BUREAUCRACY IN RUSSIA
The Soviet-era bureaucracy has survived in the form of exasperating paperwork, waits and fees. Internal passports are Russia’s basic identity document, Businesses have to be registered and registered and obtain various licenses and certifications to do this and that. These things cost business lots of money and time.
The internal passport (propiska) is a Government-issued document presented to officials on demand, identifying citizens and their authorized residence. Used in both the Russian Empire and the Soviet Union to restrict the movement of people. More limited use continued in some parts of Russia in the 1990s.
Bureaucrats live in world dominated by paper shuffling and corruption. In the 1990s, forty ministries, state committees, and services ran the Russian bureaucracy. Plans to reduce the government’s size was a major goal to reduce waste and save money. Many of these plans have been scuttled or watered down.
Bureaucracy and state control have a long history in Russia. In “The Idiot”, Dostiyevsky wrote that in Russia “people are constantly complaining that we have no practical men.” He was referring to incompetent bureaucrats who let crops rot in the fields and were unable to prevent trains from crashing into one another, a tradition that continued under the Soviets.
Repression also has a long history in Russia. The famous French traveler Marquis de Custine wrote in 1775: “The numerous questions I had to meet, and then the precautionary forms that it was necessary to pass through, warned me that I was entering the Empire of Fear.”
Bureaucracy in the Soviet Era
In the Soviet era citizens were controlled through an elaborate system of internal passports, informers and checkpoints. The Soviet system was dominated by “time servers, ideologues and incompetents.” In the background were some capable people. The worked quietly and capably and kept the system functioning. They didn’t try to stick out to much out of concern of showing up their Communist Party superiors.
The day-to-day operations of the country were overseen by the Council of Ministers, a huge bureaucracy controlled by the Communist Party and headed by a Premier. Through it hierarchy of ministries and agencies, the Council of Ministers carried out the directives of the Politburo.
The Council of Ministers, which included the Premier and his deputies, was the highest executive organ. It was also appointed by the Supreme Soviet and was comprised of a chairman, three first deputy chairmen, eight deputies ad some 70 minorities or heads of organizations of ministerial rank. It's chairman was the Premier.
The powerful Council of Ministers was the highest administrative body. It made proposals to the Standing Committee of the Politburo and took care of the day-to-day operations of the country. It was a huge bureaucracy controlled by the Communist Party and headed by the Prime Minister. Through its hierarchy of ministries and agencies, the State Council carried out the directives of the Politburo. Among the agencies were the Ministry of Truth and a Department of Propaganda.
Participation in the bureaucracy was limited to members of the Communist Party and led by the party elite. It operated under a command system of specified ranks called “nomenklatura” in which everyone knew his place, his role, and what he was supposed to do, think and say. Bureaucrats have traditionally been resistant to changes because in many cases change would make them obsolete and unnecessary.
Cadres and Nomenklatura
Common terms used to describe Communist members included “appartchik”, a petty bureaucrat; “cadre”, a group or a member of a group of Communist loyalists; and commissar, a personnel officer responsible for morale and discipline. Commissar was a word used to describe leadership positions in the Lenin government. Lenin and Stalin were chairmans of Council of People's Commissars, the effective leaders of the Soviet Union. Trotsky was the Commissar of War
Nomenklatura was the communist party's system of appointing reliable party members to key government positions and other important organizations. It also refers to the individuals as a social group. “Nomenklatyra” ("Lost of nominees") was a system of specified ranks. It often was used to describe the Soviet-era party elite, the bureaucratic class. The new “nomenklatura” is an unofficial network of powerful bureaucrats, former powerful party members an military officers.
Communist officials were known as cadres. A cadre is defined by the Oxford University Press Dictionary as “a small group of people trained for a particular purpose or profession." Senior cadres were overwhelmingly male. The party and government cadre system was the rough equivalent of the civil service system in many other countries, The term cadre referred to a public official holding a responsible or managerial position, usually full time, in party and government. A cadre did no necessarily have to be a member of the Communist Party, although a person in a sensitive position almost certainly had to be a party member."Source: Library of Congress]
Every leader at virtually every level had to be appointed, approved or otherwise sanctioned by the Communist Party. The goal for ambitious politicians and officials was to win a place on the Central Committee, with this leading to a governorship of a province or a post as a regional party secretary, with the aim of ultimately making it to the Politburo. The central authorities "most effective instrument" was "the power to appoint and dismiss governors, party secretaries and regional army commanders." Maintaining power was often a balancing act between rival factions A Communist ruler must lead as a first among equals. "He can't just issue edicts," one diplomat told Time magazine. "he has to marshal a consensus."
According to the Economist, "Communist Party officials function as a ruling class. They are a self-selected group accountable to nobody. They oversee government and industry, courts and parliaments." Elections are allowed for 'people's congresses'’so long as the party does not object to the contestants."
Describing a typical Communist official, Rudolph Cheleminski wrote in Smithsonian, "Bright, confident, well-spoken but still bearing that indefinable air of defensiveness when...encountering Westerners. Milling, ironical, circumlocuting with practiced rhetorical skill, prodding, rebutting when there was no call for rebuttal, answering questions with questions, he fenced more than he participated in an interview."
Central Organization Department and the Communist Party Bureaucracy
The Central Organization Department was the party's vast and opaque human resources agency. Andrew Higgins wrote in the Washington Post: “It has no public phone number, and there is no sign on the huge building it occupies. Guardian of the party's personnel files, the department handles key personnel decisions not only in the government bureaucracy but also in business, media, the judiciary and even academia. Its deliberations are all secret. [Source: By Andrew Higgins, Washington Post, July 25, 2010]
If such a body existed in the United States, Richard McGregor wrote in his book “The Party” it "would oversee the appointment of the entire US cabinet, state governors and their deputies, the mayors of major cities, the heads of all federal regulatory agencies, the chief executives of GE, Exxon-Mobil, Wal-Mart and about fifty of the remaining largest US companies, the justices of the Supreme Court, the editors of the New York Times, the Wall Street Journal and the Washington Post, the bosses of the TV networks and cable stations, the presidents of Yale and Harvard and other big universities, and the heads of think-tanks like the Brookings Institution and the Heritage Foundation." [Ibid]
Foreign policy is ultimately crafted not by the foreign ministry but the party's Central Leading Group on Foreign Affairs, and that military matters are decided not by the defense ministry but by the party's Central Military Commission. These and other party groups meet in secret.
In “The Party” McGregor described the existence of a network of special telephones known as "red machines," which sit on the desks of the party's most important members. Connected to a closed and encrypted communications system, they are China's version of the "vertushka" telephones that once formed an umbilical cord of party power across the vast expanse of the Soviet empire. All governments have their own secure communications systems. But China's network links not just ministers and senior party apparatchiks but also the chief executives of the biggest state-owned companies — -businessmen who, to outside eyes, look like exemplars of China's post-communist capitalism.
Federal Budget in Russia
Budget: revenues: $416.5 billion: expenditures: $408.3 billion (2014 est.); Taxes and other revenues: 20.2 percent of GDP (2014 est.), country comparison to the world: 161; Budget surplus (+) or deficit (-): 0.4 percent of GDP (2014 est.), country comparison to the world: 32. [Source: CIA World Factbook =]
Public debt: 13.4 percent of GDP (2014 est.); 8.1 percent of GDP (2013 est.). The data covering general government debt, and includes debt instruments issued (or owned) by government entities other than the treasury; the data include treasury debt held by foreign entities; the data include debt issued by subnational entities, as well as intra-governmental debt; intra-governmental debt consists of treasury borrowings from surpluses in the social funds, such as for retirement, medical care, and unemployment, debt instruments for the social funds are not sold at public auctions. =
From 2000 through 2005, Russia’s federal budget showed surpluses each year. Tax revenues tripled between 1999 and 2002. Following the tax reform of 2001, which established a flat 13 percent income tax rate, income tax revenues increased annually through the early 2000s. The 2001 reform also reduced the corporate tax rate from 35 percent to 24 percent, and in 2004 the value-added tax was reduced from 20 percent to 18 percent. Although some 32 percent more income tax money was collected in 2005 than in 2004 and the Federal Taxation Service campaigned to eradicate unreported salaries, in 2006 an estimated one-third of wage payments still were unrecorded. [Source: Library of Congress, October 2006 **]
Tax revenues for 2005 were US$153 billion. In 2005 the budget showed a surplus of US$51.1 billion, based on revenues of US$176.7 billion and expenditures of US$125.6 billion. The budget for 2006 called for US$197 billion in revenues and US$144 billion in expenditures, a surplus of US$53 billion. In the first eight months of the year, the actual budget surplus was US$56 billion. In 2006 the government’s Stabilization Fund, established as a hedge against future decreases in oil revenue, had about US$27 billion. The preliminary 2007 budget called for US$260 billion in revenues (based on further rises in oil prices) and US$211 in expenditures. By 2005 the failure to use budget surpluses efficiently had become a controversial issue in the government. **
Taxes in Russia
The Russian tax system is primitive, corrupt and arbitrary. Created from scratch in 1992, it is filled with loopholes and inconsistencies. Tax agents have the power to seize assets but at the same time the system allows people to easily hide their money and encourages them to put in overseas accounts.
A flat income tax of 13 percent was introduced under Putin. Before the flat tax hardly anyone paid taxes. In the 1990s, the income tax for people earning over $8,000 a year was is 35 percent and there were no deductions for medical coats, property taxes or charitable contributions.
Taxes on oil and natural gas provide the state with more than half of its revenues. There was a 20 percent value added tax in the 1990s and early 2000s. In 2004, the VAT was cut from 20 percent to 18 percent. A VAT (value-added tax) is a tax applied to the additional value created at a given stage of production and calculated as a percentage of the difference between the product value at that stage and the cost of all materials and services purchased or introduced as inputs.
Companies have to pay a 4 percent tax on their gross returns and a 35 profit tax (about the same at the United States except companies can't take deductions). Companies often didn’t report their profits or took their money out of the country to avoid paying taxes on them.
Taxation in Russia in the 1990s
Throughout the first half of the 1990s, international financial institutions warned Russia that major adjustments were needed in the structure and the administration of the country's tax-collection system. However, in 1996 few meaningful changes had emerged. Tax reforms until that time had emphasized revenue from income, consumption, and trade, with the value-added tax (VAT), corporate profits taxes, and personal income taxes accounting for 60 to 70 percent of total revenue. Beginning in 1993, experts have pointed to changes in the bases and rates of the profit tax and the VAT as a major cause of declining revenues. Between 1993 and 1994, the ratio of taxes collected to GDP declined from 41 percent to 36 percent, although the percentage of GDP paid in taxes already was lower in Russia than in any of the Western market economies. In the first quarter of 1996, only 56 percent of planned tax revenue was realized. [Source: Library of Congress, July 1996 *]
The system in place in 1996 taxed the profits of enterprises heavily, especially in comparison with the tax burden of personal income. In 1993 business profit taxes were three to seven times higher than in Western economies, and personal income taxes were two to four times lower. That emphasis was not conducive to expanding investment, and many non-wage sources of income were not captured by personal income tax standards. According to a 1996 estimate, Russians kept US$30 billion to US$60 billion in foreign banks to avoid taxation.
The VAT, which is levied on imported and domestic goods, is set at 21.5 percent for most purchases and 10 percent for a specified list of foods. Administration of that tax is complicated by uneven compliance and accounting rules that do not define clearly the amounts to be classified as value added. Taxation on the extraction and sale of natural resources is a major revenue source, but the current system yields disproportionately little revenue from the energy sector, especially the natural gas industry. Excise taxes are levied on merchandise of both domestic and foreign origin. The tax on imported luxury items ranges from 10 to 400 percent, and the rate on imports has been kept higher than for domestic products in order to protect domestic industries.
Taxes on trade are a major revenue source. In the mid-1990s, export taxes became a more important source of revenue as other types of trade control were eliminated. Frequent changes in the tariff schedule for imported goods have led to confusion among importers. The average tariff rate in mid-1995 was 17 percent, but a reduction of maximum rates was announced for the medium term.
Russia's taxation agency is the State Taxation Service (STS), which was established to administer the new market-based tax system installed in 1991 and 1992. Although in the mid-1990s its staff of 162,000 employees was much larger than tax agencies in Western countries, the STS has been hampered by poor organization, inadequate automation, and an untrained staff. Training and reorganization programs were announced in 1995, and some streamlining has resulted in separating the roles of various levels of government, identification of tax-eligible individuals and corporations, and application of penalties for tax evasion and tax arrears.
Problems with Russia Tax System
Daniel Yergin and Thane Gustafson wrote in the Washington Post in 1998, the Russian "tax system is a monstrosity that encourages nonpayment. It is putative, complex, contradictory, and the rates are contradictory. Those who due have the civic sense to pay taxes find that only turns them into a target for even more taxes from revenue hungry national, regional and local governments."
Experts have identified the most serious defect of the tax administration system as the ad hoc granting of tax exemptions, which distorts the overall revenue system and undermines the authority of administrators. The most problematic examples of this practice are exemptions granted to agricultural producers and the oil and natural gas industries. [Source: Library of Congress]
Businesses have to avoid paying taxes to avoid bankruptcy. If all the taxes on the books were paid a typical business might have to pay 105 percent of its revenues. Many companies keep two sets of accounting books: "black accounts," which accurately show profits, and "white accounts," with false records that are submitted to authorities.
The tax system drive away potential foreign investors and is the main reason why companies don't want to do business in Russia. One Western company was subject to just three taxes when it started doing business in Russia in three years ago; now it is subject to 22.
It also has driven the movement towards the "barterizaton of the economy" by encourages transactions of non-taxable goods rather than taxable cash. In addition, most companies owe huge tax debts. If they paid them there would be no left to pay worker s and purchase supplies.
Tax Collection After the Break Up of Soviet Union
Tax collection remained a major problem for Russia as of early 1997. Although some nominal tax reforms were put in place, tax collection remained inept, and the system still failed to promote private initiative or foreign investment. Despite constant government pleas, promises, and reform blueprints, and despite substantial pressure from the IMF, in 1997 taxation remained the main obstacle to budgetary solvency. [Source: Glenn E. Curtis, Library of Congress, July 1996 *]
The government lost large amounts of tax revenue because unofficial and illegal commerce is widespread and because the State Taxation Service inspires so little respect from legitimate businesses. According to an official 1996 estimate, only 16 percent of Russia's 2.6 million firms were paying taxes regularly, and at least twice that number paid no taxes at all. On three different occasions, the IMF postponed installments of a US$10.1 billion loan to Russia because of the taxation problem — twice in the second half of 1996 and again in February 1997.*
When the official tax shortfall reached US$24.4 billion in October 1996, the government began televising appeals for tax-law compliance. A new emergency tax commission, headed by Prime Minister Chernomyrdin and Chief of Staff Anatoliy Chubays, targeted seventeen of Russia's largest companies for bankruptcy proceedings if their huge tax arrears were not paid immediately. Among the most delinquent enterprises were three subsidiaries of Chernomyrdin's extremely wealthy former company, the State National Gas Company (Gazprom), which reportedly owed US$2.1 billion. Many large enterprises failed to comply, and much of Russia's extensive so-called shadow economy remained beyond the reach of the commission. Critics characterized the emergency commission as a stopgap tactic that delayed fundamental reform in the tax system. According to government statistics, in 1996 some 20,000 collection orders were issued for back taxes amounting to US$15.7 billion; the orders yielded only US$3.8 billion to the state budget. Early in 1997, Minister of Finance Aleksandr Livshits drafted a new tax code that would have saved the government an estimated US$30 billion annually. But the plan's anticipated closing of profitable loopholes attracted sharp resistance. In February 1997, Minister of Internal Affairs Anatoliy Kulikov, known as a hard-liner, was given the task of cracking down on tax violators. Yeltsin removed Livshits from his position during the Government reorganization of March 1997.*
In March the Government threatened bankruptcy proceedings against a new group of ninety nonpaying enterprises, many of them quite large, hoping to encourage public sales of shares that would dislodge Soviet-era managers in favor of outside investors. At the same time, privatization chief Al'fred Kokh was given control of the inept State Taxation Service.*
Uncollected Taxes and Tax Evasion in Russia
Tax collection was a major problem for Russia in 1990s. It is estimated that the Russian government collected only 8 percent of the taxes it was owed in 1998 and hardly any of that was collected on time. In 1997, only 120,000 people in Moscow (a city with 10 million people) filed their taxes on time. Federal revenues have plunged from 16.5 percent of domestic revenues to 8.5 percent in 1997. Some economist believes that uncollected taxes in Russia amount to more than $100 billion.
Although some nominal tax reforms were put in place, tax collection remained inept, and the system still failed to promote private initiative or foreign investment. Despite constant government pleas, promises, and reform blueprints, and despite substantial pressure from the IMF, in 1997 taxation remained the main obstacle to budgetary solvency. [Source: Glenn E. Curtis, Library of Congress, 1997 *]
The government lost large amounts of tax revenue because unofficial and illegal commerce is widespread and because the State Taxation Service inspires so little respect from legitimate businesses. According to an official 1996 estimate, only 16 percent of Russia's 2.6 million firms were paying taxes regularly, and at least twice that number paid no taxes at all. On three different occasions, the IMF postponed installments of a US$10.1 billion loan to Russia because of the taxation problem — twice in the second half of 1996 and again in February 1997.*
Tax evasion was endemic. Almost everyone cheated on their taxes and few people ever got caught. Oligarchs, bankers and entertainment figures with million get away with declaring incomes of only $100 a month. Victor Chernomyrdin, the former prime minister of head of the natural gas giant Gazprom, who is regarded as a billionaire, listed his income in 1996 as $8,000 and his net worth as $50,000. Countries with the biggest tax evasion problem: 1) Columbia; 2) Russia; 3) Italy; 4) Hungary; 5) Greece [Source: Executive Survey of 60 countries in 1996]
Among the most delinquent enterprises were three subsidiaries of Chernomyrdin's extremely wealthy former company, the State National Gas Company (Gazprom), which reportedly owed US$2.1 billion. Many large enterprises failed to comply, and much of Russia's extensive so-called shadow economy remained beyond the reach of the commission.
The non-payment of taxes has deep historical roots, dating back to time when serfs refused pay taxes to their Tatar overlords and cruel White Russian bosses. Some companies pay off their bills by bartering: airline companies offer tickets, oil companies offer fuel, in part to avoid taxes on profits. Employees often received only a small percentage of their earned in taxable salary and the rest as cash.
Cracking Down on Tax Evasion in Russia
In an effort to people to pay their taxes, the Russian equivalent of the Internal Revenue Service ran television commercials in which a man in bed with a beautiful blonde who has trouble getting it up because he was worries about taxes. There were also animated commercials that showed medieval thugs burning down a village of tax deadbeats.
Russia has a special academy for tax collectors. The students are taught fighting and self defence methods. The tax police sometimes show up with automatic weapons, camouflage uniforms and black ski masks. Tax agents in charge of seizing assets wear bullet proof vests and arrive in armored vehicles.
Although many Russians continue to hide extra income, compliance with tax laws is becoming more widespread. In 1998, Gazprom agreed to pay $674 million in unpaid taxes and pay $600 million a month on taxes after tax collector threatened to seize dachas, yachts and other things owned by Gazprom executives. One Russian man was outraged when was given a six month prison sentence for tax evasion. According to the Washington Post he knew he owed taxes and knew he was being investigated but he thought he would only receive a verbal reprimand.
When the official tax shortfall reached US$24.4 billion in October 1996, the government began televising appeals for tax-law compliance. A new emergency tax commission, headed by Prime Minister Chernomyrdin and Chief of Staff Anatoliy Chubays, targeted seventeen of Russia's largest companies for bankruptcy proceedings if their huge tax arrears were not paid immediately. Critics characterized the emergency commission as a stopgap tactic that delayed fundamental reform in the tax system. According to government statistics, in 1996 some 20,000 collection orders were issued for back taxes amounting to US$15.7 billion; the orders yielded only US$3.8 billion to the state budget. Early in 1997, Minister of Finance Aleksandr Livshits drafted a new tax code that would have saved the government an estimated US$30 billion annually. But the plan's anticipated closing of profitable loopholes attracted sharp resistance. In February 1997, Minister of Internal Affairs Anatoliy Kulikov, known as a hard-liner, was given the task of cracking down on tax violators. Yeltsin removed Livshits from his position during the Government reorganization of March 1997.*
In March the Government threatened bankruptcy proceedings against a new group of ninety nonpaying enterprises, many of them quite large, hoping to encourage public sales of shares that would dislodge Soviet-era managers in favor of outside investors. At the same time, privatization chief Al'fred Kokh was given control of the inept State Taxation Service.*
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Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, U.S. government, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Foreign Policy, Wikipedia, BBC, CNN, and various books, websites and other publications.
Last updated May 2016