Shadow economy

newsletter 02/09/2021

The shadow sector of the Russian economy has been shrinking over the past few years. By 2022, the Government of the Russian Federation predicts a decrease in the volume of the shadow economy to 10 trillion RUB, about 9% of the forecasted value of GDP for 2022. For comparison, the total revenue of the three largest enterprises in Russia in 2020 is 10,7 trillion RUB - JSC Gazprom (4,1 trillion RUB), JSC Oil Company Rosneft (4,8 trillion RUB), JSC Russian Railways (1,8 trillion RUB).

Does the Russian economy have a chance to step out of the shade?

The shadow sector exists in the economy of any country. Tax evasion, criminal income, understatement of the size of business take place even in financially prosperous states. The scale of the shadow economy is crucial. The greater its share in GDP and the citizens employed in it, the less budget revenues, the weaker the economy, and the higher the risks of economic security.

How big is the Russia’s shadow economy?

Despite the downward trend, the volume of the hidden economy in Russia is quite large. According to the Federal Service for Financial Monitoring of the Russian Federation (Rosfinmonitoring), the shadow sector is estimated at about 18,4 trillion RUB, 16,9% of Russia's GDP (Picture 1). The volume of shadow activity in the Russian Federation is practically comparable to the federal budget revenues. In particular, revenues amounted to about 20,3 trillion RUB in 2020.

In 2015-2017, the growth of the gray economy stopped and its share in total GDP began to decline. Russian business has adapted to the sanctions, and domestic production has been adjusted within the framework of the import substitution policy. However, in 2018, the next round of the crisis brought tangible discomfort to a number of the country's leading industries, provoked an outflow of foreign assets from Russia and the growth the share of the shadow economy.

Prospects to step out of the shade

The measures taken by the Government for deoffshorization, combating illegal income, and control over monetary transactions are yielding positive results. According to the Central Bank, the volume of shady transactions in the banking sector in 2020 decreased by 26%, which will undoubtedly affect the “lightness” of the economy.

According to Credinform experts, the share of the shadow economy will decrease due to the growth of Russia's GDP, but its volume will remain quite high: in 2021, it may return to the value of 2019, reaching 18,4 trillion RUB. (Picture 1).

Forced restriction of business activity in 2020-2021 negatively affected a number of industries in Russia. The increase in additional employee costs during the period of restrictions prompted many entrepreneurs to go into the shadows and conduct uncontrolled economic activities.

Reducing the shadow sector depends on a competent solution to the problems of Russian entrepreneurs, not only tightening measures against unreliable and shell companies, but also stimulating business development, including through a fair reduction in the tax burden.