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This note has been prepared by the ILO Bureau for Workers' Activities in co-operation with the Federation of Independent Trade Unions of Russia (FNPR). It forms a part of a new workers' activities project that is supported by the Norwegian Confederation of Trade Unions (LO) with the Norwegian Government.
The purpose of this information note is to clarify the extent and structure of the problem of the wages that have not been paid to workers who have earned them in Russia. We have done our best to collect the available information on the amount of money that has not been paid, and how the problem affects different sectors of the Russian economy.
This note makes some comments on possible reasons for the delays, but it does not pretend to present all complications of the problems. It does not pretend to know the ultimate answers, either. It is a serious attempt to understand the shape of this issue that is without parallel in history and that is the major concern of Russian trade unions and their members.
Most of the statistical information is based on data provided by Goskomstat, the Russian Government agency in charge of statistics. Other Russian and foreign sources have been used to corroborate or add to it. This data is not always comprehensive and not always accurate, but it is the best available, without conducting extensive research for primary information. Also, substantial parts of the Russian economy are not reflected in the statistics at all. This note simply presents the most accurate information in June 1997.
The Russian economy has been shrinking through the nineties. According to Goskomstat, the change of Russian GDP from previous year has been:
-9% in 1993
-13% in 1994
-4% in 1995
-6% in 1996
In 1996, the GDP was 2,256,000 billion roubles (440 billion dollars). For 1997, The Institute for Economy in Transition has predicted growth by up to 2%, but several observers say that the estimate is too optimistic.
On January 1
st
, 1997, the payment arrears of companies in Russia totalled 484,039,000,000,000 (484,039 billion or 484 trillion) roubles, which is over 80 billion dollars. Arrears to suppliers amounted to 245,937 billion roubles and arrears to wage earners to 34,705 billion roubles (Figure 1). On the 27th of January, wage arrears amounted already to 39,120 billion roubles and on the 24th of February to 39,902 billion roubles. This was more than double the amount in February 1996.
Also the government has arrears to suppliers. These arrears are not included in the figure. The government mostly buys finished products, and by not paying them contribute to financial difficulties of all companies in the production chain, those who deliver raw material or components and those who make the finished product.
Figure 1: Arrears of Companies to Suppliers, Budgets, Extra-Budgetary Funds and Wage Earners, January 1 st , 1997
Source: Goskomstat
Arrears as a percentage of GDP have increased more rapidly since the beginning of 1996. At the end of 1996, total arrears of companies excluding arrears to banks accounted for 23% of the GDP of last 12 months (Figure 2).
Since 1993, arrears have accumulated mainly between companies, but in 1996, the companies started to postpone their payments especially to the federal and regional budgets, pension funds and wage earners. The percentage of arrears to budget and extra-budgetary funds rose even more steeply than arrears to the suppliers of goods and services. Arrears to budgets and extra-budget funds were 5% of GDP at the beginning of 1996 and 9% at the end of 1996. Arrears to suppliers were 8% of GDP at the beginning and 11% at the end of 1996. Wage arrears were 1% at the beginning and 1.3% at the end of 1996. (Goskomstat)
According to estimates by the State Tax Service, 17 percent of corporate and other taxpayers comply fully and on time. Some 49 percent occasionally comply, and 34 percent simply flout the tax regime.
The list of tax debtors includes the nations' biggest companies. Indeed, 72 companies account for more than 40 percent of all the tax arrears. (New York Times, February 17, 1997)
Overall shortfall of tax revenues to the federal budget had surpassed 80 trillion roubles in February 1997. About 63.9 percent of this amount are shortfalls from VAT, about 14.9 percent from excise duties and 11.3 percent from profit taxes. (Institute of Economy in Transition)
The federal budget revenues in February 1997 remained below the second half of 1996 level. The revenues have decreased considerably. As a percentage of GDP the revenues of the consolidated (federal+regional) budget were 28.8% in 1992, 26.8% in 1993, 29% in 1994, 26.1% in 1995 and 24.7% in 1996. (Institute of Economy in Transition)
The budget deficit increased by 0.6% of GDP in February from January 1997. According to Goskomstat, the deficit of the consolidated budget increased from 3.3% of GDP in 1995 to 4.2% in 1996. According to IMF, the deficit is much bigger, 7 % of the GDP in 1996.
It is worth noting that the structure of financing the budget deficit has changed in favour of external sources in recent years. First of all, it is explained by an increase in attracting funds from international financial organisations, especially from IMF. (Institute of Economy in Transition)
Figure 2: Total Arrears of Companies Excluding Arrears to Banks
Source: Goskomstat
In addition to companies, also the government has wage arrears. Wage arrears due to a lack of financing from federal or regional governments totalled 10,334 billion roubles on 24 February. (Figure 3).
On 24 February, the total amount of wage arrears (companies + governments) totalled 50,236 billion roubles. This is over a month of the total wage bill of workers in Russia.
Only one-third of Russian working population receive wages in full and on time; one-forth have their wages delayed, while about 30 percent have to wait for months to get paid. (RIA-Novosti)
Figure 3: Wage Arrears of the Federal or Regional Governments and Companies, 24 February 1997
Source: Goskomstat
Government wage arrears have accumulated especially in education and health sectors. (Figure 4) The Goskomstat table does not include any category for defence sector.
However, Labour Ministry acknowledged in November 1996 that the state owes workers and pensioners 7.7 billion dollars and its troops another $1.2 billion dollars in back pay. (RIA-Novosti)
Although the government has wage arrears to its troops, the national defence expenditure has increased in recent years as a percentage of GDP. In 1995, the expenditure was 4,03% and in 1996 4.10%. (Institute of Economy in Transition)
Figure 4: Government Wage Arrears by Sector, 27 January 1997
Source: Goskomstat
Wage arrears of companies have accumulated especially in industry and construction. (Figure 5) Industry accounted for 55% and construction for 17% of all company wage arrears. Of all wage arrears, industry accounted for 47% and construction for 14%. Their share of GDP is much smaller. Industry accounts only for 26% of the GDP and construction for 8%.
Wage arrears per employee are larger in industry and construction than in agriculture or transport. In industry, wage arrears per employee were 1.3 million roubles, in construction 1.0 million roubles, in agriculture 615,000 roubles and in transport 741,000 roubles. In 1996, the number of employees was 17.2 million in industry, 6.5 million in construction, 9.9 million in agriculture and 5.3 in transport. (Goskomstat)
Figure 5: Wage Arrears of Companies by Sector, January 27 th , 1997
Source: Goskomstat
Altogether 50,939 companies were recorded as having arrears on 1 January 1997. In December 1994, the number was 34,200.
It is typical of fuel industry (oil extraction, oil refining, gas, coal), electricity generation and metal industry that the amount of wage arrears per company are large (Figure 6). For example, 455 fuel companies had wage arrears of altogether 3,938 billion roubles. In agriculture, food, light industry and construction the amount per company is much smaller. For example, 23,116 agriculture companies had wage arrears of 5,298 billion roubles. This number is not shown in Figure 6, because it would have distorted the dimensions too much. This reflects the differences in company size, but maybe the wage arrears per employee are also larger in fuel, electricity and metal industry.
Figure 6: Wage Arrears of Companies and the Number of Companies by Industry, 1 January 1997
Note: The number of enterprises in agriculture is 23,116. It was left out, because it would have distorted the dimensions of this figure. See text on previous page for comment.
In the Soviet era the enterprises used to enjoy soft budget constraints through an automatic coverage of losses with money given from the state budget. Hardening budget constraints on companies was supposed to create pressure for behaviour that has an impact on the real economy in the form of better company performance.
The companies created a loophole of their own to stabilisation by engaging in barter transactions and simply by letting payment arrears to accumulate, especially between themselves, but also to governments and employees. Barter transactions offer buyers a way to finance their purchases and sellers a way to avoid production cuts.
There are no reliable statistics on barter transactions. Companies do not keep official records mainly due to tax reasons. Krupnov J.S. estimated in his article in Finansy that the share of barter transactions at approximately 90% of industrial production in the middle of 1994 (Bank of Finland).
Barter transactions are most common in industry. But also government workers and troops are involved in barter transactions. Trucks pull up periodically behind cash-strapped government ministries and state-subsidised companies in Moscow, dispensing cheese, eggs, bread, potatoes or sausage instead of cash to workers. Enterprises across Russia have found similar ways of settling back wages. They offer employees candy, cement, coats, vodka, whatever is available. Farmers pay troops with cabbages for helping out with the harvest. People in Russia have become more and more dealers in products produced by their employers - steel pipes for shoes, coal for beef. Barter transactions take place in private Russian companies as well. Qualified workers are very willing to perform almost any work for Western companies in order to get paid by cash money. A Moscow neurosurgeon works as a night watchman and a head physician cleans toilets for a Western business.
Until recently, inflation was a good reason to barter transactions and postponement of payments. In 1996, the situation changed. The inflation was only 21.8% for 1996 against 131% for 1995 and 215% for 1994.
In the highly inflationary conditions, companies had a considerable interest in cashing in their receivables as soon as possible, while delaying payments and wages in the expectation that the inflation will be paid by the creditor and employees. Large, influential enterprises had the best possibilities for this strategy.
The situation was made worse by slow and expensive payment transfers by banks. Banks have been accused of delaying transfers so as to take advantage of the non-interest-bearing financial resource provided by the transfers. It has been very profitable for both banks and companies to use the cash for short-term loans at high interest rates instead of paying wages.
Until recently, the interest rates have been very high. Interest rates on short-term loans were at the level of 250% in 1995 and still at the level of 200% in the first half of 1996. Since June 1996, the interest rates have come down rapidly to 30% in 1997. (Institute of Economy in Transition)
Although inflation and interest rates have come down, the arrears increase more rapidly than ever. The most common explanation is the lack of funds in companies' bank accounts, due to customers failing to pay for shipped products.
Liquidity problems emerged already in 1992. The very high inflation increased the need for bank notes. The capacity to print bank notes as well as the system of their distribution proved inadequate when confronted by a sudden increase in demand. As wages could only be paid by using cash (nalichnye) rather than non-cash (beznalichnye) roubles, cash constraints restricted employers' ability to pay wages.
Another explanation for poor liquidity is that nominal profits of the companies dropped dramatically in 1996. This is the first year since 1992 when companies report that their nominal profits declined. Goskomstat statistics indicate that nominal profits of the main sectors of the economy (industry, construction and transport), after growing fast in 1995, fell by one half in 1996. But these statistics are not fully reliable, because companies might hide their profits for the purpose of tax evasion.
The whole liquidity problem is somewhat questionable. Foreign exports have flourished for years, especially exports to non-CIS areas. The trade surplus was 28 billion USD in 1996. (Figure 7)
Figure 7: Export and Trade Surplus 1992-1996
Source: Bank of Finland. The figures are from Goskomstat and Customs.
Capital certainly accumulates in Russia. But instead of using the money for paying debts, the companies keep accumulating USD assets at home and abroad. This liquid money either at home or abroad has not been used for investments in Russia either. The volume of investments in fixed capital keeps dropping year by year. Compared to previous year investments dropped by 18% in 1996, 13% in 1995 and 26% in 1994. (Bank of Finland) As Pekka Sutela from the Bank of Finland argues, the longer the resources that could be used for investments remain unutilised, the greater becomes the probability that they will turn into a mere source of elite consumption. Capital flight becomes a permanent phenomenon.
Labour income is heavily taxed in Russia, with a top income-tax rate of 62% on $10,000 a year and 49% on $5,000. In contrast, taxes on business and property income range from 28% to 38% and taxes on gains in bank accounts from 12% to 38%. Thus, some companies are increasingly paying some of their workers' salaries in stock, dividends, and other lower-taxed income. (Director of emerging markets at Lehrman Bell Muller Cannon Inc, Oct. 1995). In 1996, personal income tax rates were raised. Obviously, this only concerns companies with a lot of cash, and only selected employees.
To avoid the tax on wages, Russian employers can arrange for their employees loans at 1% interest in lieu of wages. The funds are then deposited in the banks in high interest rate accounts and the interest returned to the employees. According to Sergei Shatalov, Deputy Finance Minister, especially the banks as employers have evaded taxes this way. "It is well known that their (bank employees) salaries cannot be even compared with the country's average; sometimes they even reach tens of millions of roubles per month. At the same time, the official taxable pay of a bank employee is very often modest enough to make up just a few hundred thousand roubles per month. There is a tricky practice where salaries at banks are transferred to employees' deposit accounts at a very high interest reaching as much as 200, 300 and even 500 per cent of annual interest. As a result, a small initial sum would quickly turn into millions of roubles, from which no taxes are deducted or remittances made to extra-budgetary funds, first of all, the pension fund. Consequently, billions of roubles do not reach the federal budget. Another similar trick involves loans provided to bank employees on super-beneficial conditions. For instance, they can get a credit worth tens of millions of roubles at 2-3 per cent of annual interest and sometimes interest-free credits." (RIA-Novosti 1997)
Personal income tax accounts only 7.5% of government revenues according to the Russian Government's Working Centre for Economic Reform. In Western Europe, it is approximately 30%.
Demands have been voiced to speed up structural transformations in the economy, to start real reorganisation and reconstruction and to close down a number of non-viable enterprises. Still, one must take into account that such tough policies can only be successfully pursued if they are accepted or supported by a majority of the population and politicians. (Natalia Pliskevich, RIA-Novosti)
Going over to harsh reorganisation measures requires a fundamental restructuring of personnel and social policies of such companies, as well as the Government. In addition to problems caused by unemployment, the general fear is that of cutting off social services provided by companies and risking real social upheaval as a consequence.
Avtovaz serves as a good example of government policy. According to New York Times, it owes 2.8 trillion roubles -- $500 million -- to the federal treasury in taxes and penalties, more than any other Russian company does. The government will have to wait to be repaid, company officials calmly explain. Avtovaz is not in a position to repay its debt any time soon.
Companies like Avtovaz supply a range of services that in another country could come from municipal governments. Avtovaz, for example, is not just Russia's Chrysler. It is more like Russia's Detroit. The factory was erected in 1970 in a joint effort with Fiat, the Italian auto company, and it gave birth to an entire city, named after Palmiro Togliatti, the Italian Communist. The place is a monument to central planning. The enterprise not only has assembly lines capable of turning out 740,000 vehicles a year; it also produces virtually all of its own parts. Avtovaz also provides its work force with kindergartens, clinics, and other social benefits that the local municipality says it cannot afford to take over. (New York Times)
In addition to bankruptcy, also foreign investors are kept off by the management's argument that foreign owners would lay off workers. Avtovaz executives, determined to maintain control, say that giving an outside investor 51% of Avtovaz's shares would enable the new management to sell off the company's assets or lay off workers. (New York Times)
Russia has numerous tax laws. Sergei Shatalov, Deputy Finance Minister that the Finance Ministry simply does not know the number of different taxes existing in Russia, but the ministry estimates that there are 160-180 of them. (RIA-Novosti) Anatoly Ryzhov, Head of Department of Russian State Tax Service, estimates that there are 40 federal taxes and some 90 regional taxes. (RIA-Novosti).
Russia lacks a workable, clear and simple division of labour, authority and money between the Moscow centre and the regions. The second problem related to this one is that, in 1992-1993, the Russian State was strong enough to collect taxes, but it was unable to control effectively expenditure and to implement legislation. Since late 1993, even the capacity to collect taxes has been in jeopardy. (Bank of Finland)
A point of permanent dispute is the relationship between the federal government and the regions. A taxpayer in principle deals with three different budgetary authorities to which he pays taxes. Although the taxes are all collected by the State Tax Service, liability to one budget cannot be offset against overpaid taxes from another budget. Regional autonomy is one of the fundamentals of the present state structure of the Russian Federation, and most regions attach great value to the right to generate their own revenues by levying taxes, especially if precious natural resources are located in their territory. Both the most important taxes, VAT and profit tax, are partly paid to the federal budget and partly to the regional budget. Rules to attribute income to a regional branch of a legal entity are just starting to be developed; so many regions have taken the opportunity of creating additional taxes. At the moment, there are over 200 different regional taxes in force in the Russian Federation. (Coopers & Lybrand Russia)
Enterprises also deal with four different non-budgetary social funds, which levy an aggregate of 40.5% of the payroll expenses. Each fund has its own enforcement agents. The definition of payroll expenses as the basis for contribution payments used to be the same for all funds, but has started to diverge. (Coopers & Lybrand Russia)
Also the content of laws, case by case privileges granted by tax authorities and inspectors policy have been heavily criticised. "The tax system demands too much from corporate sector while virtually ignoring the banking and financial services industries" (Mikhail Zadornov, chairman of the Parliament's budget committee) Corporate taxes fail to distinguish adequately between revenues and profit (various tax specialists). Tax inspectors tend to scrutinise companies with the clearest financial records and consequently the best way to keep inspectors away is not to disclose information. (Various tax specialists)
The tax reform is supposed to reduce the number of taxes to 30, but tax reform is not around the corner. Under the most optimistic scenarios, Finance Ministry officials say, a tax reform package will be presented and adopted by the Parliament this year so that it can be enacted in 1998.