Shadow Economy Threatens the Future of Belarus

Last month the Deputy Ministry of Labour and Social Protection of Belarus confirmed that the government wants to introduce a new tax on unemployed people. 

The state wants to get money from economically active people without official jobs who benefit from free or subsidised services from the state such as hospitals, schools and kindergartens.  The Belarusian officials started to think seriously what to do with the vast shadow economy of the country.

Although some label the Belarusian regime as totalitarian, in reality its control is far from absolute, particularly when it comes to the economy. As the Warsaw-based Solidarity with Belarus Information Office recently noticed, 10 to 25 per cent of the Belarusian economically active population engage in doing illegal business.

<--break->For example, according to the Ministry of Trade every second car repair facility works illegally and many in Belarus rent flats without a formal contract. The government effectively tolerates, or rather has to tolerate illegal activities. This reality undermines legal businesses, worsens the business climate and fosters legal nihilism.

Tobacco, Fuel and Alcohol For the EU

The most publicised example of illegal business is smuggling. Many Belarusians living in western regions engage in cross border illegal trading. They smuggle fuel, cigarettes and alcohol into EU member countries, mostly into Poland and Lithuania and, to a lesser extent, into Latvia. Smugglers operate also on the Belarusian-Ukrainian border in the South.

A survey conducted this year by a reputable global information and measurement company Nielsen demonstrated that three quarters of the cigarettes smuggled into Lithuania came there from Belarus. As a result of efforts of smugglers, the scale of cigarette smuggling into Lithuania is Europe’s second-largest.  Up to 30 per cent of all cigarettes sold in Lithuania have not been legally imported according to Laurynas Bucalis of Philip Morris Baltic who gave an interview to the BNS news agency.

This illegal trade has existed since early 1990s, and first emerged along the Polish border after the Soviet government loosened their border control. The scale grew, the types of smuggled goods changed, and it is no wonder that now in the Hrodna Region about eighty thousand able body residents officially have no work and are neither students nor pensioners.

Shadow Economy Not a Problem for the Government

Most of those who work illegally work in the service sector. The most significant spheres include car repairs, flat and house repairs, organisation of festivities and events, photographic and video services and private tutorials to prepare for exams. In the first half of this year, in the south-eastern Homiel Region, the government's tax agencies prosecuted 207 individuals who leased their flats, houses or parking lots illegally; over the same period of time the Homiel police caught 69 illegal taxis.

Even those who officially register as so-called "individual entrepreneurs" tend to hide some of their revenues to pay less in taxes. According to official information, the state tax agencies find violations of the tax legislation in 99.8 per cent of the cases they audited in the first half of this year.

The government downplays the issue. In August, the minister for taxes and customs Uladzimir Paluyan said, “We shall not say that it is too large a sum for our country.” He estimated the share of shadow economy in Belarus at $5-6b, i.e., 8-10 per cent of GDP, while emphasising that this sum includes also such revenues like vegetables grown by citizens in their own personal plots and the selling of private property. In 2009-2010, the same ministry estimated the share of the shadow economy to be even higher – at 10-15 per cent of the GDP.

Belarusian Government's Social Contract With Business

At first glance, it appears that the government is losing a lot of its tax revenues. A year ago, after the Trade Ministry lamented the scale of illegal repair workshops' business in the country, Deputy Prime Minister Anatol Tozik proposed to introduce the obligatory declarations of income for every citizen. “Specialists say that we have too high a percentage of a shadow GDP. And official statistic data absolutely do not correspond with those realities which we see ourselves. How many cars do we have per capita? Why is it impossible to get a table in [overcrowded] Minsk restaurants?”

Yet these losses apparently do not concern the government as nothing has changed since then. The government regularly conducts inspections but does not go after the roots of these phenomena. The shadow economy helps the Belarusian leadership to relieve economic hardship while wild underground business destroys legal business by proposing lower prices that work well outside of the law. 

Nevertheless, the government apparently understands that it is better off leaving illegal businesses alone. Precarious businesses hold illegal businessmen and workers in check as they realise the instability of their own situation. Illegal entrepreneurs and their employees do not actively engage in oppositional activities, at least no existing evidence suggests that they provide funding to the opposition.

This social contract – a tolerance of illegal business in exchange for not engaging in active politics – works not only for common people but also for state officials. Numerous public servants in the eastern regions of Belarus have their own business enterprises in neighbouring regions of Russia. Usually they work in retail or own cafes or restaurants.

Tip of the Iceberg?

The shadow economy in Belarus encompasses not only some shrewd individuals. Presidential edict 510 prohibited audits by tax agencies of new firms in the first two years from the date of their establishment. It created a loop hole for fraud as fake firms appear, operate and close down before tax agencies can check their work.

The Customs Union with Russia has led to new massive illegal capital transfers from Russia through Belarus. They apparently remain under the radar of Belarusian governmental agencies. Meanwhile, a major Russian journal Expert deemed it “Trading with Emptiness,” and explained last month, “Conditions for illegal capital transfers from Russia through "gray" [opaque - ed. BD] mechanisms inside the Customs Union seems to be very suitable. Measures taken by the Russian Central Bank against them are arguably useless.”

According to the Russian Central Bank, fictitious imports from members of the Customs Union made up a bulk of capital runoff in last year as $15b have been transferred out of Russia to offshore accounts by using “doubtful” contracts with Belarusian exporters alone. Inside the Customs Union no customs control exist and a mere goods consignment note suffices.

In fact the Belarusian government is far from omnipotent and state control in Belarus has certain limits. The regime tries to convince people who are doing illegal business that the state agencies are aware but will tolerate unrestrained entrepreneurship, provided that illegal businessmen behave properly towards the regime.

This is a very loose form of control which allows economic freedom and even huge profits without any connection to the state - be it official registration or the payment of taxes. Lukashenka may lash out at these rather dubious kinds of businesses and called people engaged in them "lousy fleas," but business goes on. While it does not threaten the regime, it damages the future of Belarus as a country based on the rule of law.

Siarhei Bohdan is an associate analyst at the Ostrogorski Centre.

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