How much money is there in off-the-books construction in Russia? 

Millions of our fellow citizens in construction and construction materials production do not pay taxes. Neighboring states get the income from accidental construction work in Russia. Is it possible to legalize the work of these people?  

 

Almost every other job is off the books

At the recent sitting of the council on strategic development and priority projects, the President of Russia, Vladimir Putin, charged officials with working out proposals on motivating the part of the population involved with the shadow economy to legalize their labour.

According to June’s poll, carried out by the Russian Presidential Academy of the National Economy and Public Administration, about 30m people work in the informal sector of the economy in Russia at present, which is 40.3% of the gainfully employed population of the country, totaling 76.5 m people. About 8.7 m people are totally excluded from the official economy whilst others have additional earnings which are either not registered officially or are received as hidden wages.

The scale of the “garage economy”, where non-registered employees (builders, counterfeit producers, taxi drivers, mechanics, traders, tailors, dentists and vets) work cash-in-hand is evaluated as a quarter of the GDP of Russia - about 18.4 trn roubles. (!)

 

50 shades of grey

The construction complex is traditionally among the industries in the “grey” economy, especially low-rise and wooden housing construction.

— The share of low-rise construction in the total volume of housing put into operation is 53—54%, Valery Kazeikin, Deputy Coordinator of the “Svoy Dom” State Duma Program on the development of low-rise housing construction told our journal. — Controlled development is about 14—15%. That is, 40% of all housing put in operation— about 20m square meters — is non-controlled development.

If we multiply these 20m by 35,000 roubles (the price according to the “Housing for the Russian Family” Presidential program) we get 700 bln roubles a year, from which the state might theoretically receive 300 bln roubles of taxes (more than $4.5 bln) – ‘might’, but does not. “Grey” operators do not pay taxes and their employees, citizens of  neighbouring states, do not spend 80% of their earnings in Russia but send them home.  

Thus, the total losses to the state on the “grey construction front” may be assessed as being as much as 3 trn roubles over the last 10 years (about $50 bln). The figures are impressive.

According to Valery Kazeikin, the majority of the houses built by such people are documented within the framework of “dacha amnesty”:

— A boss writes an application, specialists from the cadastral office come to measure the house and the land plot, and the former receives a permit for the house, so everything is legalized...

According to information from the National Agency for Low-Rise and Cottage Construction, most low-rise houses are put into operation in the North Caucasus, Siberia, Bashkortostan, Tatarstan and the Moscow region.

           And where do such agents work in Russia? The Director General of the Wood Housing Construction Association, Oleg Panitkov, has made a corresponding study of the regions (see table): the share of such agents is 25—50% of the total market participants. 

 

Share of grey brigades in the total number of wood housing construction market contractors (%) and citizenship of foreign builders

 

Region	Southern FD	Central FD	Volga FD	Ural FD	Siberian FD	Far East FD	North-Western FD	Saint-Petersburg and LR	Moscow and MR
%	50%	40%	35%	30%	30%	30%	30%	25%	35%
Nationality	Ukraine Belarus Moldova Central Asia	Belarus Ukraine Moldova Central Asia	Belarus Ukraine Moldova Central Asia	Belarus Ukraine Moldova Central Asia	Central Asia Belarus Ukraine China	China Ukraine Belarus	Belarus Ukraine Moldova Central Asia	Belarus Ukraine Moldova Central Asia	Belarus Ukraine Moldova Central Asia

Source: Wood housing construction Association

 

We are not slaves, but they are

— As opposed to other segments of the “garage economy”, the problem is that the majority of these people (55—60%, I think) are not Russian citizens, Oleg Panitkov stresses. — And consequently, in the total volume of the wood housing construction market, which we evaluate at as much as 1.5 bln roubles, the “grey” constructors’ earnings are a serious flow of capital, going abroad.

Legalizing the work of these people is a very complicated matter.

— It is necessary to make out documents for the right to work in Russia – firstly, a license. Then it is very desirable, but very difficult, to draw up a labour contract in writing with an employer, — the chairman of the migrant workers’ trade union, Renat Karimov, explained.  

As the “360” TV channel reported, there are more than 10m migrant workers in Russia, and only 1.5m of them have licenses for work.

As a result, many migrants actually enter into slavery. Recently the story of a citizen of the town of Serpukhov (Moscow region) was discussed all over the country: he found a note with a plea for help from a probable slave in the construction materials industry delivered by one of the timber works in Bratsk (Irkutsk region). He took the note to police. 

 

“Bad” does not mean “cheap”

Alongside with capital exports, there is another serious problem.

— Wood housing construction is mainly industrial now. Because of the “grey brigades” the capacity of our legal companies is only 30—40%, Oleg Panitkov complains. — So, to be profitable we have to produce houses at higher prices than we might. It means that we cannot implement the programs of available low-rise housing, and the state loses money in the form of taxes.

Besides, someone who chooses a “grey brigade” to build a house is taking great risks, as the work may be low quality, and threaten family members’ lives and health. As such brigades cannot carry out a professional project, they do not offer any guarantee…And, it is difficult to believe, but their work may be more expensive. Why?

They simply deceive customers by claiming lower prices, for one thing. Secondly, they buy construction materials in retail stores, while legal companies either buy them at wholesale prices, or produce them. Then they use low quality materials and tools, and under-qualified personnel.

 

Will SRO save us?

How can it be stopped?

— Citizens should show initiative themselves, Marina Konopleva, the Director General of “Komstrin-Perm” LLC, thinks. — They must check if the companies are members of an SRO, if they have the necessary licenses, if the SRO can be responsible for them in case their security is threatened. And if people cannot ask even these simple questions, such businesses will keep on blooming.

However, it is not so simple with SROs. Recently, the State Duma adopted

372-FL, developed by the Ministry of Construction, Housing and Utilities. According to this, companies with contracts of less than 3m roubles need not be members of an SRO, and their membership is voluntary. Contractors will now hire subcontractors themselves and will be responsible for the quality of their work.

As Victor Priadein, head of NOSTROY administration, explained, it allows one to decrease the financial and administrative load on businesses. However, part of the construction community forecasts the return of the 1990s, with even a larger number of “grey brigades” and other joys of the past.

— Instead of highly qualified construction organizations we’ll get pick-up work for contracts implementation, Novosibirsk constructors are sure. —The government has legalized the practices of unfair SROs instead of introducing strict controls. As far as good-faith SROs are concerned, they may become non-competitive in these new conditions.

So, people are first driven to dodgy operators and then measures are taken to drive them out. It is quite traditionally Russian.

 

Will insurance reform help?

— If such people exist, their participation in the economic life of Russia should be granted amnesty, the Vice-President of NAMIKS (National Agency for Low-Rise and Cottage Construction), Valery Kazeikin, reasons. — They should receive a license without any penalties for their activity, and be immune from taxation for, say, three years.

According to the expert, such an approach may be welcome: it is time to try to return this money to the economy, at least in part. Mr Kazeikin is sure that if President charged them to do so, the government and the deputies will take to the job.

But not everyone shares his optimism.

— There were lots of amnesties in different spheres, but, to tell the truth, I have never seen any significant effect from them, Oleg Panitkov states.

What is to be done? The Wood Housing Construction Association has proposed that the Ministries of Construction, Housing and Utilities and of Trade and Industry introduce a system of compulsory insurance for houses being constructed.

— I stress that it’s not about an SRO, but about the system of low-rise construction and wooden housing insurance, as it is done all over the world, Mr Panitkov explains. — If an insurance system is developed, insurance companies will not cover houses built by “grey brigades”, or will do so at a high rate.

So, the market regulator will appear automatically and will make customers seek reliable contractors, civilized and clear in their business.

— At least it is a practical measure, Oleg Panitkov remarked. — And I doubt that we can legalize millions of migrants …

And it is hard to argue.

 

In Russia and abroad

…Will the “garage economy” be overcome, resulting in trillions of additional roubles in the country’ purse? I am afraid we shall not live to see this glorious time.  

In such European countries as Germany, Finland and others, one would not be allowed to tile a bathroom or fix a power socket, and the buildings erected by professional constructors (not any Tom, Dick or Harry, as with us) meet all modern requirements and regulations in terms of ecology, security, energy efficiency, etc.

Such an approach is costly, of course. But standards of living in a country with a wealthy middle class provide demand for such an attitude towards buildings – meaning, the people who will live and work there.

And in Russia? While the government and the CB are destroying the middle class, making half the country poor, how can we speak about legalizing a modern approach to housing construction? That’s why we are building cheaper and with the help of half-literate migrant workers. How long will a house stand and will its residents’ health be threated? This issue is, alas, not so important for the majority of Russians.

We shall continue to discuss the problem of the shadow economy in the construction complex and our next article will be about “garage” production of construction materials.

 

Andrei CHERNAKOV