War on Cash and Informal Economy: Russia to ban Transactions over $10,000

Since the financial crisis of 2008, governments around the world have taken financial repression to a higher level. 

Russia’s government plans to restrict cash transactions supposedly to increase bank reserves, as well as, to curtail her informal economy which allegedly has grown to at 50%-65% of national output.

From Russia Beyond the Headlines (hat tip Zero Hedge) [bold mine]

Russia may ban cash payments for purchases of more than 300,000 rubles (around $10,000) starting in 2015. The move is expected to boost banks’ cash reserves and put a damper on Russia’s shadow economy. However, the middle class will most likely end up having to pay the price for the scheme.

Moscow is looking to kill two birds with one stone: Firstly, it wants to bring some of the population’s “grey” income out of the shadow; secondly, it wants to increase the volume of cash reserves in the banks. The government’s bill will introduce the new rule to the State Duma. The document was prepared by the Ministry of Finance and approved by the government.

The proposed transition, from the same article.

The restrictions on cash transactions will develop in two phases. In 2014, a ban on cash payments for purchases worth more than 600,000 rubles (about $19,500) will be introduced; the limit will then be halved to 300,000 rubles in 2015. Furthermore, the document introduces mandatory, cash-free, salary payments.

Smaller companies with fewer than 35 employees will be the only exception, and trade companies will be able to pay salaries in cash if they employ no more than 20 people on staff.

Informal economies are basically products of an anti-business regimes based on over-regulations and various forms of social and economic controls, bureaucratic morass, high taxes, rampant inflationism and high welfare economies or simply said a highly politicized economic environment. 

Informal economies are what I would call guerrilla capitalism. 

Yet the desire to simply restrict cash transactions will likely fail, and the produce outcomes opposite of the intentions. 

Such restrictions will likely provide a huge disincentive for Russian firms to expand beyond 35 employees (20 for trading firms) that would limit attaining competitiveness. 

Russian firms are also likely take advantage of such legal loopholes to maintain numerous small companies than to consolidate them. 

In short, more restrictions promote the incentives to remain in the informal or shadow economy.

More from the report:

Even now, cash withdrawals on payday account for around 85 percent of all ATM transactions. Moreover, in 2005–2011, cash flows more than quadrupled. According to Bank of Russia estimates, more than 90 percent of all commodity purchases in Russia are paid for in cash.

The government is now trying to bring the shadow economy into the light and increase money flows into the treasury, according to Investcafe analyst Yekaterina Kondrashova. In her words, as soon as the new rules come into effect, those using unofficial wage payment schemes will encounter certain difficulties, although there could be some ways to circumvent the law.

Governments are against informal economy simply because they defy political control and in so doing the private sectors retain their resources or savings, which the government desires to tap or to confiscate via taxation or various fees, so governments naturally come up with the usual excuses to justify their actions, such as money laundering…

The Ministry of Internal Affairs and the National Anticorruption Committee estimate the market for money laundering and cash conversions at somewhere between 3.5 and 7 trillion rubles ($113–230 billion) — about 60 percent of the Russian federal budget.

Rosstat reports that the volume of the shadow economy (“grey” money from tax evasion, compensations paid as “cash in envelopes” and violations of currency and foreign trade regulations) is at least 15 percent of the GDP, according to Ricom-Trust senior analyst Vladislav Zhukovsky.

Given the substantial criminal activity and illegal entrepreneurship, the grey and black economies account for 50–65 percent of GDP. Even former Central Bank Chief Sergey Ignatyev had to admit that about $50 billion was taken out of Russia illegally in 2012 alone.

Russia’s informal economy has been expanding during the post-USSR era, the informal economy grew from an estimated 23% in 1993 to 46.6% in 2006, and now 50-65% based on the above report.

Yuriy Timofeyev of the Frankfurt School in a a paper “The Effects of the Informal Sector on Income of the Poor in Russia” notes that Russia’s informal economy “played a significant role in stimulating the country’s  economic activities and in educating the new businessmen in many skills”. 

And that “In some sense, the shadow economy has been a place where many economic entities have gained initial experience and entrepreneurial skills and have accumulated the initial capital needed for a transfer into the official sector. The shadow economy, to some extent, has played a positive role, stimulated overall economic activities, and has generated employment and additional income, which is especially important for the poor part of the population”. 

In other words, restricting cash flows will prevent productive "informal" enterprises from flourishing and from transferring to the official sector. Such policies would only defeat its purpose.

So the Russian government will squeeze wealth from productive sector and transfer them to the politically privileged banking system via building up of cash reserves. Of course, the Russia's banking system serves as main intermediaries to the funding needs of the government (foreign ownership of Russian bonds are low), aside from direct financing.

I would also like to add that the informal economy is not necessarily "free". They principally include informal arrangements with many authorities via bribery or other forms of business easing concessions or popularly known as "corruption". 

If measured from Transparency International, Russia ranks as one of the most 'corrupt" countries in the world (133 out of 176 in 2006). Bribes accounted for 20% of GDP as of 2005. 

So "corruption" is tightly linked with the informal economy.  In short, "corruption" represents as another offshoot to economic repression, aside from the informal economy.

Yet more politicization and cronyinsm from the same article:

There is another side to the move toward plastic, however. Cash-free payments will result in higher prices for some goods and services. The middle class will suffer the most, because the “risk group” includes property and automobile transactions. The luxury segment will also be affected, including customized tours.

The problem is that Russian banks charge commissions ranging from 2–4 percent of the total amount of cash-free transfers. Sberbank charges up to 2 percent, says Irina Tyurina, spokesperson for the Russian Union of Travel Agencies.

Well so much for the bullishness in emerging market economies who punishes productive activities.