Belarusian Government: Strong on the Opposition, Weak on the Shadow Economy

The Belarusian government plans to step up its campaign against the shadow economy. In January 2016, new amendments to the Tax Code will come into force which introduce harsher punishments against illicit business. Last month, President Alexander Lukashenka demanded that Valery Vakulchyk, the head of the KGB, suppress illegal economic activities.

Belarus' shadow economy has been an elephant in the room for many years. Restaurants do not document all of their employees wages. Shops sell goods without receipts. State organs have for a long time closed their eyes to this, apparently fearing that more law enforcement would cause political repercussions.

State of Denial

The government downplays the problem of the shadow economy. This spring, the Tax Ministry announced that the share of the shadow economy accounts for only about 11% of national GDP. Two years ago the same ministry told that it accounts for 8-10%.

Yet a mid-level National Bank official, Lyudmila Stefanovich speaking at a conference in Minsk in May stated that, “the share of shadow economy in Belarus is very big. According to research results, it is about 35% of GDP.”

Indeed, in spring 2015, the IPM Research Centre conducted a survey asking small and medium enterprises whether some of their activities existed in some areas of the shadow economic. 35% of respondents dared to admit that there were such elements.

Some experts believe that the share may be even higher. In 2010 the World Bank published a study on the shadow economy which assessed its share in Belarus in 2007 at 43.3% of the GDP. Among Belarus's neighbours only Ukraine fared worse with 46.8%. The situation in the national economy has failed to substantially change since 2010.

Promises Instead of Documents

Tax evasion in legally registered private businesses is commonplace. The author recently visited the city of Maladzechna near Minsk and was impressed that very few private businesses even in respectable looking large trade centres, such as Troyka and Modul bothered giving receipts for bought goods.

The vendors promised to accept returns if customers found deficiencies. They had no concerns about possible undercover tax officers, although they hardly pay taxes for the goods sold. On top of this they probably pay somebody in order to be allowed to work so.

Last year, state agencies resorted to a new form of control by assessing the whole income of a vendor by measuring his income over a short time and then appropriately multiplying it. Tax officials conducted 80 raids using this method, and found irregularities in 70% of business entities.

Another sphere of tax evasion involves accommodation rent by private landlords, as well as renting premises to be used for commercial and manufacturing purposes. Houses and flats are often rented in Belarus without registering a contract with the authorities. In May, the real estate web-site Pro-n.by estimated that every second flat (i.e., more than 46,000) is rented in Minsk illegally.

Even production lines (for instance tile production) and workshops visibly consuming electricity and water have for years functioned without proper registration. Last year, the tax authorities conducted around 2,600 raids on premises which were suspected to be rented illegally. Almost in all cases it turned out to be the case, as more than 2,500 persons were found to rent property without paying the necessary tax.

Illegal car repair workshops, which have many customers, work on unregistered premises without encountering problems with the police or tax authorities. For instance, in Maladzechna local authorities do not care much about such illegal workshops. Meanwhile, because of this unfair and illegal competition legally registered workshops who pay taxes and social insurance have to reduce personnel and then close down.

Officials of the Tax Ministry articulated the problem of car repair workshops in the early 2010s and promised to take measures. Little has changed since then, thousands of these workshops seem to continue work throughout the country and government agencies no longer speak of the problem anymore.

Belarusian Laissez-Faire

The government apparently avoids antagonising private entrepreneurs engaged in illegal practises. The chairman of State Control Committee, the key control agency, Leanid Anfimau in September announced that the number of raids conducted by the Committee since 2000 decreased tenfold, from 14,000 to 1,500 last year.

Certainly, dubious business practises in Belarus involve much more than hiding income. Violations of labour law stand out as another common practice. Even a fashionable restaurant in the prestigious Niamiha neighbourhood of Minsk belonging to a known Russian businessman pays half of the employees wages “in envelopes,” its personnel told Belarus Digest. Therefore it avoids paying more taxes and social insurance for them, effectively cutting their future pensions.

It is easy to spot these violations as a minor cook gets officially just $250 per month. Without additional payment he would be unable to work. Yet no state agency has an interest in the situation because a raid on this business will bring the state agencies up against an owner who is well connected with the Belarusian regime.

And you do not need to be so influential to be able to break the law without punishment. Even low-level administrators of discount chains have no fear to say those willing to work as merchandisers that if employed they will be prohibited, for instance, to take any sickness leave for the child. This violates Belarusian law, yet the practise has functioned for years without causing the interest of state agencies.

The Belarusian Government: Strong Yet Weak

The Belarusian state faces a paradoxical situation. On the one hand, it controls the political life of the country, including election results. On the other hand, it fails to suppress the shadow economy. The size of the latter remains relatively stable. Moreover, the government displays little willingness to challenge the illegal economy.

For a good reason. It could not do anything about it. Analysing the problems encountered by new independent countries Samuel Huntington once wrote, “there is a failure to recognise that most countries are suffering from an absence of power in their political systems.”

The behaviour of the Belarusian government illustrates the point. State authorities fear the consequences if they touch illegal deals. So far, the Belarusian private sector has refused to finance the political opposition to the Belarusian leadership. The state effectively buys political silence by tolerating not just informal economic schemes but also outright illegal businesses.

The Belarusian state remains narrowly focused on political control. It achieved sophistication in preventing social and political unrest or doctoring election results. Yet its taxation organs let a large shadow economy thrive which seriously undermines honest competition, labour law, taxation and pension systems.

Siarhei Bohdan is an associate analyst at the Ostrogorski Centre.

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