Sunday, December 21, 2014

Russian Cat Arrests: Pedigree Pussies Snatched in Lieu of Unpaid Taxes

by Nomad

A recent news story about Russian tax officials and cats as tax dodges exposes a badly-kept secret about the Russian economy. Corruption and widespread tax evasion has made real development next to impossible. The question is now whether Putin is really prepared to risk tackling the problem or not?

Here's a story from the St. Petersburg Times that caught my eye.

Herding Cats for Mother Russia
When Russian tax collectors demanded that a Novosibirsk resident pay back taxes of about 12,000 rubles  or (as of this minute) about $198, he explained the he had no money and no assets for them to take. So, The state tax officials threatened to seize the man's pedigree cat and its three kittens.

Russians have had to find creative ways to hide their already dwindling cash reserves. Apparently one way, tax inspectors claim, is to invest in expensive breeds of cats. According to the Interfax News agency,
When collection officials arrived at the young man's apartment, they initially found nothing to seize for his tax appears because the man was living with his parents, attended college and had no regular income, the Novosibirsk region's court marshals service was cited as saying in a statement by Interfax.

"Then a bailiff noticed a beautiful cat that the debtor was holding in his arms, and three small kittens of a British breed that were running around the house," the statement was quoted as saying. "Because the animals are pedigree and expensive, the representative of the law decided to place the cat brood under arrest."
The threat was enough to shake the loose change from the pet owner's pockets. As the bailiff was filling out the seizure order, the man unexpectedly found the money to pay his debt.

The article also notes this was not an isolated incident. In the Siberan region of Tomsk, bailiffs arrested four Scottish Fold kittens when one businessman couldn't cough up his taxes and no other assets could be recovered. In a separate case a Sphynx kitten was seized in lieu of unpaid taxes.

In 2013 tax in Russia is payable at the rate of 13% for an individual on most income. Compare that to France which is about 45% or Denmark which is roughly 55%. 
Nevertheless, avoiding Russian taxes is a national pastime. The problem is real. However, seizing pricey pussies isn't going to save the Motherland. 

Roubles in Flight
According to a 2013 Guardian article, Russia loses up to 1 trillion roubles (£20bn or about over $31 billion) a year in tax evasion schemes. In 2012, a further $50 billion left the country illicitly. (Those figures, by the way, do not reflect the dramatic devaluation of the rouble so the amounts are considerably higher than these. Like, double the amounts above.)

How precisely the sanctions affect this money transfer situation is not clear. Undoubtedly the economic troubles spell headaches for individuals and companies using offshore banking to hide from the Russian tax officials. 

One of the main destinations has long been Cyprus which, as sanctions tighten, is expected to be feeling the secondary effects. Cypriot foreign minister, Ioannis Kasoulides, warned earlier this year that sanctions would have "a catastrophic effect on Cyprus’s economy." Two days ago he said:
“Cyprus was always very careful and reluctant of the use of the sanctions. We have never been happy with this policy and we have said it so — it is wrong."
That kind of self-interest is understandable. According to the Moscow-based Federal Statistics Service.
Cyprus is the biggest foreign investor in Russia, with $69 billion accumulated through the end of last year, while the island is the second-biggest destination for Russian investment at $33 billion.
Presumably, that only includes the legal banking transactions. But what is legal is debatable in a country with such widespread corruption.  

Shadowy Operations and Inside Connections
Sergei Ignatiev, before stepping down as governor of Russia's Central Bank last year, blamed the economic drain on "shadowy operations" that  transfer money abroad were worth the equivalent of about 2.5% of Russia's annual GDP. Wisely Ignatiev refrained from naming names but did report that analysis showed that 50% of the illegal transfers could be tracked back to one organisation.  

A Wall Street Journal report from last month, U.S. prosecutors launched an investigation of possible money-laundering which could implicate a member of Vladimir Putin ’s inner circle, as well as the "Russian president’s cadre of billionaire supporters." 

And it could be closer than that. One source alleges that some of the banks involved the biggest money-laundering operation were linked to a relative of   Putin and a former Kremlin official.

If true, it shouldn't surprise anybody. At least that would explain why tax officials would prefer to incarcerate felonious felines rather go after any of the big fish. Trying to arrest the friend of the son of a friend of Putin is a good way to end up in Siberia. 

Russia's economy has long been handicapped its development by corruption at all levels since the fall of the Soviet Empire. Today, according to the Guardian piece, Russia is seen as one of the most corrupt countries in the world, ranking 133rd out of 176 on Transparency International's Corruption Perceptions Index.
Sergei Guriev, a leading Russian economist who was pressured to leave the country last year, argues that the Russian economy is in a period of stagnation primarily because of corruption.
Mind you, this was before the sanctions and low-oil prices.

Putin's Anti-Corruption Crusade: Serious or Show?
All that could be changing. 
 If an analysis by Bloomberg is correct, one unexpected effect of sanctions and the crash of the currency may just be a more serious approach by Putin to crack down on corruption, one of his only remaining options to stabilizing the economy. Putin wants to call the anti-corruption initiative "Economic Freedom" which will possibly include legislative reforms to cut opportunities for tax evasion and money laundering schemes.

Whether Putin is serious about rooting out corruption at all levels is questionable, especially when, as cynics would tell you, many of the offenders are powerful Putin- supporting oligarchs. The next logical question is how much interference will they tolerant from Putin and Kremlin law-makers before the oligarchs collectively say "Nyet."

More likely Putin's anti-corruption crusade will boil down to a few more tax officials running around dimly-lit apartments chasing terrified kittens.