THE CRIMINAL ECONOMY
3. PROTECTION MONEY: EXTORTION OR "SHADOW TAXES"? - RAS 13, JRL 6571
SOURCE. Galina Gradosel'skaia, "Tenevoe nalogooblozhenie v legal'noi ekonomike (po materialam issledovaniia v Moskve i Volgograde)" [Shadow Taxation in the Legal Economy (Using Survey Data from Moscow and Volgograd], pp. 49-58 in Konkurentsiia za nalogoplatel'shchika: Issledovaniia po fiskal'noi sotsiologii [Competition for the Taxpayer: Researches in Fiscal Sociology] (Moscow: Moskovskii obshchestvennyi nauchnyi fond, 2000)
AUTHOR. The author is at the Higher School of Economics in Moscow. She provides contact information: tel. (095) 928-504; e-mail mss981009@msses.ru
The author interviewed six entrepreneurs engaged in legal activity in Moscow and Volgograd about their relations with criminal organizations, known as "roofs" [kryshi] or "power [silovye] partners," that provide them with protection and other services. If her sample is small, she explains, that is because it was so difficult to find businesspeople willing to take the risk of divulging information on such a dangerous subject.
The market in criminal services arose during perestroika as a straightforward protection racket, spreading in a random fashion as gangs gathered information about prospective victims. Although a certain amount of simple racketeering still exists, the typical relationship between "protector" and "protected" has undergone considerable evolution. It has become a less coercive "deal with uncertain outcome" by which the "roof" provides real services in exchange for tribute. The entrepreneur now perceives himself as a purchaser of valued services rather than a victim of extortion.
One sign of the changing relationship is that it has become less dangerous (if still far from safe) to reject an offer from a gang. One informant tells the author how he said to a visiting gang representative: "OK, you can become our roof if you retrieve a KAMAZ truck we had stolen recently." When the man came again he was told the same thing. The gang did not find the truck and did not become the firm's roof.
Besides providing physical protection and recovering debts and stolen property, a "roof" may offer to serve as an intermediary in putting the firm's business relationships on a more satisfactory footing. This can include dealing on behalf of the client firm not only with suppliers but even with the tax inspector! Such a feat is within the reach only of a "serious" power partner -- that is, a criminal group that is well-organized and has close links with the state authorities. Nowadays connections and expertise are more important than muscle in the "roof" business.
The author makes the bold claim that criminal organizations enjoy greater legitimacy than the state in business circles. When you pay tribute or "shadow taxes" you know what you're paying for, while the state demands exorbitant taxes without ensuring your physical security or defending your property rights. Which of them is the greater extortionist?
This argument legitimizes tax evasion. Moreover, an entrepreneur who pays both tribute and tax in full will go bankrupt. This conclusion follows from these figures, provided to the author by her informants:
* Tribute (shadow tax) varies between 10 and 30-35 percent of profits. (1)
* Government taxes may go up to 70-75 percent of profits, which firms try by various means to bring down to 30-50 percent.
It would be interesting to receive comments from JRL readers familiar with Russian business practices.
NOTE
(1) The expense is recorded in firms' books under such headings as insurance or payment to consultants.
Next Article