Shadow economy, rural self-sufficiency allowing Russia to weather sanctions, new study finds

Russian rubles (Image: Anastasia Makarycheva, RBC.ru)

Cash is the lifeblood of the shadow economy. Russian rubles (Image: Anastasia Makarycheva, RBC.ru) 

2015/05/31 • Analysis & Opinion, Russia

Russia’s shadow economy and the self-sufficiency of Russians living outside of the major cities of the country “have allowed Russia to survive the crisis and the introduction of sanctions without large losses, according to five-year-long study of provincial society carried out by sociologists at Moscow’s Higher School of Economics.

According to the study’s findings, Diana Yevdokimova writes in “Novyye izvestiya,” Russian provincial society is characterized by a pattern of social stratification in which “the status of an individual depends not on income but on his public authority and influence, his status [with the authorities] and his membership in various clans, employment and shadow groupings.”

Consequently, Yury Plyusnin, one of the authors of this study says, while Russians in the cities are frightened as a result of sanctions, the nature of provincial society with its self-organizing and self-supplying systems guarantees the stability of the state and means that an economic crisis as understood in the cities or abroad will not affect most residents.

…Official sources say that 40 percent of Russia’s GDP is in the shadow sector. But in fact, the actual figure is much higher. As a result, “the country stands on a very firm foundation,” one seldom described, and “lives according to its own laws because for the state it doesn’t exist.”

 

According to Simon Kordonsky of the Higher School of Economics, official sources say that 40 percent of Russia’s GDP is in the shadow sector. But in fact, he suggests, the actual figure is much higher. As a result, “the country stands on a very firm foundation,” one seldom described, and “lives according to its own laws because for the state it doesn’t exist.”

People in this category, include those who do not work anywhere officially, often move from place to place, and do not pay taxes. Some of them live in a natural or dacha economy where they grow their own food. Others engage in “garage” production where they produce and sell things but without reference to the state and its rules.

“No fewer than a third of all rural families live off water and forest resources of the country which are in no way controlled by the state,” Plyusnin says. They may declare part of what they harvest but far from all of it, and thus they have incomes which may be twice or more what the state thinks they do.

In Yevdokimova’s words, the authors of the study draw “several other important conclusions.” First, the sociologists say that Russia must be understood not as a market economy but as a resource economy. Second, the country’s social structure is one consisting of various strata, some of which are connected to the state but many of which aren’t.

The sociologists identify four strata groups: the authorities (five percent), the people (66 percent), the entrepreneurs (15 percent), and the marginal (13 percent).

And third, they say, many Russians engage in seasonal work and move among two, three or even more residences in the course of the year. As a result, Kordonsky says, there are really two Russias, “one visible to the state and one invisible.” If the visible is in trouble because of the crisis and sanctions, the invisible continues to function, not contributing much to its members’ advancement but preventing them from falling even further behind.

Edited by: A. N.

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  • Brent

    It’s a Moscow institution study, so likely the picture would be rosy no matter the circumstances.

    Alot Putin’s strongest support comes from the large civil service. Yes, the same civil service he imposed travel restrictions on last year. And if they start taking cuts in pay or pensions, that will quickly erode that support as he ‘bought this support’ through those benefits. As well, his popularity was not nearly as high when he campaigned in 2012 and there were large protests against him.

    Who knows, maybe the smart Russians have all emigrated elsewhere and only the sheeple are left behind….

    • John Shirley

      Did anyone else think it was a bit strange that even Sergei Khrushchev, Nikita’ s son defected to the US in 1991. Shows me that there was at least a little intellegance in that family.

  • Rods

    Not that different from Ukrainian village society. Where the growing of food, keeping buying / selling of animals and farm produce like milk and eggs, most likely a small pension or if they are of working age and lucky some sort of job. For the unemployed/unemployable that are overly fond of the bottle home/village made vodka. But it is a way of life that is gradually dying out where the young are migrating to the larger towns and cities where unemployment is relatively lower and wages are much higher.

    I suspect the pressure on village life surviving is only going to increase where costs like gas and electricity are making it more difficult to survive and many of the jobs are minor government officials, small local hospitals and teaching in village schools. All of which are going to come under pressure as the government is going to have to making savings to balance the books by having fewer minor officials and fewer, bigger, more efficient hospitals and schools.

    Over the last 20 years there have already been vast changes where local collective farms that used to employ 100’s are now fully mechanised and only have 2 or 3 or so operating farm machinery.

    • Brent

      The only difference in Donbass is it’s hard to grow gardens and raise animals with all those Russian GRADS flying around and all those terrorists stealing whatever they want. I really feel sorry for the residents of Donbass, whether they support the DPR and LPR or are loyal to Ukraine. They had meager existences before, but now it’s got to be pure hell living with Putin’s war going on all around them. When I see the destruction of towns like Debaltseve or Shyrokine, I really wonder if any of them think it’s worth supporting Russia who doesn’t value their lives one bit, but wants their territory.

  • evanlarkspur

    This is pretty narrow economics. Shadow economies do not exist separately from the formal economies, but rather are an outgrowth of them. The availability of resource in the shadow economy depends on the formal, but with a time lag. Changes in the formal economy are always reflected later in the shadow. Just as a speeding train that comes off the tracks continues due to momentum for a bit, so with the russian economy(s). Just watch over the next six months.