New roads, more hospitals, better sewer and water systems...The list of needs is endless in the countries of the former Soviet Union. You might ask, “What’s the problem? If they need those things, they have to raise taxes—plain and simple.”

Unfortunately, it’s not that simple. The increased burden of these programs weighs heavily on taxpayers’ shoulders…and paychecks, which reflect wages often insufficient to support life. What’s a person to do? Live in the shadows—the shadow economy, that is.

In a shadow economy, people avoid government attempts to gain a share (often a large share) of their earnings by “going underground.” Some work temporarily in developed European countries, gaining tax-free income to support their families.

Others resort to a time-honored (and non-taxable) method of paying for goods and services: bartering. Consider Tanya and Elaina, who work in our Kiev office in the Ukraine. No different from many young women, Tanya and Elaina love pretty clothes. How do they afford them? First, they pore over the Russian version of Cosmopolitan, looking for current fashions. When they find dresses they like, the women carry vegetables from their garden to the market, where they barter their produce for fabric sufficient to produce three dresses. The fabric goes to Tanya’s grandmother, who plies her old treadle sewing machine skillfully, fashioning a dress for each young woman and one for herself (her “wages”).

Peter, a middle-aged Moldovan beekeeper, uses a third approach to stay “under the radar” and still make money. Although he lives some distance from the capital city, Peter weekly rides the bus to sell his honey door-to-door and in outdoor markets in Chisinau. Peter hardly resembles a salesman, since he keeps the honey in unmarked containers of all shapes and sizes within the lining of his large, heavy coat. Peter fears the tax police, who could put him out of business with their thirty-percent tax assessment. (This exceeds Peter’s entire cost of production!) Just in case his ruse isn’t successful, Peter also bribes government collectors to look the other way with his shadow business.    

Eventually, when these countries establish the rule of law, systems will protect citizens from abusive government taxes and other practices. Until then, citizens cling to the shadows to survive in an increasingly challenging economic climate.

by Everil Quist, International Agri-Business Consultant