The Cable

Russia’s Informal Sector Hits Its Highest Level in Over a Decade

The shadow economy is hurting Russia’s economy. It’s also a sign of deeper structural problems.

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Russia’s informal economy employs 15.4 million people, or more than one-fifth of the Russian workforce.

According to a new report from Russia’s Federal Service for State Statistics, or Rosstat, 21.2 percent of working Russians were employed in the informal sector in 2016, up from 20.5 percent the year prior. The informal economy, at least as defined by Rosstat, includes people who work at enterprises not registered as legal companies, such as those who are self-employed or work for an “individual entrepreneur.”

The informal economy does not include those people paid under the table at legally registered companies, however. They were included in last year’s Russian Academy of Sciences calculations, which say Russia’s “shadow labor market” includes 30 million people. That’s more than 40 percent of Russia’s “economically active” population.

The good news is those numbers indicate that, even in times of crisis and negative GDP growth, Russian unemployment remains relatively low. The bad news is that informal employment hurts the development of the rest of the economy by reducing tax revenue, which takes away from the state budget. On the flip side, those in the informal economy aren’t benefiting from the state budget, because, for example, they can’t collect pensions. The informal sector also decreases productivity and efficiency by employing people who might otherwise develop the private sector, according to Vadim Grishin, an expert on Russia’s economy at the Center for Strategic and International Studies.

The Russian government is well-aware of this and has discussed some reforms. For example, a policy to reduce the amount of cash in Russia would squeeze the informal sector (this policy is currently being considered elsewhere — namely, in India, the most cash-dependent country in the world). “A cashless economy is a very popular topic now,” Grishin said, “but just applying this measure is not sufficient to create incentives to move [the] informal sector to [the] formal sector.”

Structural reforms, including pushing back against large state-owned monopolies, would be needed to help reduce the informal economy, according to Grishin. Until that happens, the informal sector is likely to remain, a costly reminder that it exists because of an unhealthy economy — and not the other way around.

Photo credit: DIMITAR DILKOFF/AFP/Getty Images

Correction, April 18, 2017: Russia’s informal economy employs 15.4 million people, or more than one-fifth of the Russian workforce. A previous version of this article mistakenly said it was more than one-fifth of the Russian population.

Emily Tamkin is a staff writer at Foreign Policy covering ambassadorial and diplomatic affairs in Washington. @emilyctamkin

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