Russia’s Economy Isn’t Just the Gas Station Many Think It Is

By: Luke Teague

Oklahoma City— The Russian economy has been referred to as a “gas station masquerading as a country”. By the measure of Gross Domestic Product (GDP), Russia registers as the 11th largest economy in the world according to the International Monetary Fund (IMF), with an economy of roughly $1.64 trillion. While sizable, this is closer in scale to countries like South Korea: large, but not a global economic superpower. However, it is drastically larger than it appears.

Russia’s largely undocumented “grey” market alone is valued at hundreds of billions of dollars. This combined with the country’s vast resource reserves make the Russian economy one of the largest in the world.

While not as headline-grabbing as 1990s Russian mobsters or the selling of old Soviet weaponry, the modern Russian grey economy is a major facet in everyday life. This activity occurs mostly in corporate and income tax evasion. Companies commonly pay part of their employees’ salaries in cash under the table, saving them from paying various payroll and pension taxes.

Many Russian adults work outside the registered employment system as well, as to avoid income taxes on their earnings. Whether by selling produce from their gardens in rural areas, or driving an unregistered Uber in the cities, up to 30% of Russian workers, or 25 million people, participate in the grey economy.

Another major group who primarily receive informal salaries are Central Asian migrant workers. Mostly working in construction and other low-wage jobs, the almost 2.4 million labor migrants who come to Russia each year are disproportionately paid under the table.

Much of this untaxed cash is sent to laborers’ home countries in the form of remittance payments. In some cases, like Tajikistan, this under the table money from Russia constitutes half of the national gross domestic product.

This huge number of Russians working informally and corporations skirting their tax obligations generates enormous amounts of economic activity that isn’t taxed by the government or measured when calculating official GDP.

These estimates of informal economic activity range from the low end of roughly $200 billion, or 15% of GDP, all the way to the IMF estimate of 34%, coming to $557 billion in economic activity. That’s the equivalent of an economy the size of Virginia’s.

This number is even more significant when added to the consideration of purchasing power parity. Nominal GDP may not be the best way to measure the economic activity of what is still very much a developing nation.

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When looking at Russia’s GDP based on its purchasing power parity, a way of measuring how much people can actually purchase with their money, the IMF considers Russia to have the 6th largest economy in the world, valued at roughly $4.3 trillion. This is ranked only behind China, the United States, India, Japan, and Germany.

Just by looking at wages in Russia, one can see how the measurement of their economy against a developed economy like the United States or Germany would make it appear to be an economic backwater.

In 2019, the average monthly wage for a Russian adult was only 46,000 rubles, or $718. That’s an annual income of $8,600. However, the Russian government has set the official poverty rate, or minimum subsistence rate, at $169/month. In the United States, the equivalent poverty line is a monthly income of $1,063, or roughly 6 times higher than the Russian poverty line.

This can be seen in how cheap various products, services and amenities are in Moscow, Russia’s most expensive city by a large margin. This includes average monthly rent of $550 ($2,900 in New York) outside the city center, monthly utilities and internet costs of roughly $140 (~$250), and a monthly unlimited Metro Pass that is less than $40 ($127).

So by taking into account Russia’s economy in terms of purchasing power parity, one sees that domestic economic activity is drastically higher than it would appear at first glance.

If the IMF estimate is the closest to being correct, when combining Russian measured and informal economic activity, the country probably has a domestic economy of almost $6 trillion; smaller than only the US, China, and India.

However, this added economic activity, while good for Russian consumers, is not necessarily good for the country. Every ruble that isn’t counted for tax purposes means less money for infrastructure, education, pensions, and all other government programs. The grey economy’s share in Russia is more comparable to other developing nations, such as Azerbaijan, as opposed to countries like the United States. The equivalent value in the US is believed to be between 5-10%, an efficiency which the Russian government certainly aspires to achieve.

The massive informal sector demonstrates not only that the Russian government is plagued by inefficiencies in its revenue collection, but also its inability to perform basic oversight of daily transactions across the country. If Russia wants to not only increase its official GDP, but swell its government coffers as well, it will need to reform the way Russians do business. Whether this way of life is too ingrained for considerable change, however, is still unknown.