Underground Economy in Russia: the Size and Specific Features Essay Example

my course work is to reveal the reasons of shadow economy development and the ways of its restriction in Russia. The materials of different Russian and foreign authors that conducted research on this subject are also used in the work. The proportion of positive and negative consequences of shadow sector existence in national economy mainly depends on its scale.

On the way to disclosing the secrets of underground economy there arise obstacles, which are connected not only with the obvious lack of information for reliable estimation, but also with the conceptual difficulties like difference of understanding the phenomenon. There exists confusion in the usage of the terms: for example, the underground (shadow) economy is often identified as informal economy or as criminal economy. Meanwhile, it is important to separate them, because they define different segments of the market.

Definition of underground economy

The underground economy consists of illegal and hence undeclared transactions. These could be transacions where the goods and services are themselves illegal, such as drugs and prostitution. Alternatively, they could be transactions that are illegal only in that they arenot declared for tax purposes. For example, to aboid paying VAT, a garage may be prepared to repair your car slightly more cheaply if you pay cash.

Another example is that of «moonlighting», where people do extra work outside their normal job and do not declare the income for tax purposes. The widest notion has the term informal economy, which represents itself the aggregate of economic relations, which are not reflected in the official accounting and formal contracts. It consists of two parts. The first one includes the segments, which blend with the existing legislation or at least

are not contrary to it. The second is the underground economy, which is not reflected in the official accounting and, moreover, conflicts with the existing of legislative establishments.

But it is important to know, that not the whole shadow economy is criminal. The important segment of underground economy is quite legal but the nature of the means used periodically contradicts the law. Criminal economy is the part of underground economy connected with the notorious infringement against the law as by usage of illegal means and also by the objectives of activity, in other words, production and distribution of goods and services, which are forbidden by the law.

On the basis of legality degree we can propose the following classification of the informal economy:

1. Legal economy – economic activity, which is not recorded in the accounting and contracts; however, it does not break neither the existing legislative norms, nor the rights of other economic agents. For example, the natural production in housekeeping.
2. Out-of-law economy – economic activity, which violates the rights of other economic agents, but which is not regulated by the law. These are the rosy markets. The obvious examples are finance pyramids of the mid 90's.
3. Semi-legal economy – economic activity, which doesn’t contradicts the existing legislation by objective of its activity, but which periodically oversteps the bounds of the law by the nature of the used means. These are grey markets. First of all they are connected with the ways of evasion to pay taxes, barter exchanges, functioning without license and patent, labour hiring without registration.
4. Non-legal, criminal economy – economic activity, which is forbidden by the law and which contradicts it by the notion:
   

drug business, illegal production and trade of weapons, smuggling, prostitution, human trade, racket.

These are the black markets. Thus, the first two segments of informal economy are not the part of underground one while the third and the fourth serve as the parts of it. We should also define the term «fictitious economy», which connected with recording of non-existent economic activity in statistical accounting. The given approach considers the underground economy as the aggregate of relations peculiar to all without exclusions sectors of economy. Under this point of view any economy appears as complicated interweaving of legal, semi-legal and non-legal connections.

The other approach considers underground economy as the aggregate of economy forms or economy sectors, opposing the state or legal segments of the market, thus, equalizing underground economy to criminal one. To distinguish this approach we will overview the structure of underground economy as the adherents of this approach.

Structure of underground economy

The basic elements of the underground economy are:

• concealment of enterprise;
• concealment of economic operations;
• concealment of labor force hiring;
• concealment of income.

Often these elements are closely connected, but they are also able to play a separate role. For example, one may not register the enterprise but duly pay the taxes, and one can conceal economic operations of the existing enterprise. The structure of the underground economy market is formed by the shady turnover and criminal turnover. Let us compare and analyze these two notions by subjects, objects, regulating norms and the consequences for the society. The subjects of the shady turnover are legal entities, created in compliance with or with violation of existing legislation; natural persons; officials of state structures, who breaks legal regulations.

The

objects are goods and services, not forbidden by the law, by its nature necessary and useful for the society. The participants of the shady turnover use so called “conceptions” as regulating norms. The runaway from government control and usage of corruption are the specific features of this sphere of underground economy. The shady turnover has negative consequences for the society and state. Basic subjects of criminal turnover are organized criminal groups, criminal organizations and criminal communities.

The auxiliary subjects are legal entities, created by the criminal elements for criminal turnover; legal entities created by basic subjects with usage of funds gained in felonious way; corrupt officials of the state structures. Goods and services, which are forbidden by the legislation and present real hazard for normal existence and development of society act as the objects of criminal turnover. Comparing with the shady turnover the regulating norms of criminal one are so called “conceptions”, which are accepted in criminal sphere.

The specific features are the wide usage of violence, corruption and criminal methods of competing and argument clinching. The consequences of criminal turnover carry socially dangerous nature. Basic and principal differences of shady turnover from legal turnover are runaway from government control and regulation of relations between subjects with non-legal norms. In these the shady turnover is closer to the criminal turnover. On the basis of the above stated we can form the general definition of underground economy as the whole aggregate of economic activity, non-legal r legal with usage of non-legal means, which is not recorded in the official statistics and not included in the Gross National Product of the country.

The history and peculiaruties of underground economy formation

in Russia. Overall view on shadow economy in Russia. Russia now has sixth largest shadow economy. Nowadays shadow – or “off the books” – incomes account for 44% of all income in the country. Thus, some 6. 5 trillion roubles ($278. 8 billion or €174. 9 billion) go undocumented each year, meaning that almost 850 billion roubles ($36. 5 billion or €22. 9 billion) never make it into the national budget.

The inability to collect these tax revenues contributes to Russia’s low pensions and low wages for government workers. The system of taxation must be reformed to keep revenues at the municipal level. Income and property tax remain decentralized, and battling corruption would break the “aqueous armistice” currently drawn up between the authorities and the criminal element. The criminalization of economy now is rather stable and could be characterized as self-developing social process that sets up criminal rules of doing business, involving more and more law-abiding citizens.

The dynamics of the revealed by all law-enforcement authorities economic crimes is a very persuasive evidence. Thus, during the period of 2005-2008 the overall amount of the revealed economic crimes increased to more than 380 thousand crimes Their matherial damage exceeded 111 billion roubles. Although in 2003 there was a little decrease in the level of economic crimes, but that was mostly caused by the law-enforcement authorities' concentrating on more difficult economic crimes that are committed at especially large-scale rates.

The fact also is that since 1999 the amount of the given crimes committed at large- and especially large-scaled rates increased approximately by 2. 9 times (or from 7. 2 to 20. 7 thousand). Among all the revealed by law-enforcement authorities

the most dangerous are crimes committed at large-scale rates and obligatory to be investigated, the main part (from 49% to 87% in 1999-2006) is formed by the crimes concerned with illegal entrepreneurship, tax discharging ambages, evasion of insurance contribution into government non-budget funds.

One of the most substantial problems now is the high level of such branches' criminalization that is key for our native economy and forms the profitable part of the government budget. Thus, during 1999-2007most part of enterprises with the revealed offenses against tax law at especially large-scale rates is observed in such industries as fuel-energy complex (in 1999 – 20,8% of all enterprises. 2005 – 25. 5%), timber industry (8. 6 and 16,7%), ferrous and non-ferrous metallurgy (2. 6 and 5. 5%), food industry (3. 1 and 4. 8%).

Comparing with the January-July of 2005 the amount of economic crimes revealed by law-enforcement authorities became 14. 4% more. 327. 5 thousands of the crimes of the given category were revealed. Their average weight is 14. 5%. The material damage of the given crimes is 56. 2 billion roubles. About a third (36. 4%) of the whole amount of economic crimes are serious and heinous crimes. There were revealed about 156. 3 thousand of economic crimes by the sub-divisions against economic criminality. Their average weight is 47. 7%. The material damage of the given crimes is 15. 2 billion roubles.

The sub-divisions of tax criminality of domestic affairs authorities revealed 18. 1 thousand economic crimes. Their average weight is 5. 5%. The property damage of the given crimes is 30. 0 billion roubles, and the sum of the compensated damage is 29. 9 billion roubles. Hence,

the criminality in the sphere of economic activity is tightly connected with shadow economy that represents the average of hidden from the authorities of government administration, control of economic relations of all the administrative-economic subjects.

From the Soviet underground economy to Russian

During the soviet times underground economy was widely distributed, and since then has also undergone serious changes. First, the Russian economy changed from an expensive deficit to cheap abundance. In the soviet times the underground economy was organized around the production and distribution of deficit products and services. They were distributed through the informal channels with active usage of «personified profitable connections». Post soviet underground economy is on the contrary directed on the production of the most ordinary non-deficit goods and services and on their distribution through open non-personified commercial sales6.

Thus, soviet underground economy worked for the infill of the market emptiness, when post soviet shadow economy penetrates on the tight market segments. This shift from deficit to relative profusion has changed the expectation of the quality of the goods and services produced by the underground sector. Lets compare the shady markets in the soviet and post soviet periods with the help of the following table:

Shady markets in soviet and post soviet periods Parameters of the underground economy |Soviet period |Russian period | |Volume of operations |Non-significant |Significant | |Nature of the product |Deficit |Non-deficit | |Quality |Higher than average |Lower than average | |Price level |Higher than average |Lower than average | |Market function |Infill of market |Segmentation of market | |Distribution way Personified profitable connections |Non-personified commercial sales | Table ?1

Second, the soviet underground economy was based on the regular stealing from the

state (kleptocracy). In the russian conditions stealing from the state remained as the objective of the underground economy, but it has radically changed the form of this stealing to non-payment of taxes for the usage of private resources. The stealing from the state in the soviet period occurred mainly on the working place. The character and the scale of stealing were defined by the status of the worker. It was so called stealing according to ones rank privilege provided by the working place itself.

Thus, soviet underground economists behaved as individual entrepreneurs, still acting as toilers working for general welfare, while in the russian underground economy entrepreneurs behave vice versa. Third, there is the change to legalization of business. The shady character of economic activity in the soviet period was conditioned by the practically full impossibility to receive rights for entrepreneurial activity. Soviet “shadow” is the product of so called exclusion mechanism of entrepreneurial activity, while the post soviet “shadow” connected with the escape from licensing to avoid high transaction costs.

Finally, fourth, the position of the official state structures was tightly connected with the underground sector. Soviet authorities in every way understated the scales and meaning of the underground economy, underlining the effectiveness of government control.

Post-soviet authorities act direct oppositely: they industriously overstate the size and role of underground economy, understating the role of the government control under economic activity. Thus, along with the enlargement of underground activities' zone, in the post soviet period qualitative change of the contour took place.

The dynamics of economic criminality

The Conception of national security of the Russian Federation7 defined that the threat of criminaliztion of public relations that was formating during

the process of the reforms of social and political system and economic activity obtains specific acuteness and impend over national interestes of the country and its security. Serious miscalculations that are made at the basic stage of economic, military, law-enforcement reforms' realization (as well as in other spheres of state activity), the dilution of state regulation and control, the imperfection of Russian law basis and the absence of powerful state policy in social sphere, the deterioration of moral and cultural potential of the society – are the key factors that accompany the growth of criminality, especially its organizaed forms, and corruption as well8.

The environment in economic and tax spheres continues to be difficult and is characyerized by the growth of tax and economic criminalty in all the basic branches of national economy, it mass character and hight degree of latency, permanent complication of used shemes and methods of taxation ambages including based on the imperfection of active legaslation. In the Strategy of economic security the criminalization is included into the list of main threats of economic security.

The reasons of underground economy development in Russia

Reasons for underground economy appearance. The reasons of underground economy vary for different regions of Russia, however there is a complex of reasons for existence of shadow business. Usually three groups of factors, which contribute to the development of underground economy are distinguished:

The first group (Economic factors):

1. high taxes (income tax);
2. restructuring of economic activity spheres;
3. the crisis of financial system and influence of its negative consequences on the economy on the whole;
4. imperfection of privatization process;
5. activity of unregistered economic structures.

The second group (Social factors):

1. low standard of living, which promotes
   

the development of concealed economic activity;

The growing unemployment, the flow of refugees, non-payment of salaries and etc. is the perfect nutrient medium for the underground economy. People, who lost their jobs and do not get the salary for long period of time, agree with conditions of non-legal, underground employment: the relations with employee are usually based on oral agreement, the dismissal is usually possible without social guarantees and even without warnings. For the employees such terms are more than just profitable: employers turn out to be interested in the concealment of employee’s business underground; employees possess the uncontrolled power over the employers; direct finance profit already lies in the non-payment of tax for remuneration of labor fund.

The third group (Legislative factors):

1. the imperfection of legislation;
2. insufficient activity of law machinery of illegal and criminal economic activity suppression;
3. imperfection of the mechanism of coordination of fight against economic criminality;
4. exposure of rights of ownership;
5. political instability.

The Legaslative factors rise to the entrepreneurs’ psychology. If the right of ownership is not properly defended by the law and the practice doesn’t guarantees its reliable defense, then entrepreneur tries to use his chance in maximum. If it’s possible to avoid payment of taxes and maximize his profit, then he will do it. Political instability freezes official economy for the better times, besides increasing underground one.

Depending on the development of market relations and the state of the economy on the whole the number of reasons and the degree of its influence varies. Economic freedom, bordering with permissiveness and deformation of

moral-ethical requirements also influences the development of underground economy.

Reasons for small enterprises to go underground. Modern economic policy in relation to the entrepreneur is very simply expressed: he should survive under the pressure of the economic policy. That is why he faces the dilemma whether to break the law or not. To prevent the growth of the underground economy, it is necessary to obtain changes in economic policy, which will provide normal terms for domestic producers functioning.

The general causes for small enterprises to go underground are: tough tax pressing, the possibility of alternative accounting (cash, barter and so on), administrative character of rent relations (non-development of immovable property market), administrative-bureaucratic barriers in licensing and registration. In experts’ estimation the underground economy covers from 30 to 40 % of production volume. Subjects of small entrepreneurship, participating in the underground economy, could be divided into three groups:

1. The first group includes practically criminal small businesses, primarily created with illegal objectives (fraud, money-laundering, illegal business activity). They form peculiar frame of the underground economy in the sphere of small businesses and possess sufficient mighty resources, power and influence.
2. The second group includes technique-managers, lying significantly underground, because the way out from underground will turn out for them to be connected with considerable loss of profit or the closing of the business. The in many respects supplement the frame, created by the first group however this the possible basis for middle class in prospect.
3. The third group includes sole proprietors and hired workers, in a way the “soldiers” of the underground economy. Significant part of this group are people, for whom unregistered activity is force.

Situation with material wealth of

general mass of Russian population arises completely different, what is dictated by the rules of market economy. To the fore is the sharp decrease of former standard of living: this fall amounts to 40% in comparing with 1991. The liberalization of prices has lead savings of general mass of population to nothing, in that way the act of incomes redistribution was realized. The poverty question is the question of minimum salary and correlation of it with the cost of living. Beginning from 1992 the minimum salary is in four-five times less than the cost of living. This says that the minimum salary has lost its role of the most important social guarantee. Poverty is redoubled with the delay of payment of wages, pensions and cash benefits.

Non-payments as mass phenomenon is nonsense for market economy, and for the solution of the problem extraordinary actions of legislative and administrative character. But the point is not only in this. The roots of the problem lie deeper: the state itself is the defaulter, resorting to the mean of inflation suppression. Moreover, the majority of enterprises wait because it has no money for realization of payments. This implies two important conclusions. First, the state must refuse the delays of its debt repayment as the mean of inflation fighting. Second, the problem of non-payment in national economy wouldn’t be solved until the policy of domestic production suppression is changed to the policy of its stimulation. 4 Underground economy and its peculiarities in modern Russia.

Size of underground economy in modern Russia

There are several factors that determine the size of shadow economy.

1. The first is the level of taxes and reguations.
2. The second
   

is the determination of the authorities to catch up wuth evaders, and the severity of the punishments for those found out.

And another determinant is the proportion of population that is self-employed. The underground economy in Russia is on a huge scale, which reflects the distrust to the state, the high level of criminalization of it and its weakness.

As a result, authorities do not know the real size of the economy and can not regulate it efficiently, huge shortage of taxes takes place and unfair distribution of tax burden and consumers are badly protected. Underground economy in Russia increased its size for the last 15 years roughly in 20 times and is now forming about 40% of Gross Domestic Product . By the share of the underground economy Russia is entering the leaders, inferior only to Nigeria, Egypt, Georgia, Azerbaijan and FYR of Macedonia. For the valuation of changes in underground economy in Russia it is necessary to consider the dynamics of the following determinants:

1. the level of economy monetization;
2. weight of cash flow;
3. share of cash payments and share of direct product exchange (barter) in the general volume of paid products;
4. the level of tax collection.

With the help of level of economy monetization index real monetary base could be estimated, in other words the degree of economy’s money saturation. The level of monetization it the ratio of M2 money aggregate to the annual GDP. By the level of monetization Russia takes one of the last places in the world. This witnesses as if the huge part of economy it doesn’t exist or

is full of barter exchange and is not served by the national banking system. Thus, the level of monetization has began to increase from 1999. At the same time its level is still very low and can not reach the level of 20 % of GDP, while in the developed countries this level lies within 80-100% of GDP10.

Another indicator of underground economy size is the weight of cash flow, which shows the ratio between cash and money supply. Now this index lies on the level of 36%. In Russia the use of electronic money is not widely spread. In Russian Federation we buy cars and accommodations for cash. Tendency for the reduction of cash payments and penetration of cards is very slow and there is no use of cheque. The other side of cash flow is the huge amount of cash operations in underground business, which is not accounted anywhere and doesn’t pass through bank channels. It is also important to pay attention to the fact, that significant part of cash payments is realized in US dollars.

For the estimation of underground economy size it is necessary to analyze the dynamics of share of cash payments and share of direct product exchange (barter) in the general volume of paid products. Comparing with 2001 the part of payments in cash amounted to 84,7% and in 2002 77,7%. It is obvious that improvement of these indicators is an important positive tendency11. The size of the corruption market is estimated to be close to $300 billion, equivalent to 20% of Russia’s GDP. 80% of all Russian businesses pay bribes.

In the past eight years the size of the average business

bribe has gone up from $10,000 to $130,000, which is enough to buy a small flat in Moscow. Considering the level of tax collection it should be pointed out that during 2002 the shortage in summary taxes amounted to 8 billions RUR roughly.

Thus, the fiscal situation in the country worsened formally. In practice the situation is even worse, than presented by statistics. The level of tax collection is officially estimated to be 70%, but in reality this index is on the level of 30-50%, thus about half of taxes is not collected. To summarize it can not be said that size of underground economy is decreasing. Moreover, it still can not be said that, the state implies tough actions to fight shadow economy.

The peculiarities of underground business and economic reforms in Russia. There are some peculiarities of market reforms conducting that became the facotors of larrge-scale expansion of shadow activity in Russian economy.

The first peculiarity – rapid decrease of the level of government legal warranties of property and contracts protection effectiveness that is tightly connected with the distruction of party structures in the USSR. This distruction had various reasons: slow fulfilling of the gaps in legislative system, non-observance of the law and edicts. The judicial system demonstarted law effectiveness in reformation especially of making judicial decisions. Secondly, talking about moral consequences it is vitable to mention that now it became a tradition of citizens to disrespect the government. Hence, the fraud in regard to the government isn't morally condemned by the society. The third peculiarity is an excessively influential role of the government in economy.

There are two forms of its expression.

• At first, in the
  

reservation of substantial givernment sector that needs direct or indirect subsidies from the budget. That causes the occurance of illegal money-laundering through state machinery.

Another source of shadow activity is licening of different types of economic activity. It makes private firms dependant on state authorities and gives them an opportunity to obtain greater shadow incomes.

Finally, there is a direct forced suppression of competitors by state law-enforcement authorities in favour of more profitable for them companies (esp. in fuel and oil industry, metallurgy, building). The forth peculiarity is the reservation of typical for the soviet system forms of monopoly and the arrangement of new forms. The first are connected with the activity of the government. Thus, the direct state control of working sectirs of economy creates monopolism that causes shadow activity.

For instance, the preservation of control under gold extraction and the limitation of private capital inflow cause the arrangement of black gold market, the turnover of which is many tens, hundreds kilogrammes per year. Another source of monopoly is the activity of ex-ministries and their sub-divisions. Although, formally «Gasprom» and «United energetic system of the Russian Federation» are non-state structures they have very strong influence in state machinery. That makes them a hybrid of private companies and state departments. They regulate whole sectors of economy

in Russia, are very powerful, fulfil all the functions of government and community theirselves. They are very closed from any possible control – that gives wide opportunities fro the development of the undreground activity (tax discharging ambages, incomes' concealment).

The fifth peculiarity is extremely high level of tax withdrawals and repressive character of the system of taxation. This is the system when 60-80% of profit are withdrawn, and private firm hasn't legal protection against state tax inpection – the government aims to save «command tops» in economy and control main financial flows. As the result a strong habit of tax discharging ambages is formed in Russia14. The sixth peculiarity – asocial character of market reforms in Russia. Market reforms deprived of usual socila niches, savings, the life quality was decreased. Although the prices were set free, the economy liberalized, the mechanism of economic filtering wasn't created.

There are lots of inefficient unprofitable enterprises (especially in heavy industry and agriculture) that can provide only supplying with minimum of subsistence. At the same time there are no alternatives for better work places. Thus people have to join shadow business or moonlighting. State and privatized enterprises are «overgrown» by great amount of commercial structures, many independent firms through which people can earn on free market without any restriction or duties appeared. Moreover, the significant part of labour activity is realized without any official registration. The seventh peculiarity is illegal character of economic reforms that is provided by law disregulation of real behaviour of authorities and population during the period of reforms.

It happens so, first of all, because there is disinterestedness of ruling «boy gangs» in effective work of law-enforcement system.

The normal court work, Office of Public Prosecutor and other authorities could tie hands of highstatued group that are involved in division of ex-socialistic property. Moreover, law-enforcement authorities participate in economic activity and are main subjects of modern Russia. They are corrupted and go into shadow business. Therefore, the authorites cannot maintain law and order in the sphere of economy and perform as arbiter when deciding appeared conflicts. Then, these conflicts are reconcileed by informal structures.

Another evidence of illegal character of reforms is that the authorities pass laws without inquiring and considering the interests of population. The legislative authorities mostly pass not laws adapted to the real life and population needs, but administartive orders that reflect the interests of influential groups, which have an ability to lobby the decisions they want, sometimes even with the help of bribery.

Socio-economic effects of underground economy in Russia

Tax and budget sphere

The concealment of economic activity from state control and tax discharging evasion lead to significant reduction of the profitable part of budget.

This is the reason underfinancing of social programmes and state institutions of economy regulation (controlling, law-enforcement authorities). In the developing countries with the transitional economy the reduction of funds that are intended for realization of social programmes and investitions in the aims of development, jeoparadize social stability and progress. There is rapid reduction of state spendings aggravate structural crisis that drived enterprises of millitary-industry complex, where high technologies and mostly qualified labour potential is concentrated, into difficult economic situation. Underfinancing of state spendings is one of the main reasons of non-payment's crisis.

It aggarvates financing situation of the eneterprises of the real sector, depriving them of circulating capital and

motivating them to use extreme and unlawful strategies of survival. Moreover, tax discharging evasion of one tax-payer leads to increase of taxation of incomes of others law-abiding tax-payers. An increase of tax obligation motivates the subsequent concealment of incomes from taxation, strengthen the differentiation of incomes and property. The inefficient allocation of budget resources as the result of corruption and illegal lobby activity, redistribution of economic activities because of illegal granting of provileges, qoutas has significant size nowadays.

Money-and-credit sphere

The influence on money-and-credit sphere appears in the deformation of structure of payment cisculation, stimulating of inflation, deformation of credit relations and an increase of investment risks, causing damage to credit institutions, investors, depositors, shareholders and society as a whole. The manipulations with currency that realize organized criminal groups for money-laundering and receiving of illegal incomes, can exert baneful influence on exchange rates and banking systems in many countries. Moreover, the presence of large funds that are received illegally creates independence, which criminal elements are ready to use. The statute described above can often result into inflation.

Sudden transaction of funds can damage the activity of national financial institutions. Criminal economic activity had a negative impact on currency market as well due to massive convertation of criminal incomes into foreign currency and its outflow abroad. Criminal structures in the collaboration with some commercial banks purchased currency at the highest exchange rate with stolen money. Criminal organizations represent theirselves as a serious threat to the existence of financial and commercial establishments at national and at international scale as well. Transforming these institutions into absolutely corrupted, unnatural eonomic enterprises leads to the abuse of public funds.

During 1993-1995 there was a

period in economic history of the Russian Fedration when the activity of so called "financial pyrmids" occured. As a result the damage of financial crimes against private investors was about 20 trillion non-denominated roubles. One of the consequences of this misuse is a rapid decrease of insurance to credit organizations.

Economic growth and investment process

In a whole the concealment of economic activity is negatively reflected on economic development, decreasing tax proceeds and causing the chain of consequences described above. However in the conditions of unjustified inflexibility of state regulation, conservatism and inefficiency of official institutions the concealment of authorized economic activity from state ontrol, in spite of the reduction of tax proceeds, in some cases it influences positively on economic growth. Because any underground work causes legal economic activity (through the use of illegal economic activity for aquisition of goods and services that are created legally) GDP inceases».

However the concealment of normal economic activity often limits the abilities of investment sources (esp. foreign) attraction. There also cound be vice versa. Thus, the recession of 1996-1997 in the legal sector of Russiam shadow economy is blocked by the upsurge of underground activity in the sector of shadow activity. It was provided through the concealment of the resources of investition origin.

The concealment of real investors is the method of investment risks insurance. Investment climate worsen the legal outflow of capital. Being the consequence of high criminal activity, imperfect econimic policy, distrust of people and business towards financial institutions as well as to the whole instability, illegal outflow of capital exert inverse negative unfluence on economy, depriving it of deficit investment resources and limitating the opportunities of choice by

the government of optimal economic course. Every year leakage of the part of GDP abroad is negatively reflected on economic development of the country, because it is the direct deduction from resource base of internal investments.

The outflow limits the freedom of activities of the government in conducting of optimal economic course rate, destabilizing the sytem of macroeconomic regulation and damaging the fiscal discipline, because the outflow of assets causes tax evasion. Concealed money finds are moved to consumption or abroad for consumption as well. On the whole mainly organizaed criminality, which aims to get profit in shortest possible time, but not to stable growth, has the most negative effect on the investment process. The most part of profit is removed abroad, depriving the country of investment resources. The organized criminal activity in Russia damages foreign investment and trade, because of an increase of capital investment's risks. This high level of risk promotes specific natural selection of investors that are able to resist hostile environment.

Foreign organized criminality that possesses a mechanism of capital investment protection and is ready to risk in hostile environment often appears as such investors. At the same time legal western enterprises don't switch to the particular market because of the threat of extortion and impossibility to get profit legally as well.

Competition and effectiveness of money mechanism

The effect of underground economy on market mechanisms is ambiguous. On the one hand, non-criminal part of shadow sector has market and competitive character: small producers that disappears from the surveillance of controlling organizations can orient only on payable demand of such isolated from each other customers. Informal production mainly use non-capital, but labour resources.

Produced by shadow

eneterprises goods has approxiamtely the same quality (or a little bit worse) as the production of legal entrepreneurs, but is less expensive (informal businessmen don't pay taxes and can set up lower wages). On the other hand, the enterprises of shadow economic sector damages more effective enterprises of legal sector and dicrease the overall production and consumption in the country. As a result of infraction of the rules of competition some legal enterprises lose marketing outlets, bear losses and become ravaged. This motivates owners to reduce prises. As a consequence the overall reduction of prises that is favourable for consumers comes first. However further legal enterprises don't receive enough profit and become out of business. Only those survive who succeeded in illegal aqusition of raw materials, tax discharge avoidance and etc.

The influnce of organized criminality the main aim of which is to set up monopoly control of the markets and the spheres of their activity is the most distructive for the regime of competition.

Among other forms of criminal economic activity that infract the rules of competition are the following: illegal use of intellectual property rights, commercial bribery, unfair lobby activity and corruption of state institutions.

The ability of organized ciminality to produce large capitals, interfere into legal business and with the help of control under prices to bankrupt their competitors are serious threats for any society. The non-observance of laws gives organized criminality an advantage over law-abiding enterprises. This lso leads to the expansion of organized criminality and political clientilism, controlled market as well.

Employment, reproduction of labour-power and labour productivity

With the exception of entrepreneurs there also are ordinary workers, specialists and engineers in underground economy. The

significant part of shadow economy is realized at a particular workplace. It is not difficult to understand the reasons of such an activity of workers if to be guided with the conditions of perpetual wage delays and their low official level. However shadow activity plays an important role of social stabilizer that smooth the contradicitions between "leaders" and "followers". It makes the transtional period easier for people.

The results of sociological questionnaire of enterprises' directors of military-industrial complex show that about a half of questioned don't see anything dangerous in using of material base in workers' personal interests, considering this as lesser evil against the background of developing processes of criminalization in the country. The consequences of work at underground enterprises are negative for workers. It is connected with the absence of guarantees of employment, remuneration of labour and social insurance. The system of underground work allows to exploit labour power uncontrolledly with the methods that are typical for the period of capitalism foundation on XIX century.

In the case of such methods of labour and production organizing expansion the contempt of social freedoms of citizens, wide using of labour force in industrially developed countries that is typical for developing countries, high productional traumatism, unfavourable labour conditions, the absence of social guarantees, opportunitites of career growth etc. should be expected. The concealment of normal economic activity deform the system of labour division, increase the expences of production and realization of market deals, is also negatively reflected on the quality of goods and services. In underground sector the danger of exposure plays the decisive role. In many cases the employees that work illegally prefer to work alone in

spite of opportunity to receive higher profit and more benefits when organizing joint work. The danger of concealment prvents the growth of the enterprises and using of opportunities of large production and joint technology as well. Illegal sector could not be used by advertisement or newspapers or other legal channels of marketing.

The struggle against underground economy

The ways of governmental influence on underground economy

Thus, the role of underground economy should not be underestimated. Its influence of our everyday life is very significant and has an expanded character. Therefore the government makes lots of efforts in order to diminish this impact. However it is practically impossible to struggle against all the segments of shadow economy. The size of underground activity is rather hypertrophied, and it is more effective to contend it within the frameworks of overall Russian social economic strategy of development.

So, the first question we should answer is how much the government is able to curtail shadow sector. An reference parameter that identify the amount of this reduction is approximately not more than 10%. This reference point could be supported by several arguments.

• First, the practice of effective functioning of market economy proves the permissibility of this underground activity level (for instance, countries with developed market economy).
• Second, our native history argue that the hypertrofied sizes of shadow economy is the specificity of the development in 90's. It is important to mention that there are various subjects of shadow acitivity with various interests, so undreground economy is rather differentiated.

Thus, the significant part of the participants of shadow economy – private and public – could become the real power that may strengthen domestic production. The most effective

ways of reduction here are means of non-administartive indirect character (taxation and labour legislation and etc. ). On the other hand, the government should use direct interference and strict law realization when infringements are concerned with the corruption of state machine and shadow activity of oligarchs. Thus, the processes of coalescence of state authorities and entrepreneurs is obvious and leads to formation of criminal elements that damages public well-being. The realzation of these objectives demands the changes of government structure.

The most important reforms that should be conducted are: the optimization of structure of state administartion and law-enforcement authorities, effective state control establishment in economic sphere, administraive reform of the system of state officialdom. Lots of reforms were conducted in the last three years by president V. V. Putin in order to reduce nagtive consuqences of XX-XXI centuries. However it is essential to redirect the course of reformation at ethic side of the problem – the practical one is not more essential as it is considered, because there are a lot of opportunities to evade law.

For instance, there are several of them:

• different weaknesses of entrepreneur actvity regulation;
• non-fulfilement of contract liabilities;
• unfair competition;
• unscrupulous business and state relations of mutually beneficial agreement (bribery).

Hense, in order to overcome these problems the government should take responsibility for conducting of educational function that is aimed to strengthen moral proncipals and ethics in the environment of Russian entrepreneurship and state machine16. It could be realized through cooperation with institutions of civic community - organized labour and entrepreneurship, creative assotiations, mass media and etc. Nowadays the goverment even considers the possibility of organization of special codified system of morals and

rules for entrepreneurs – a manual with guidance that will control the behavior of businessmen internally (like the Hippocratic Oath) – and organize special subjects that will supervise these official ethics. Besides, this experience is not innovative. For the first time it was invented by west colleagues in order to control the self-consciousness of officials.

Moreover, in 1998 the recommendation for ethic begaviour at public service was published by the organization of world cooperation and development. Thus, it is really essential to form favourable ethic base for business. That is one of the most discussed questions of Russian government. However it is obvious that state machine is able to reorganize structure in order to change the situation of hypertrophied underground business activity and to maintain Russian economic growth.

Legal normative aspects of struggle against the criminalization of economy

The last ten years of Russian economic history could be characterized by the return to market economy that is accompanied by the growth of infringments and criminality.

By 2003 the legislative system for preventing of such infringments has been organized in Russia. The Criminal Code of the Russina Federation identified the responsibility in the sphere of economy in part VIII (chapters 21-23)17. • Chapter 21 "Crimes against property" includes the following articles (158-168):

• fraud (Art. 159),
• misapplication or exaction (Art. 163),
• property endamagement (Art. 165)
• abuse of power (Art. 201);
• abuse of power by private notaries and auditors (Art. 202);
• excess of power by provate security and detective services (Art. 203);
• commercial briery (Art. 204).

There was also conducted the reorganization of law-enforcement authorities. New directions were identified:

• the limitation of activity of controlled by criminal organizations "legal" entreprises;
• identifying and neutralization
  

of leader and chiefs of these organizations;

Today the government considers a possibility of new laws' setting:

• to legalize the "deal with criminals";
• to consider the possibility of criminal responsibility absolution in the frameworks of active repentance;
• the possibility for law-enforcement authorities to appear in court as a "to hear" voucher;
• the possibility for interrogation of vochers in closed court sederunt;
• the possibility of interrogation of vouchera without revealing of their biographical particulars;
• to maintain the institution of "main voucher".

Thus, in order to reorganize the overall conditions of economic activity the government has to consider the following: economy reformation, the diminishing of legislative gaps, strengthening of morality through legaslation as well. The basis of such arrangements is the idea of integration of legal and undreground economies within the frameworks of modern democracy.

The direction of struggle against underground economy

However it is rather difficult to identify economic crime in criminal law meaning. Thus, the struggle against underground economy could not be the decision of problem of strong normal legislative base creation. At the same time the perfection of legislative basis is initial dispatching of the struggle against shadow economy. As it was mentioned above the criminal code of the Russian Federation considers the system of responsibility for felony in the sphere of economics. The great amount of arrangements can prove that the legislative basis for the struggle against underground activity has already been created in Russia.

However it is not enough for shadow economy diminution. Statistics show that only less of 1% of all briberies become known. Thus the data that is

revealed in mass media cannot reflect the real image of economic situation in Russia. Hence, the perfection of the Criminal Code is only the beginning of struggle against shadow economy and isn't the only one. Conclusion To summerize, I want to underline, that in the conditions of our complex economic system, which has formed in our country, underground economy must have appeared. It is essential to consider the history of shadow economy development in Russia, because it shows the initial reasons of its appearance.

Thus, the history proves that one of the most significant reasons of its growth is the transition from bureaucratic command administrative system to market system. In parallel with the legal economy appeared underground the size is comparable in Russia. Moreover, the same number of mechanisms as in official roughly appears in the underground economy. There exist its own rules of price formation, means of contract fulfillment securing, specific set of professions with its own code of behavior and its own mechanism of investment. These shadow mechanisms have changed the lives of millions of people and created special terms of enterprise operating.

Specialists, investigating the problem of underground economy, have even started to talk about the “shadow order” in Russian society. It is hard to expect that in future five-ten years those mechanisms will transform into legal rules of economic behavior. Most likely we will experience the gradual evolution of these underground relations, democratiation and legalization of some and slow elimination of norms, unacceptable for civilized society.

Endnotes

1.  «Economics» by John Sloman //«Do GDP statistics give a good indicator of a country's standard of living? » // 6th edition, FT Prentice Hall, an imprint of
   

Pearson Education P. 376

Bibliography

1.  McConnell, Brue. Economics. McGraw-Hill Higher Education, 2002;
2. Jim McTague. Going Underground.
   

BARRON’S, Monday, January 3, 2005;

Work Sites

1. www. hartford-hwp. com/archives/63/291. html;
2. www. encyclopedia. com/doc/1G1-68501336. html;
3. www. mailman. lbo-talk. org/2003/2003-January/000937. html;
4. www. nytimes. com/1997/05/18/weekinreview/the-russian-economy-notes-from-underground. html;
5. www. rags. ru/s_center/tenevaya/analiz. html;
6. www. theotherrussia. org;
7. www. cdi. org/russia/johnson/9262-5. cfm;
8. www. experiencefestival. com/economy_of_russia_-_shadow_economy;
9. www. economist. com;