Official against Entrepreneur: Manipulation of Law as the Basic Control Technique in the Pos - Soviet Russia

This paper presents an attempt to critically look at the process usually referred to as the “law enforcement” in the Western literature studying the relations between the tax inspectors and entrepreneurs in the post-Soviet Russia1 The early version of this article was published in the collection “Rezhim Putina. Ideai i praktika” [Putin’s Regime. Ideas and Practice] (M., 2005). The author owes the deepest gratitude to J.Adams, K.Martin and the participants of the seminar “The Qualitative Methods in Sociology” (Michigan, 2003) for the comments and remarks to the initial version of the article; Committee2008 for the support of the project, as a result of which it appeared; Moscow Public Science Foundation, the program RSS/HESP of the Soros Foundation, program CREES of the University of Michigan for the financial support of the projects, in which framework most interviews that constitute the empirical base of the research were conducted; as well as to L.Blyakher and I.Olimpieva for their kind approval of using the materials collected within the projects on studying the Russian business that were implemented under their control.1. Most researchers dealing with the relationships of the state and the society consider state officials who are supposed to enforce the law as the actors that can switch between two mutually exclusive strategies. In one case, a state official is a “perfect” law enforcer, the ideal bureaucrat in Weber’s sense, who forces subjects to follow the law and punishes violators. On the other side, he is a “corrupt” law enforcer who pursues his own interests and sells to the subjects some illegal “exemptions”, which allow them to benefit from avoiding the legal requirements. But what if for some reason the laws are unfeasible and controversial? Let us imagine the situation that is similar to the Russian life: the laws are controversial, instable, and can not be followed in its entirety even by the most law-abiding citizens. Several questions appear. First, what is really enforced by bureaucrats when it is impossible to reach total compliance with the law? Second, how is it enforced if the direct application of the law can destroy business of the violator, but cannot bring him into the state of lawabiding citizen? Third, what institutional outcomes result from such a situation?

Even a quick look at the process of the “state control” in Russia (let us say, within the clothes bazaar) allows to reveal the substantial differences between the theoretical scheme and the practice. Here is the excerpt out of the interview with the entrepreneur:

Q: What are the typical problems that you face running your business?

A: Typical problems? In the first place, the tax inspection checks. Q: And how exactly does it look like? A: Well, they come to your table, they start choosing goods, they buy something. If you would not give them a receipt, they would show their IDs. Principally, the most serious fines are settled for not giving receipts Well, and there are usual tax checks, they can come to each table... show their documents... and then require that you should show your certificate, your permission to sell, all these documents.

Q: So they also check if you have the legal right to trade here, your documentation?

A: They are not just checking, they would start digging for something. And they will dig out something to get to you anyway. For example, if they “can not see” a price-tag on something even if it is actually present. Each price-tag has to be arranged in a certain way Or if a price-tag had fallen down from some thing. So they would find the first pretext of any sort, and they would not waste their time on digging further.

Q: Are they interested in having a certain amount of the official fines or... just count and then come to the agreement?

A: They are interested to come to an agreement with you. If, for instance, they got a minor violation, usually they use minor violations to impose an official fine for their own purposes, for reporting. Of course, serious violations are normally to be solved on site.

Q: And how much can it cost?

A: Usually, around a half of possible fine. Well, actually they just look on their own what they can get from the entrepreneur. In other words, if you do not have a half of the fee on you, but you do have a quarter... So: “Do you have something?” — “Yes” — “Okay, give us whatever you have then”. That’s how it usually happens...

Maybe this is not the complete and ultimate truth, but this is how the small entrepreneur himself structures the situation of interaction with the law enforcers. Let’s try to deal with that. The law enforcer — the tax inspector in this case — does not hunt for the rare violators among the generally law-abiding citizens (with an intention to either bring the violators back to the order, or to engage into the illegal negotiations for the price of shutting his eyes to their illegal behavior). On the contrary, he is ninety percent sure that he will be able to “dig out” some violation in the process of any checking. The main question for him is how much time and effort he will need to put into “digging”. Faking violations (or accusing a seller of the violation of some rule she is not in charge of) is sort of a labor-saving strategy. Why do such deviations from the law work out for the inspector? The reason lies in the shared knowledge that the deeper check or the check with the participation of other agencies will inevitably find some violations that will end up with serious negative consequences for an entrepreneur. In other words, the interaction between the inspector and entrepreneur is based on the shared knowledge that under any circumstances the entrepreneur would appear to be a violator if the inspector would “dig” deep enough2 The interviews were conducted in 1997—2004. Each interview was from 1 to 4 hours long and regarded history of the respondent’s business.2.

Law: contradictory, unfeasible, changeable

By now my collection includes 244 biographic interviews with the entrepreneurs from Saint-Petersburg and its province, Moscow, Khabarovsk, Novosibirsk2, and almost each of them has evidence that the respondent violated the law. It is not about the special talents of the interviewers being able to evoke the frank conversation, but rather about the certain practices that are so usual for the entrepreneurs that they don’t consider their illegality.

Practically all the participants of the survey point out that the tax burden that the modern Russian legislation puts is beyond their strength. In 2003 (that is already after the second tax reform) the professional accountant stated that if she had been paying all the taxes, she would have been left with 3000 rubles per month. The entrepreneurs with less professional knowledge in the accounting consistently claim that “if you pay everything you owe” the taxation burden will inevitably exceed 100% of your profits. The professional experts also posit that the nominal taxation burden in many cases absorbs more than 100 percent of profits. According to the survey carried out by V.Radaev3 See Radaev 2001.3, the entrepreneurs systematically report that the taxation burden is the most important problem they face in their activity.

The unfeasibility of the economic legislation does not stem exclusively from the nominal taxation burden. The rules are also extremely complicated, controversial and changeable. In this sense, there is a need for some methodological explanation.

The researchers of the informal economy usually contrast the “illegal”, “informal”, “shadow” business to the “legal” one. It is implied that the legal business is the economic activity that is conducted in correspondence with all formal rules of the country, including laws and bylaws. Such definition includes three implicit assumptions that in their essence come down to the fact that there is such a thing in a country as the cohesive law: 1) the economic legislation is principally feasible (e.g., taxes never exceed average profits) and the cost of compliance with it (accounting costs, time and resources one has to spend in order to keep up-to-date with the information on the changing requirements etc) is acceptable; 2) the existing official regulations do not contradict each other; 3) the regulations are rather stable; in planning an economic activity an entrepreneur can to a certain extent count on the stability of the main regulations; the changes that might be significantly destructive for his projects are not likely to occur unexpectedly.

In case of Russia all these assumptions can not be taken for granted. In this case, there is no such thing as the law — the unified, stable, and non-controversial set of the official rules. On the contrary, there are laws and bylaws that appear and disappear unexpectedly (in the first place, it concerns bylaws), contradict each other, are overseen by different authoritative bodies, are complicated and require unbearable costs not only for their enforcement, but also even for their monitoring.

In some cases the bylaw itself might include such “traps” and contradictions that an entrepreneur regardless of the chosen behavior appears to be a violator. There is such a huge number of the similar cases that the laws in Russia are nowadays evaluated in terms of their “corruptogenic potential”. However, “corruptogenic potential” is caused by the overlap of the various formal rules, rather than by the defectiveness of the separate laws. In 1997 the Federal Department of Justice performed an examination of 1544 regional laws within the Ural Federal District of Russia. The conclusions are impressive: 306 (almost 20%) regional laws contradicted the federal constitution or the federal legislation4 Minin 2000.4. This example shows the frequency of contradictions between only two levels of legislation — the federal and the regional ones. However, the city and municipal authorities also possess the right to issue regulations regarding business. Other important regulations are those that are issued by different control departments, such as tax inspection or fire inspection. In practice, bylaws are not just technical clarifications of the laws as they are formally supposed to be. In their essence, they are kind of quasi-laws with their violations entailing the same sanctions as breaking the law. However, since bylaws de jure do not have the status of the law, they are usually less carefully elaborated and barely checked for the possible contradictions with each other (the most unsuccessful instructions are just cancelled post factum) and with other bylaws, especially those edited by other authoritative structures. For example, one of the respondents engaged in the construction business reports that the fire inspection, referring to the fire safety rules, demanded that he should include into the pavilion project the emergency exit, whereas the agency being responsible for the construction safety prohibited that. It is rather natural that the entrepreneur had to violate one of the regulations solving the problem with the respective agency in the informal way. Of course, in most cases the discrepancies are less obvious, but the common situation is as such that any specific rule can be easily obeyed separately, but all together they are unbearable. The total costs of being legal are too high, which is reinforced by the controversial rules and their instability that made the situation more visible to the direct participants.

Another problematic area includes the complicated and poorly-thoughtout reporting system. To make it clearer, I’ve calculated the number of reports that one Russian company had to make in April, 2004. Although I did not include the local reporting requirements as well as the reports that are relevant only for the companies that are preoccupied with the specific types of activity (for instance, reports to the licensing agencies) or the ones that deal with the specific branches (such as extraction of natural resources), it appeared to be that the medium-sized company was required to accomplish 23 reports within 22 workdays. However, there is something else about these requirements besides their “massiveness”. Out of 30 reports required from different companies 16 are regulated only by some internal departmental regulations or decrees issued by the government, rather than by the federal laws, whereas out of 26 of specific branch — 12. Of course, the law application is also mediated by bylaws; nevertheless, it is important to notice that for around half of the requirements the internal regulations are the primary source of the official game rules, rather than a mediator between the law and the performer.

The experienced accountant in the interview says that since 1989 all the quarterly reports she had been filling in differently. The forms to be filled, as well as the algorithms of calculating taxes, are changing almost every month. Even in the big companies accountants are often not able to timely track all the changes in the rules. Apart from that the rules are unpredictable. The permanent changes in the legislation not only hamper long-term planning, but also create such situations when the action undertaken today might appear to be much more costly or even prohibited later. The retrospective application of new regulations, although formally prohibited de jure, is usually possible technically. Furthermore, the problems with monitoring make some applications of the regulations, although formally non-retrospective, retrospective by nature. Imagine that a new federal law regarding taxation and changing the structure of quarterly reporting passed at the end of a quarter. It will take a couple of months for a tax inspection to elaborate the internal instructions and forms of the reporting as such. For entrepreneurs it also takes some time and money to get the access to these regulations and related bylaws. Thus, although the law came into effect before the beginning of the quarterly taxation period, actually, the firm gets access to the new regulations on tax calculation and reports’ preparation only by the end of the quarter. However, the decisions have already been made, the deals closed, the money spent...

Therefore, the formal game rules are controversial, changeable and on the whole unfeasible. Despite that the entrepreneurs still manage to work, and the state officials still somehow control their activity. The puzzling question is how they do this.

Vicious Circles: Transitional Problems or Systemic Determinants?

The contemporary researchers are aware of the fact that the economies of the “transitional” countries have some specific features that separate them from both “western” economic models as well as the traditional “pre-capitalistic” ones. The main characteristics of these economies are the following: the undefined property rights, and what D.Stark called the “mixed property forms”5 Stark 1996.5; the “blur boundaries” of enterprises, the discrepancy between the formally registered companies and their economic essence; the tensions between business practice and the official regulations; the imperfect and massive legislation; transitional anomie (the lack in the society of the stable shared norms of behavior); the weak execution of contracts from the state side; the high level of the shadow economic activity, and corruption.

The problem is that all these features are frequently treated as the system “defectiveness”, i.e. what the system lacks by nature. What exactly is deficient in the transitional economy is a subject for a broad discussion. The following things are usually mentioned among the latter: the clearly defined and legally protected property rights6 Soto 2000.6, high quality courts and security agencies, the culture of interaction between business and power7 Ledeneva 1998.7, the organizational culture of the state bureaucracy8 Volkov 2002.8 etc. It is implicit here that in the process of transition the economy will improve these deficiencies and normalize itself either by developing the modern capitalist system or by stagnating in some form of the “archaic”, “traditional economy”. Stabilization, anyway, is linked to the end of the “transformation” period, during which the deficiencies will be generally overcome. This approach to the transitional economies, as A.Ledeneva reasonably notes, prevents the researchers from the exploration of the intrinsic logics of such economies9 Ledeneva 2002.9. “Any variant of the Russian modernization, including the successful transition to democracy, requires strengthening and improvement, and in its essence, transformation and recreation of this weak and self-absorbed state bureaucracy”, — writes, e.g., the author of the book devoted to the stability and continuity of the negative features of the Russian bureaucracy throughout 300 years under three principally different political regimes10 Ryavec 2003: 14.10. The clear understanding that the Russian bureaucracy “appears to be the one continuing phenomenon flowing through the whole modern Russian history”11 Ibid.: 37.11 does not prevent K.Ryavec from treating this phenomenon as the “deficient” model that needs improvement.

Remarkable that in one of the best sociologic works Economic Crime in Russia12 Ledeneva, Kurkchiyan 2000.12 dedicated to the analysis of the different aspects of the Russian economic life nearly almost every author describing one negative phenomenon or another (bribery, weak law-enforcement, shadow economic activity, etc.) provides the compelling evidence that it is the logical result of the certain systemic conditions, rather than just a deviation. Furthermore, the authors interpret all other systemic properties of the Russian economic system as the very systemic conditions being temporal, “transitional” as well as subjects to “normalization”. Reading all these articles together, you can not but hypothesize that all these overlapping “vicious circles” are the main properties, or structural elements of the system, rather than its flaws.

Russia has been in the “transitional” state for already more than 15 years. However, the stabilization started in the last years, after the rapid, revolutionary changes in the 1990s can hardly be called “normalization” in terms of overcoming “defects”. All the “transitional problems” listed above seem to have successfully stabilized and even to some extent institutionalized. The extortion of bribes for the registration of the company was replaced with the quasi-legal (being practically invulnerable to the judicial prosecution) practices: during each tax inspection there is the “friendly” judicial company being famous for the fact that the documents that it processed easily pass registration. The bureaucrats who are responsible for the companies’ registration simply recommend to the applicants the services of the law firm that has already proved its efficiency. Instead of the illegal bribe there is a rather legal (by appearance) deal that, basically, comes down to the same bribe13 My attention to such practices was drawn by I.Olimpieva within the private correspondence.13.

How is the institutionalization of the informal practices implemented? To put it more broadly14 By “institutions” I imply following D.North (see North 1997) evolutionary formed persistent sets of rules of action that increase the predictability of transactions and structure the interaction, thereby reducing transaction costs and risks.14, what institutions for dealing with the theoretically unfeasible rules have people created? Obviously, the informal institutions should act in such a way so that the compliance with the formal rules will not appear to be destructive for the economic subjects in the real life. Below I will try to demonstrate how entrepreneurs support the minimum predictability for their businesses in a situation when any person can be at any moment accused of violating the law, and what the “business-state” relationships in this situation look like.

Bargaining and the Law Application as a Threat

Imagine that you are a state officer who is responsible for controlling a certain domain of the companies’ activities. You are aware of the fact that the absolute and direct compliance with the rules that you are supposed to enforce will lead any company to bankruptcy. At the same time, you have some responsibilities, neglecting which might cause serious problems. It is dangerous, for instance, if an employee of the construction committee will overlook a mistake in the project documentation that might lead to the building collapse. Regarding the tax inspector, his main task is the implementation of the plan for tax collection. What is more, the ways of accomplishing this plan are of no interest to anyone. The inspector can control the situation so that the amount of the paid taxes will correspond to the size of the companies, or “dully” conduct deep checking in some companies and charge them “additional taxes”, or attack one large company in order to obtain the missing sum at one strike. Another planned indicator is the amount of checks. In this case, an inspector has also different options: the checks of each firm on a rotation basis, checks on the base of the suspicion, i.e. of those firms, which reports had discrepancies, or regular checks of larger companies. The last option makes it possible to easily hit the target in terms of the planned collections, but raises political risks, as a large company may consider frequent checks as an attack, and seek for the counteractions, ranging from judicial recourse to agreements with the more influential officials.

Therefore, there are some rules, which are to be actually checked. However, apart from them there are other rules. Nobody expects that the tax inspector will check any deviations of companies, which fall into his responsibility, from the officially established norms. If a bureaucrat discloses enough violations to confirm his activity, accomplishes the planned figures, does not undertake false steps (such as checking the company that belongs to the wife of the high-rank director) and is not subject to the serious complaints from the side of entrepreneurs, his performance is considered satisfactory.

An official is not interested in over-delivering of the plan as it might lead to the raise of the next year benchmark. Within the plan he has a certain independency and can himself distribute the burden between the companies. At the same time, he has a tool for putting pressure on those who try to resist his requests or to pay unacceptably little. This instrument is a threat of switching from distribution of necessary (planned) payments to the full-fledged check of the company activities. This instrument is being applied to the non-cooperative entrepreneurs, like the interviewee’s friend.

A.: F. has permanent problems with them. He’s officially both director and owner. He is just dumb. He acts unreasonably; he does not know how to get along with people (...) Once people from the tax inspection came to him. They said: “We know that your turnover was higher than you have shown in your documents”. Here he would have better shut his mouth. Just pay. No, he started arguing, like “no, everything is right in my papers”.

Q: May be, it is true that everything was right?

A: So what? Do you think they came there in order to find the truth? They came to get money and leave. And he was hampering their business. So, they started digging. Of course, he made them mad at him. Sure, they’ve found out a lot. Principally, they do not care whether he is actually guilty or not. He is guilty to them. Now he has huge problems”.

Due to the unfeasibility of the legislation described above a formal deep check usually guarantees that the ground for a serious harm to a company will be found. At the same time, there are some exclusions, but they only reinforce the general rule. In this sense, the excerpt out of the interview cited below is rather discernable: it is about how the main office of the branched network of the fake companies that was created for backing large import operations (the respondent refers to it as a “virtual reality”) was subjected to extraction of documents. The reason for that were “sins” of one company’s partner.

R.: ...There was the name of our company in some documents, and they decided to check its all economic commercial activity...Once they just came and confiscated all accounting of the company, 200 thick kits with all documentation. They cleared all the shelves in the accounting department. They were reading it for a year. And then they returned it to us. And there was an audit summary enclosed, that they have found two minor mistakes and imposed a fee of around 2 minimal salaries. I was so proud! I made a celebration for me and my partner! It was a super-achievement! In my virtual reality with a turnover of $250 million a year we have built such a system of passing the documents that each penny was documented. And they were reading it for a year, and they failed to dig out anything!

It is worth mentioning that when prosecuting other companies, state officials without doubting for a moment took out all the documentation of the company that was free of any accusations at that time. This fact will be useful to us when dealing with the damage being incurred to the firs regardless of the disclosed violations. The more substantial conclusion that can be drawn from the story is the following: the less you are constrained with the need to match your documentation to the real-life performance of your company, the higher is the chance to create a perfect accounting documentation, which matches with legislation. On the contrary, the most transparent, law-abiding companies are at the same time more vulnerable to hostile checks aiming at extraction. This statement is clearly demonstrated by the sensational “Yukos case”. All the experts unanimously claim that in the 1990s — at the beginning of the 2000s all the Russian oil companies almost to the same extent avoided taxes using the similar schemes. In 2000 Yukos undertook a number of measures designed to make the company more transparent (as an attempt to reach the world financial markets). The campaign invited the independent Western auditors, disclosed the company property structure and even re-negotiated with the state authorities the privatization deals of 1994—1996 that could cause questions in the future. The amount of taxes paid by the company increased from $53 billion in 2000 (which already represented the highest taxation rate among the Russian oil companies) to $455 billion in 2003, namely, nearly 9 times over two years. These figures suggest that in 2000 the taxes were, to put it mildly, underpaid. Nevertheless, the company had never suffered excessive pressure from the state until it made an attempt to repair the situation. As a result, within the prosecution implemented since 2002, the company were accused of the illegal privatization (regarding which the second negotiations with the State Property Committee were already held and all the claims were cleared away) and concealment of incomes for the period of 2000—2003 (i.e., after the campaign for the “cleanness” of accounting). This begs the question: why did the transparency campaign make the company that for a log time smoothly avoided taxes an object for the unprecedented series of checks and claims? Putting aside the political events as the causes of the attack on Yukos (this is beyond this article), the popular publicist explanation is the following: the more transparent and law-abiding the company became, the more hostile attention of the state authorities it caused, since the latter were deprived of their ability to extort different illegal payments (ranging from simple bribes to the voluntarily imposed requirements for companies to cover some “state-related” expenses in a form of the “voluntary” donations). It is also plausible to assume that the very fact of increasing transparency of the overall business activity increased the visibility and accessibility of minor and bygone violations, making the company more vulnerable. It is notable that the companies of the comparable sizes that did not undertake any effort to improve their transparency and pay taxes in somewhat better manner did not experience any comparable attacks.

This is not an accident. Although the interviewees consistently mentioned the possibility of a “deep” check as a significant threat for their businesses and as the most important instrument of control agent’s power, actually the number of real-life stories about such checks is insignificant. Most checks go on in a routine manner, but in the presence of this threat, as it was described in the first example. But before switching to routine version of checks, some more notes have to be made.

However, let us step back to the law-enforcement as the most important tool of the power of the law-enforcement organs’ officials. Although respondents always mention the possibility of the deep check as the substantial threat to their business, in reality there are only few of such checks. The overwhelming majority of the checks are conducted on the routine base. The deep check is usually resorted to the cases when officials have some reason to put pressure on a company, find out violations that can be used as a ground for charges, which can seriously damage or even destroy the company. The reasons could vary ranging from the extortion of additional tax payments or bribes to paving the ground so that competitors can take the company over. The same attack can also result from any sort of personal or political conflict between a state official and an entrepreneur “demanding his rights”; it is used to punish those companies that support opposition, or raise official complaints about a certain officer performance, request the VAT payback etc.

There are, of course, other inspectors who really insist on the compliance with the law and do not accept negotiations. Such performance hurts both companies suffering from inconsistent regulations and inspector who fails to collect the planned money being too busy trying to enforce counter-productive rules. Usually the stories about such inspectors (entrepreneurs call them “dumb” and incompetent) end up with dismissal from the office.

R.: My inspector was a young girl; she was interested in nothing else but swaggering. People were just crying because of her. There were normal inspectors responsible for other districts; it was possible to solve problems with them.

Q: So what was going on? What did she do wrong?

R.: Well, you know, you could not talk to her. Sometimes you just better say: “do this-and-this”. And she was like: “I do not know”. The people are coming who have their own problems. They haven’t come for a year, they did not know that they should have come and submit nil declarations. They are charging them a certain fine, and they do not know what they are accused of. Everything is written down in such a way that it is unclear what they are fined for. “Well, how is that possible when I don’t work?” No, one should come and pay nil returns. And now I have got a great luck. She was fired. Now I have a normal inspector, a phlegmatic middle-aged lady; she does not care much about the rules, she would just say: “write this-and-this here”. I am happy.

What exactly a “normal” inspector should have known, you can easily understand from the narrative of an experienced entrepreneur:

When I first registered a firm, and I first paid taxes, by the end of the first year... I asked people around, you know, those who also work, “how much do you pay?” They said “around this-and-this amount”. I was like “okay, so I will bring same amount. And I did show the same amount. And the tax inspector just yelled at me: “How can you live like this? How is it possible that you have been working practically without making any profit? Shame on you!” (smiles) That’s it. I was ashamed. Next time I, let’s say, went ahead and paid twice as much taxes, and I had pretty much a different conversation with the tax inspector. The conversation was polite, pleasant, nice. Our people pay as much taxes as they want if there is no “attack” from the side of the tax inspections.

Interestingly the tax inspector did not use an opportunity to demand a bribe or impose a fine. Instead of that, he made it clear for the beginner that he’s violating conventions and should pay more. It is indicative that the beginner is aware of such conventions, consulted with the friends — he just failed to guess the right amount from the first attempt.

The “negotiations” on the expected amount of taxes can be even more direct. I think the best evidence that the interaction in the sphere of taxes is regulated by the informal rules, rather than laws, is the fact that sometimes companies are even forced to fake their accounting in order to provide evidence for the additional duties.

R.: Everybody knows that nobody pays all taxes. Look, I come to my tax inspector in order to submit a quarterly statement, and she says me explicitly: “I know I am accepting a piece of bullshit from you. I am spending my own time on it. And you, how much time do you spend to fake all this bullshit for me?” Now we sit and look at each other. She says: “You fake cashier’s receipts, don’t you?” I say: “I do”. Of course, I do, but I do it reasonably. Because at the previous year I tricked it so blatantly that they said me: “O dear! Let’s be reasonable and show somewhat more.” I said: “Fine. How much?” They said: “Let it be at least 18 thousand rubles [$600] more”. I just took out of my report some documents, right there. And they were normal documents. “Okay, I do not have these documents, now I owe you 18 more thousands.” I have very friendly relationships with my tax inspector. When I come to her for a check, she says me: “Would you please make some mistakes? I am required to impose some additional taxes on you if I am checking you.” So, when I am filing my tax declarations or reports, I am writing down the mistakes I am doing there on a separate sheet of paper. Just now I brought my documents to her, and she asked me: “Did you bring me your little mistakes?” “Yes, I did”. She is required to impose some more fines, to find at least some wrong calculations, so I make-up some wrong calculations for her”.

So, “good relationships” mean faking the accounting together in order to bring it to some “reasonable” level of payments that is enough for the tax inspector and that is not too big for the entrepreneur. The time-saving behavior towards an inspector can substitute bribes. The inspector optimizes his well-being by balancing the necessities to fit into the planned targets, to minimize time and effort and may be (not necessary, but usually) to get some material rewards. The source of power for a state official is the ability to apply the law selectively.

Since the legislation is unfeasible on the whole, the best way to legally destroy business is to make an entrepreneur actually live according to the existing legislation. However, a full-fledged attack on some company requires coordination between different agencies (given that, as it was already mentioned, each concrete regulation is usually feasible, while their combination is not). Such a “massive application of laws”, as V.Shenderovich shrewdly framed, is usually organized either by political authorities, both federal and local, (consider the story of the YUKOS), or by powerful business competitors who attempt to bring a firm to bankruptcy in order to take it over. Nevertheless, sometimes the initiator can be a street-level state officer. Respondent N., a private dentist, reports that his business became a target of everyday checks from different control agencies (e.g. tax inspection, sanitary inspection, licensing agency and fire inspection) after one of his clients, who was unsatisfied with his treatment, appeared to be an ordinary tax inspector. Although she did not have enough formal authority to organize an attack, she just mobilized her informal connections with employees of other agencies that were ready to help her for free to get the revenge in her personal conflict with an entrepreneur. This fact reassures that participating in a hostile check comes at practically no cost for the control officers involved. It is of no surprise: entering the “mass law application” or performing a deep check at their own initiative, they do nothing else but accomplish their formal duties more scrupulously than they used to. The fact that a certain company gets significantly more attention than other ones does not constitute any formal fault for an official.

I do assume that there are some stories of successful resistance to such an attack. However, all stories of massive law application that I known from the interviews or from media analysis ended up with a destruction or a takeover of the company, or, if the complete destruction was not the goal of organizers, with serious concessions of the attacked party. Winning one or two lawsuits during such an attack is possible for a company, but it does not prevent it from the loss of business. The reason is that the very process of such a check can itself be a serious threat for a company. Even a routine, planned check disturbs the work of medium-size companies and often completely interrupts activity of smaller ones for several days depriving first the accounting department and then other departments of the ability to perform their everyday duties. Moreover, a hostile check, in contrast to the routine one, can easily start from temporarily confiscation of computers and all the accounting documents (as in one of the above cited examples). The tax inspection and other law-enforcement bodies are not responsible for the damage that such measures can cause for a company, even if finally no violations will be found.

Interviewee V. reports that his accounting documentation and computers were confiscated in 2000 for more than half a year, because he was formally accused by the tax inspection of claiming illegal VAT returns. Returning money is a technical problem for tax inspectors: after the planned amounts of money are collected, and it is too late to improve the figures, it appears that some money is to be returned, the plan appears not to be fulfilled successfully. After all V.’s accounting documentation was extracted; his company experienced certain problems with, first, maintaining everyday activity, and, second, creating financial reports for the next quarter (you need “old” documentation for it technically). V. assumes that on this stage the responsible officer was expecting a bribe from him, but V., in his own words, decided to refrain from the payment, because he perceived the attack as impudent and unjust. After that the tax inspection conducted checks of all V’s business partners explaining that the checks of their companies are due to the investigation of the activity of the suspected violator. As a result, the majority of partners refused to cooperate with V’s company in order to avoid drawing further attention of the tax inspection. All in all, V’s business was completely destroyed. After V. got his papers back, he found that the papers were actually not unsealed after the confiscation, i.e. there was no real investigation, whereas the check itself was used only as a punishment.

Selective Law Application: Managing Uncertainty

As it was already mentioned, street-level state officers usually have rather limited options to organize the “massive law-application”. Each agent plays his own game with the interests of the various agencies’ officers as well as of these agencies themselves contradicting each other. The reason lies in the fact that the claims corresponding to the costs are targeted at same firms. In the situation when the legal requirements of all agencies can not be completely fulfilled, each official seeks to raise “his” share of the companies’ costs.

The formal rules are used as the tool of pressure. Moreover, both inspector and entrepreneur know that neither the inspector nor the entrepreneur is interested in such an outcome when bargaining (explicit or — more often — implicit) will transform into the confrontation. The deep check for the inspector is a counter-productive and time-consuming process, while for the entrepreneur it can cause serious losses. Besides, of course, while selectivity of law application as such does not constitute any offence for a state officer, its explicit usage as a threat for extortion is still a criminal offence, and if it comes to the direct conflict, a bureaucrat by no means always manages to compensate for the efforts made and time spent. Therefore, the extreme cases such as direct bargaining regarding the payments or an unprovoked attack against an alleged violator are relatively rare. The most frequent situation is much more routine.

Q.: Do your colleagues-competitors pay about the same?

A.: The same. Everybody pays about the same. May be plus or minus one-two percent... Everything depends on the number of points. It depends on the thoughts of that exact person who pays taxes. He shows whatever he wants.

Q.: What does “whatever he wants” depend on?

A.: Nobody wants to pay money, the more so to the state! I will explain it to you. You come and tell them you have business... You will be asked which business. So you tell them. Of course, a tax inspector is not stupid. If you show 10 rubles or 7000 rubles of profit, they will ask you like “are you crazy or what?” You need to show them no less than the certain amount, so that the tax inspector would not have any questions. All accountants know that it is better to show this-and-this sum.

Q.: Where does this sum come from?

A.: It can not be true that an entrepreneur earned 5000 rubles over 3 months. So you think that you should show at least 10 000 rubles for 3 months.

Q.: Do you discuss it among yourselves?

A.: Yes, we do. Why not? One has to fill in papers and declarations. “How much does she need now?” — “Let us say, 300 rubles, or 600, or 1000”.

Therefore, there are informal conventions on the acceptable payment sizes; they are discussed between the entrepreneurs and accountants of various companies and after that “approved” by the official. When entrepreneurs tell about their direct interactions with tax officers, they usually consider the individual payment to the inspector. An inspector “needs” the taxes in order to succeed in fulfilling the plan. Inspectors impose additional fees “for themselves” and can fake the documents in the same way as for getting a bribe. In this case, faking is seen more as a time-saving technique rather than as some serious cheating. An entrepreneur is aware of the fact that a tax inspector could have found a formal excuse for the payment, but it will be more timeconsuming for both parties. There is no real difference for an entrepreneur between fees and bribes, as well as between legal and illegal excuses for their imposition. An official has the right to manipulate the formal rules, which serve his interests. An attempt of entrepreneur to use the law in his own interests can result in even more serious sanctions rather than just a deviation from complying with the informal conventions. A state officer is a monopolist not only in manipulating the law, but also in demanding that everyone should obey it.

The equilibrium cannot be maintained between entrepreneurs “guessing” about how much to pay both to the inspector and to the state, on the one hand, and the inspectors imposing destructive sanctions upon the alleged violators of the informal rules. Although, as we have already seen, at a certain level of mutual understanding direct negotiations are possible, more often they are rather risky. Some sort of technique of the informal bargaining is necessary.

A.: Of course, you are regularly giving some gifts to them. If you do not, it would be like: “Oh, you forgot to put a comma here in the papers, get out of here!” And if you do, it would be “Well, next time you better put the comma in, but well, this is not a big deal.”

Q.: So you “fed” them a little and now you are an insider?

A.: Yes. Actually, there is nothing bad about it. Otherwise, they can always say “Did you not read this 4-page instruction of how to fill these forms? I can’t say that I came somewhere and they told me “Give us money”. But they will treat you badly, talk to you badly and will not tell you anything to the point. This is without a doubt. They will tell you to redo it again. And it lasts forever. It takes so much of your time! In this situation, no matter what you do, you are always breaking some law. Therefore, taking it into account you always think of yourself as a law-breaker and you have to ransom yourself from this.

As a response to the non-cooperation, an inspector creates such a situation, in which the entrepreneur is vulnerable to the serious and, which is specifically important, growing losses. At the first stage this is what M.Spence called “a market signal”15 See Spence 1974.15 symbolizing the demand that the entrepreneur should pay more or give another gift, rather than a real threat. An inspector is “digging” violations and is playing for time waiting till an entrepreneur understands himself what is expected from him. According to the interview, inspectors frequently employ this technique to request more taxes as well as to request bribes. Even in case of requesting the official additional taxes inspectors usually retrospectively cancel the official accusations of some violations or impose just symbolic fines upon them. Therefore, violations are disclosed in order to create a ground for request rather than for the law-enforcement. But if the entrepreneur does not respond to the signal, the “digging” will continue. The deeper the inspector “digs”, the wider range of possible punishments for the entrepreneur may appear, and therefore, the more uncertainty he experiences.

R.: If he finds some intricate thing which has to be covered with a document, and I don’t have it covered, in this case he gets to have a choice. He can either decide to make a big deal of it, go to his boss, celebrate the victory, and anticipate an official award [literally: “make a hole in his coat for a decoration”]. Or he can extort money from me.

Dixit in his book “Lawlessness and economics” presents a mathematical model of a situation, where parties conclude an informal deal despite the fact that there is the formal law that regulates it16 See Dixit 2004: 30—32.16. The model is called “Bargaining with the law as a backstop”; it assumes that two equal right parties are involved into the bargaining process on the deal’s provisions, and both are subjects to bearing some costs in case of applying the law. In Dixit’s model it is court expenses and lawyers’ wages; in our case it would be the official fines and the time spent on “digging” violations. The model predicts that the voluntary agreement is better for both parties than the actual application of the law; the actual outcome depends on the relative power of the counteragents, whereas the legal outcome serves here as a “(mutual) threat point”, which are the worst outcomes for both parties. It is exactly what the officials being able to apply the law in a selective manner can avoid by managing the unpredictability of the legal outcomes. Instead of a fixed “threat point” of legal outcomes, they get a flexible “threat range” of possible outcomes for an entrepreneur. The deeper the official “digs”, the wider range of possible punishments he is able to apply to the entrepreneur. Thereby, he solves two problems at once: he moves “the threat point” to the location being more beneficial for the officer, and increases his bargaining power. Here the limitation for the inspectors’ outcomes would be the understanding that taking too much from too many subjects being under his control he can undermine his own base for “feeding” rather than some “threat point” determined by a certain law. An inspector that always “digs deeply” risks to be categorized as a “dumb” inspector and to lose the job since he does not cope with the real (in contrast to the formal) duties — those being driven by practice.

In the situation described above, the law-abiding behavior expressed in denying the demand for a bribe, or “faking” the tax payments accounting aimed at reaching the necessary figures is not only costly, but also risky for the entrepreneur. Despite the opinion established in the literature in reality there is no balancing between the monetary costs of being legal and risks of being illegal. An entrepreneur regards both risks and costs as being on the “legal” side. At the same time, this strategy shifts risks out of officials: although the entrepreneur is forced to pay, no explicit extortion was committed. Getting rid of the risks related to being legal, an entrepreneur takes a much lower risk of being exposed as a person who suggested a bribe or fake documents. The officer just accomplishes his direct responsibilities, namely, conducting an official check of the accounting.

Both parties know the informal rules, like the ones that minor fees are to be paid, while serious ones are subject for a bribe. If the routine interaction goes smoothly, there is no need in the actual bargaining. An entrepreneur understands when he is supposed to suggest the “informal solution”, and when he just pays whatever the law requires. It is also taken for granted that after imposing an official fee for a minor violation the officer will not use this fact in order to perform a deep check. So the fact that some violation is found and the violator has nothing against it protects a violator from the further investigation of his activity. Otherwise, the entrepreneurs would strongly resist the attempts to fake minor violations. However, in practice, an inspector does not “dig” further (unless he has an intention to incur harm to a company) once he gets some payment without any resistance. This means that checks are not regarded as the law enforcement actions. Otherwise, the activity of a person officially caught with some minor violation would become a target for more deep checks, while a person never caught with such crimes would be left in peace. In the real life we can see the opposite: the more law-abiding the entrepreneur is, the less vulnerable he is to the law application, the more “digging” will be necessary to find at least some ground for the official demands. The more vulnerable he is in terms of the formal law, the less investigation is made; the first violation that was found somewhat “covers” other ones (recall the “little mistakes” that an entrepreneur brings voluntarily to the inspector in order to avoid an actual check).

The techniques of pressure discussed here are rooted in the Soviet tradition. The Soviet law-enforcement bodies used preventive, demonstrative and selective repressions so that people could guess about the "right" behavior that prevents them from becoming victims without articulating their demands and rules. In the modern Russia with the governmental repressions being rare the technique of “making them understand without saying” has converted into the prerogative of the rent-seeking state officers. The usual technique of raising demands to business is to create a trouble and then to make the entrepreneur search for ways of its solution. The experienced entrepreneurs masterly understand this numb language and for a novice the area of interaction with the state officials usually appears to be the sphere of mysterious rules and unpredictability.

The uncertainty, presumption of culpability, and non-transparent activity of the control agencies constitute the three issues generally raised by interviewees talking about their interaction with the state structures. This is the main entrance barrier for novices, whereas for entrepreneurs these are the conditions that they manage to deal with. Paradoxically, the issue of high taxation, which is, according to the formal surveys, supposed to be central for businessmen, is, although frequently mentioned in the interviews, but typically it is far less loaded emotionally. It seems that the issue of taxation has to be the key one for entrepreneurs seeking to maximize their profits. However, in practice the actual amount of taxation is something entrepreneurs generally feel being to some extent in control of. They make the first move in the implicit “bargaining” process by submitting reports that determine the primary taxation duty the tax structures, while the officers just respond to them, either accepting their “suggestion” or signalizing about its insufficiency and initiating the search for violations. The process of interaction with the state structures (checks of different sorts, endorsements, extortion of bribes and voluntary-enforced legal payments) is much more emotional than taxes as such.

Accumulating the experience, an entrepreneur comes to understanding that the unpredictability in the relationships with the state officers is the result of the conscious manipulation and not just a systemic flaw of the bureaucracy in the transitional period. The state officials use these “unpredictable” sanctions (for instance, they start some legal checks) not randomly, but as a sign of the existence of some claims for an entrepreneur. The entrepreneur has to guess what exactly is demanded and to offer a deal. This suggestion transfers the interaction from the official realm of “following the formal regulations” to the informal realm of balancing the interests.

The strategies of resistance employed by entrepreneurs are generally based on reducing the transparency of business for bureaucrats. It is important to mention that despite the universally accepted opinion entrepreneurs are defending in this way because of the officials’ manipulations of the law, rather than the necessity to comply with the laws as such. Entrepreneurs fake accounting that conceals the company’s “nitty-gritty” from the outsiders. The real accounting can not fit the regulations so ideally as the “virtual” one that was made with this exact purpose. However, the real function of the “virtual” accounting lies in preventing a bureaucrat from getting the information about the company’s real activity, rather than imitating the law-abidance (anyway, nobody will believe it). At the same time, entrepreneurs blur the borders of an enterprise, for instance, redirecting the officials attention from the company’s central subdivisions to the peripheral ones that accumulate some dubious operations instead of the assets and profits and any time are ready to become a target for the “legalistic” attack.

The simplest way to avoid the malevolent look of the state is not to inform about the company existence (although this strategy puts crucial restrictions on the development of business). My interviews are full with the stories about the registered entrepreneurs being punished for different violations found while studying their documentation, but they lack a single story about the unregistered business’ any problems with the authorities, except for the street traders whose goods are sometimes confiscated, and they have to bribe the policemen. The officials’ ability to evaluate business’ performance practically totally depends on the reporting and documentation provided by business itself.


Since the rules are controversial and flexible, it is important focus on the process of their application. As far as I know, David Stark was the first who used the ethnomethodological concept of “accountability” and the concept of “justification management”17 See Boltansky, Thevenot 2000.17 developed by Boltansky and Thevenot within the research on the transitional economy18 Stark 1996.18. D.Smith explains that the idea on the “accountability” refers to the “members’ methods of accomplishing the orderliness and sense of local processes. Members themselves and for themselves constitute the observability of what has happened and going on, in how they take it up as a matter for anyone to find and recognize”19 Smith 1987: 161.19. To put it simply, each actor is responsible for presenting his behavior as an appropriate one in terms of the existing norms: that’s how he legitimates his own action. Thus, the legitimization appears to be the two-fold activity: an actor partly changes his own actual behavior so that is it meets the norms, and partly searches for the appropriate explanations of his behavior. The smooth accountability is accomplished when the explanations are accepted. The problem of an economic actor in the post-Soviet country is that it is necessary to legitimate the same behavior in several value systems at the same time. An entrepreneur has to appear as an honest taxpayer in front of the state (it is better to say “within the system of the abstract formal rules”), and at the same time as a loyal partner for a state officer applying the regulations under a set of informal game rules. In these circumstances, according to Stark, not only does an actor try to gain accountability within each value system, but also manages the “portfolio of justifications”, which means to be constantly prepared to legitimize any action in different accountancy systems or protect this action from somebody’s claim for justification20 Stark 1996.20.

I would argue, however, that this complicated picture is still oversimplified. Starting from M.Foucault’s “Discipline and Punish”21 Foucault 1999.21, the researchers have made a good deal of attempts to describe the behavior of an actor in need for the legitimization of his actions. However, if Foucault is right assuming that control is located not only in the hierarchical power relationships, but also in the lateral interactions, any actor appears to be not only an object of the claims for justifications, but also simultaneously a subject of such claims and the “control authority” for others, which is exactly what the theories of the social control posit. Therefore, each actor also manages another “portfolio” — a portfolio of the rights to require other’s justifications, i.e. a number of opportunities to effectively control behavior of others by questioning its legitimacy. This is an important source of power. A state officer authorized to evaluate another person’s performance according to the official rules has a powerful tool that allows him to require justifications from others with the help of both the official (controversial) rules being well enforced by the state, but not recognized as mandatory by the participants, as well as the informal, customary, practical rules, recognized by participants, but not officially enforced.

The state officers use their ability to selectively apply official rules as a mean for the unofficial rules’ enforcement. Actually, they use the official laws neither as a regulator for their own and others’ behavior, nor as a mean of the direct pressure exerted with the purpose to obtain bribes in exchange for selling exemptions. Instead, in the process of managing their own “portfolios of justifications” they use the official law as an excuse that sanctions the employment of the enforcement rights that the state officials were granted with for the direct informal norms’ enforcement. At the same time, thanks to their ability of manipulating their access to the information on the companies’ activity, they manage the “portfolio” of the rights to request the justifications from entrepreneurs “shutting eyes” on the actual illegal performance of those loyal to the informal norms and “exaggerating” the guilt of those violating the informal norms. The vulnerability in this situation is directly correlated with visibility: as everybody is “guilty of something”, the more information the officer collects about the entrepreneur’s performance, the more the latter is vulnerable to the legal punishments and the informal demands that are not necessarily illegal in their literal sense, (e.g., the demand to pay the additional official taxes for the company that anyway pays less than it should), but are necessarily determined by the informal norms, and not by law. These informal practices of dealing with the formal rules are highly institutionalized and provide the participants with the framework for shaping the interactions between entrepreneurs and bureaucrats in the unpredictable legal environment.

The highly institutionalized nature of these practices makes them practically independent of the actual quality of the official legislation. The protective mechanisms embedded into the formal laws (such as faking the additional duties and the increased vulnerability of the most transparent economic activity) prevent these practices from automatically declining with an improvement of the legislation. The introduction of a new, much more consistent tax code in 1999 has not triggered any visible decline in these practices so far. Moreover, the interviews conducted after it was put into force in 1999 contain more facts about the direct pressure and faking the additional tax payments than the earlier ones. Today, for example, any attempt to “end” the quarter with losses almost inevitably entails the conflict with the tax service even if these losses really took place.

R.: I have huge losses, but I can’t show them that instead of 83 rubles I have minus $2000. I am showing to them the minimal, but they refuse to accept it. I am explaining that they have to accept it for now, and after that they can do whatever they want, like continue to “dig”, call for the tax police, I will show them all the documents. They say “No, we do not want it, and so we will not accept it”.

Such toughening seems to be the result of the system’s adjusting to the more consistent legislation. When they lack enough legal pretexts for exerting the direct pressure, they start to resort to more severe law manipulations in order to preserve the informal order of redistributing the taxation and quasi-taxation burden. This is how the system of the selective law application demonstrates its institutional sustainability and adaptability.


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