Ministry statistics, the authorities are collecting no more than 65 percent of the estimated level of tax contributions. Experts note that this is a fairly low indicator–approximately equivalent to that of Italy in the 1970s. Russian courts may impose a penalty of a large fine or up to five years’ imprisonment for nondisclosure of income. Russian justice, however, has yet to create any such legal precedent. No serious tax criminal has yet been put behind bars.

Of course, Russia, like other countries, has an income declaration form which all citizens are supposed to complete. Meanwhile, the expenditure of wealthy Russians still lies beyond the range of the tax bodies: They cannot ask state officials with modest salaries or personalities with no specific occupation where they got the money from to build their mansions worth hundreds of thousands or even millions of dollars; they cannot ask with what income they purchased their flash cars, yachts and foreign property.

Unfortunately, the investigation of the relatively “low-key” tax offenses (in comparison with armed robbery and murder) is continually postponed for various specious grounds. Moreover, such investigation requires in-depth knowledge of economics, finance and taxation law. The level of training of officials of the Russian tax police and Interior Ministry departments responsible for economic crimes is not sufficient for carrying out competent investigations. For these reasons, 9 out of 10 people accused of tax crimes escape liability.

The database of the Russian Federal Tax Police Service contains information on thousands of big names and well-known organizations which could be charged with not paying particularly large-scale taxes. However, the tax police do not presume to approach them: These figures either hold high state posts or enjoy the protection of well-known politicians.


The tax authorities’ explain their inability to collect taxes by claiming both that the relevant laws are not in place and that they do not have the appropriate level of technical support. Russia suffers a serious dearth of up-to-date computer technology, which would enable the government to compile a database of all Russia’s taxpayers and open a federal tax file for every citizen, company and bank. Nevertheless, the authorities know everything there is to know about the persistent tax defaulters–at least, according to the Russian Tax and Duty Ministry. The largest nonpayer is the fuel and energy complex, followed by the railways and the car-manufacturing industry. Metallurgical enterprises have also run up large tax debts.

Trading companies conceal billions of rubles from the tax authorities. Suppliers get cash for their goods, but their returns do not reflect the true volume of sales. To give one example: The Moscow tax inspectorate reported that the volume of daily takings doubled when there was a tax inspector sitting next to the collector.

Large sums of money in the alcohol market are concealed from taxation. In the Soviet Union–when there was a state monopoly on alcohol, production and sales–duty was levied strictly and in full. Statistics show that this money made up 32-35 percent of Russia’s budgetary income. Since that time, the situation has changed. The state monopoly on the production and sale of alcohol disappeared in the post-Soviet reforms. today the “vodka” tax does not even amount to 8 percent of the budget income though Russians did not start drinking less. Most of the excess profit goes into the pockets of the underground alcohol producers and importers. Despite the government’s decision to reintroduce the alcohol monopoly, it is not yet possible to collect all the taxes. Vodka manufacturers and retailers bribe officials, who turn a blind eye to the antics of the alcohol barons.


Apart from companies, banks and organizations, a number of wealthy and very wealthy people in Russia who do not pay their taxes in full. Tax authority specialists admit that taxing individuals is uncharted territory, the exploration of which is not permitted by the authorities. Many citizens have several apartments which they lease at a high rent, but do not pay tax on that income. This problem is particularly acute in Moscow, St. Petersburg, Nizhny Novgorod and other large industrial centers. For example, a tax inspection of just one fashionable apartment block in Moscow, not far from the U.S. Embassy, showed that of thirty-eight apartment owners earning between US$1,000 and US$2,500 per month, only ten were registered at the tax office and paying the appropriate taxes.

Russia’s wealthiest citizens hide their income abroad. However, Tax and Duty Ministry officials are not allowed to conduct a strategic exchange of information with Israel, Switzerland the United States or other countries about the bank accounts of Russian citizens. Yet law enforcement bodies and tax authorities of those countries are not at all averse to establishing such a practice with their Russian colleagues. “Black” money from Russia has a corrupting influence on business in these countries and feeds the criminal communities there.

The main method for hiding the income of Russian individuals and companies lies in offshore companies and banks in tax havens–in Cyprus, for example, or the Bahamas or Iceland. Russian taxpayers regularly wire their money there, thus avoiding taxes. According to figures from the Office of Public Prosecutions, Russian residents have set up over 60,000 offshore companies abroad, and capital exported from Russia illegally is transferred to these companies’ accounts. In 1998 alone about US$9 billion was illegally exported from Russia–an amount significantly higher than the loans extended to Russia in that period by international financial institutions, including the International Monetary Fund. The Interior Ministry claims that US$300-350 billion has been taken out of Russia over the last few years.

The Office of Public Prosecutions, however, does not allow even the slightest leak of information about the illegal export of Russian capital to offshore zones. The authorities have yet to name one company which has set up an offshore company on the Bahamas. High-ranking Interior Ministry officials are also reluctant to talk about big tax dodges. One example will suffice–that of the large Russian car manufacturer AvtoVAZ. In order to avoid paying tax, the companies’ managers struck a fictitious deal on the supply of huge quantities of builder’s sand, which had not even been extracted, but which was lying quietly in the sand dunes on the shores of the Caspian Sea. Details of the chicanery at the huge car plant made it into print: Russian Prime Minister Yevgeny Primakov recently referred to this tax fraud in one of his television interviews. Nevertheless, the car giant bosses have not been penalized for the racket.


To avoid paying tax, Russian businesses and commercial banks often use the so-called “black cash” trick. Business partners pay for products or services in cash, using both rubles and foreign currencies. According to the Central Bank, in addition to ruble sums, no less than US$40 billion in cash circulates in Russia and feeds the hidden economy. Naturally, this “black cash” does not feature in any accounts. It is only possible to monitor these sorts of financial operations through a detailed audit, but the tax authorities undertake these very rarely.

Another widespread tax dodge is to open a multitude of accounts in several banks simultaneously. The proceeds from a sold product go to ten different places which the tax authorities are in no position to monitor. There is no electronic database of the financial operations of enterprises; no one is capable of monitoring the real accounts and tracing the real business. The taxpayers take advantage of this. The Tax and Duty Ministry has identified cases where enterprises have opened hundreds of accounts in dozens of Russian banks. The head of one of the Ministry’s departments points out that his division has the right to debit the accounts of companies violating the tax laws with the sum of the tax owed. But how can they debit the accounts if they have to find them first?

Russian tax experts are convinced that three or four accounts is quite enough for a company, taking the features of Russia’s primitive capitalism into account. But proposals to impose strict controls on tax contributions have not yet met with a sympathetic response in either the government or the State Duma. Confiscation of debtors’ property creates a real hullabaloo. The tax authorities are in combat with not only the tax defaulters, but also the politicians and lobbyists who cover for them, and who are paid generously for their services.


If one were to ferret around in the accounts departments of Russia’s persistent tax defaulters, one would always find large sums of money. The managers of both state and private Russian enterprises live very comfortably. The bosses have plenty of money. They are not just avoiding paying tax. They are not developing production; they are not creating jobs; they are not even paying their staff salaries. Is it possible to combat tax evasion? It looks as though the universal corruption in the Russian authorities does not allow it to happen.

Experts believe that only bankruptcy will help raise taxes. It is necessary to bankrupt persistent tax defaulters and transfer their companies to other owners. If owners knew that they might lose control of their companies, they would, of course, pay both taxes and salaries. As yet, no tax debtors have been bankrupted in Russia.

Not long ago, the former head of the Russian State Tax Service Aleksandr Pochinok said that the problem of defaulters in Russia was about to be resolved. In particular, he promised to begin collecting property taxes from the Odintsovsky region of Moscow Oblast, where Russia’s upper classes have built thousands of mansions. The owners of these villas do not pay taxes, though the value of their property is several hundred thousand or even several million dollars. There is a simple trick to avoid paying tax: not registering with the tax authorities. The villa owners explain their failure to register by saying that the building work is not yet finished: one house is missing a door handle; another is painted the wrong color; a third has a window which doesn’t shut properly.

According to Russian law, if construction is not complete, the owners do not have to register their homes, even if they live there permanently in the lap of luxury. This is happening all over Russia. In recent years more than 5 million private luxury homes have been built.

At the time Aleksandr Pochinok resented this a great deal, and was planning to fly over the Odintsovsky region in a helicopter to root out the rich property owners and force them to pay their taxes, whatever it took. But his desire to fill the state’s coffers suddenly waned. He was made an offer he couldn’t refuse. The president’s administration sold him a wonderful villa in the exclusive village of Uspenskoye near Moscow–in the very same Odintsovsky region–for the symbolic sum of US$75,000. Experts claim that the sale price was reduced at least tenfold. Suffice to say that the rent for such a mansion in such a fashionable place would cost tenants US$150-200 per year. Although Aleksandr Pochinok had to leave his job as chief tax officer, today he holds the very distinguished–and lucrative–post of head of the finance and credit control department of the Russian government bodies.

Judging by information from the Tax and Duty Ministry, Pochinok’s plan has collapsed. The ministry’s officials admit that they have not managed to increase the collection of property taxes. The project has not moved forward, though an inventory of property and plots of land was begun. According to the tax authorities this requires a great deal of time and money. The Odintsovsky regional budget does not have the funds available, so the chief violators of Russia’s tax laws can sleep soundly in their beds.

Aleksandr Pochinok was succeeded as head of the tax authority by the former finance minister and former Duma deputy Boris Fyodorov, who was implicated in the big story of the illegal export of 182 million dollars’ worth of gold and diamonds from Russia to the US. Fyodorov, who is considered to be one of the political figures closest to Yeltsin, was not left untainted by the scandal. Investigators from the office of public prosecutions started calling him in for questioning and pressing for his arrest.

It was somewhat embarrassing to keep a “tarnished” politician as head of the tax service, so Georgy Boos replaced him. Boos has yet to achieve any noticeable increase in tax collection. The Russian budget is still empty.

As yet, the Russian government is not in a position to monitor the hidden money. Russia’s illegal market continues to hide its income successfully. Russian experts claim that it will only be possible to collect taxes if the government is honest and incorruptible, if the economy is efficient and business brisk. Until Russia gets rid of its corrupt officials, and until trade and industry begin to function properly, there is no point expecting tax contributions to be made in full.

Valery Virkunen is a correspondent for “Argumenty i fakty.”