Thursday, December 13, 2007

Kremlin considering another crushing blow to business

Citing unfair privatization and profit loss to the state budget the newly elected Kremlin-friendly Russian parliament is considering confiscating 20% of 10 years profit of big Russian business, which was part of privatization of former communist state assets in the middle 90s.

There are two reasons given for the decision which would transfer some 62,5 billion dollars from private firms to state budget: unfair privatization in the 90s and, read between the lines, alledged superprofits enjoyed by the private entities in the eyes of the MPs and their backers (see this story in Russian).

"All pover to capitalists, to workers and peasants - death" (

Is Russian business uncommonly profitable?

But is it a fact that Russian business actually has accountable "unfair profits"? What would happen if the situation in Russia's economy in the 90s wasn't as corrupt and unfair as it in fact was?

Let's compare the results of Russian undertakings to the undertakings in the least corrupt country of the former Soviet block, Estonia, from where your author is writing this piece. In 2006 Estonia had been estimated by international anticorruption body Transparency International to hold 24th place in the World corruption index, surpassing some of the Western countries, while Russia enjoyed a place among or near some of the most corrupt - somewhere around 140. Even though the particular figures are from this century, Estonia has been considered one of of the least corrupt former Soviet countries in fact since re-appearance in 1991. Privatization in Estonia, happened roughly at the same time as it happened in Russia has also been perceived as generally fair. This fact established, let's see how much money private players earn in two countries.

In the 1990s post-Soviet private business was in the beginning of its formation and operation. Since the second half of the decade working market economies with varying level of freedom emerged in two countries.

According to the latest available consolidated statistical data on the year 2005, Russian private undertakings produced about 105 billion dollars in pure profits (I used data from this piece in Russian, which says that Russian firms earned 85 billion dollars in 10 months of the year 2005). Estonian private operators succeeded in the same year in earning 3,02 billion dollars (1 USD = 13,2 EEK) of profits, according to statistical database Again, this is the latest year on which consolidated statistics are available (free access).

What do these numbers demonstrate? Estonian undertakings earned 3 billion dollars in profits, while Russian firms earned only 105 billion dollars in profits. Because Estonia has approximately 100 times smaller population (1,35 million vs 143 million), per one inhabitant Estonian businessmen achieved more than 3 times more profits than Russian businessmen.

Of course, this is very rough estimate, and it misses many different variables, but at the same time it is clear that Russian business is not unusually profitable, at least in the part which is visible and accountable. But it is the visible and accountable part of the business the government can tax, right? Perhaps things changed to the better for Russia since 2005, given the spike in energy prices. But so far I am claiming that the earnings in Russia have been a mere 1/3 of what they would have been had the environment worked as in Estonia.

Taking out a very large part of the private earnings - 20% of the profits earned in 10 years - is undoubtfully going to hurt. A lot. And, going further with the Estonian analogy, participation in unfair privatization has not made the difference on the account sheets. Instead, any Russian superprofits must have gone into grey accounts on Cyprus, where the authorities aren't going to get them anyhow. That's why the honest enterpreneurs are worried and those in the black exonomy, both criminal and FSB-related, aren't. And if you have shares in transparently traded Russian funds you should too.

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