Why is Cash Flow so Popular in Russia and How Can we Combat it?


Is it true that the economic activity of Russians is twice as low as that of European citizens?


Who use a progressive tax scale in real estate as opposed to a flat tax scale?


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Why is Cash Flow so Popular in Russia and How Can we Combat it?

The issue is not «popularity» per se. The problem is that, according to our company’s analysts, no more than 13% of retail outlets and service providers accept bank cards for payment or have POS machines. And this is the data for cities with a population of more than one million people. As for so-called «remote places», the financial inclusion is even less there.   As a consequence, people simply do not have the opportunity to pay for their purchases with a bank card, even if they want to.

On the other hand, retail outlets are not in a hurry to install POS machines either, because in this way the shop loses up to 3.5% of its turnover — that is the transaction fee charged by the servicing bank. And now that the government is thinking about imposing restrictions on cash flow, imagine the losses that such fees can cause to businesses? In my memory, one car dealership in Moscow was explaining to a client that a POS machine was not working in the showroom, just to prevent the client from paying for the car with a card. The cost of the car was 3.5 million roubles, and the commission charged by the bank to the car dealer was 3.5%. So the bank’s commission would make 122,500 roubles, or $4,000. Most often, that is the entire potential profit of the sales outlet. So obviously shops don’t need this service, that’s why they refuse it.

Besides, we should not forget that corruption is still rife in our country, and officials prefer cash. As a consequence, no reasonable businessman, if only he wants his business to flourish, would refuse cash flow — after all, it is cash that pays for «high patronage».

In the end, switching to cashless payment system and POS machines can only be beneficial for the banks, which make money from it. On the other hand, if the government forces banks to significantly reduce transaction fees on bank cards and continues to root out corrupt officials, then, of course, we all — individuals and merchants alike- will naturally give up cash flow.



Is it true that the economic activity of Russians is twice as low as that of European citizens?

We think one needs to get into the background. You know, Europe has two parts — historically, Western Europe, whose citizens have been doing business for centuries. The world’s first stock exchange, which created the world’s first crisis, was in Holland, by the way. During that crisis in 1636, even Isaac Newton lost savings on his bank deposits. By the way, Russian Emperor, Peter I, in 1620 followed this example and ordered to form the so-called «bourges» in Russia, «so that merchants could trade at market prices». Both in Russia and Europe, citizens were engaged in business, invested in banks and securities, and it was commonplace. Our company kept shares, bonds and units of different Russian companies, which issued their securities at the end of the 18th and the beginning of the 19th centuries, including those of the European stock exchanges, in its office. These shares are real rarities!

But that’s not the main point. The point is that before 1917, Russia was not only the biggest Empire in the world, but also one of the most economically developed countries. However, during the coup d’état of 1917, businessmen, or, as they became known, «bourgeois» — that is, people earning their living by trading in the stock market — were expelled from Russia. The new government decided to level everybody by «taking from each according to their ability» and «giving to each according to his/her needs». Thus, the class of people who had been the real leader of the economy, the people who had business skills and the desire to take risks, to invest was abolished in Soviet Russia… Here the question arises: where to invest, if in Soviet Russia only the so-called «Savings Bank» remained — the only bank to host deposits.

After the Soviet soldiers defeated Nazi Germany, the so-called Eastern Europe emerged — countries with a more democratic regime than the USSR, but though controlled by the Soviet Union. In these countries business was still developing in one form or another, at a time when Soviet citizens had completely lost the will to run it.

Now,  70 years after communistic «equalization», the citizens of modern Russia have the opportunity to invest their money in banks and «blue chips» and do business, but almost 90% of our population appeared to be unready for this as they simply did not understand how, what for and «why they should give their money to a bourgeois» -the Soviet regime discouraged them from investing their savings in business or relying on bank deposits.

Therefore it is not correct to say that the Russians’ economic activity is twice lower than that of European citizens. If we compare Russians’ economic activity with Eastern Europe citizens’ one, the difference is  1.5 — 2 times, indeed, but if we compare it with economic activity of Western Europeans, the difference is probably 5-7 times. However, this historical fact suggests that the Russian citizens’ low economic activity is not so much the result of laziness or poor education. The history of Soviet society suggests that over the 70 years of Soviet regime Russians lost the ability to think and dream of super incomes or to do business.

The study cites the example of bank deposits with rates of 9-10 per cent a year. Aren’t bank deposits in Russia more profitable than the stock market, which index is just 4 per cent up?

Admittedly, this study is as biased as the previous statement. It is true that Russians are not actively investing their money in bank deposits. All this is only because with an average yield of 9-10% on deposits, real inflation exceeds 30%.  And since this is the case, why put your money in a bank — you will not get any profit anyway. It is better to spend it on current needs.

At the same time, the stock market shows uneven, wave-like volatility. So, if you take as an example Gazprom stock price in June 2010, when it cost 142 rubles, and October-November of the same year, when it jumped to 210 rubles, the growth will make 48%, or more than 90% annually. And our company clients, who listened to our recommendations, have only profited from it. However, after that, the shares of this issuer began to fall in price, and it is possible to earn on this fall, too  — «to take short positions». Yet, an outsider, an incompetent researcher is unlikely to see either the profitability of the previous rise, or the profitability of the projected fall in the share price. Such a researcher will only record an average return of, let’s say, an average 4% per annum. However, while such an incompetent researcher is calculating the average stock market yield, our company’s clients are earning an average of 60-120% per annum, depending on strategy they chose.

Forgive me for saying this. It’s not advertising. It’s just the peculiarities of the stock market. Those who understand them earn money. By the way, there are a number of banks that place their funds with us. And they earn much more than they pay out to their depositors on bank deposits.

Why are citizens unwilling to take loans in banks?  

Oh, it’s simple: would you take a loan from a bank, at an 80% interest rate? No, of course not, especially knowing that the bank raises those funds at 9-10%. However, banks still continue to lend to the public on these terms, despite the restrictions imposed by the Central Bank of Russia. Simply, they bypass these restrictions. The population still goes to these banks for loans, as there are simply no other options. These are the conditions of Russian business.

Well, if banking in Russia is both unattractive for the general public and attractive to investors, why hasn’t your company set up retail lending arm yet?

Oh, that is a great question. And while I am not an official speaker on the subject, I can only say that our company has been considering options for buying a regional bank, for a long time.



— How many countries use a progressive tax scale in real estate as opposed to a flat tax scale?
— Most countries in the world now use a progressive tax scale. The introduction of a wealth tax is nothing new. Such a tax has existed for a long time, dating back to Roman times. However, the experience of a wealth tax introduction shows that the existence of such a tax is closely linked to imperfections in a country’s taxation system.

It is a very simple step — it is better to introduce a wealth tax than to initiate reforms in the tax system itself. At the moment, developed countries prefer to replace the wealth tax with a higher VAT rate or to apply it to truly exclusive items: heavy-duty cars and yachts, expensive jewellery. By changing the tax structure itself and resolving the property tax issue, many countries have already done away with the progressive tax.

Japan abolished the tax in 1950, Ireland— in 1974. More recently, Austria, Italy, Finland, Germany, Denmark, the US and Luxembourg have joined them. Yet, today property tax is calculated on the basis of the dwelling value in 18 European countries, including France and the United Kingdom. It is calculated on the basis of geographical proximity in seven countries, and on the basis of area in only five countries, mainly in Eastern Europe: Ukraine, Slovakia, Poland, the Czech Republic and Croatia. 

Liechtenstein is the only European country where property taxation is based on the total value of the owner’s assets. An exception is also Spain, where estate tax is imposed on the basis of the ability to pay. In addition, progressive tax, including in real estate sphere, exists in China, Mexico, Chile, Tunisia, Algeria and Australia.

— What percentage of the population are usually potential contributors?

— This usually depends on the standard of living in the country. For example, in the UK, a wealth tax paid by less than 2% of the population brought in around £45bn to the budget in 2012. And France added €2.5 billion to its budget in the same year, with around 1% of the population as taxpayers. But in both the UK and France not only luxury property is taxed, but also other luxury purchases such as cars, yachts, jewellery, paintings etc. In any case, both in Russia and in other countries, progressive tax payers are potentially around 1% of the population on average.

— The price threshold for real estate, after which it would be classified as luxury, is set at 300 million roubles. How does this compare to other countries?

— For example, in Spain there is a tax on property worth more than 700 thousand Euros. In Lithuania, owners of real estate worth more than 1 million litas (about RUB 12 million) pay an annual tax of 1%. Englishmen, when buying a home more expensive than 125 thousand pounds sterling should also pay a tax of 1 to 5% depending on the value of the property. In Mexico a five percent wealth tax applies to any goods and purchases over 250 thousand dollars. Chinese due to 15% tax on a number of luxury goods pay on average 60% more than Europeans.

— How do you think wealthy Russians will perceive this? Is there a risk that they will try to avoid paying the new progressive tax, or maybe they will try to sell their properties and buy houses abroad?

— For wealthy Russian citizens, the introduction of such a tax is a perfect answer to any reproach — yes, I am rich, but I pay wealth tax, thus redeeming my «guilt» towards budget workers and pensioners. However, this will only affect those who legally own luxury goods. Here we are talking about public people, celebrities. The rest will prefer to moderate their wishes and try to «hide» luxury items or sell them before the tax is introduced. I also admit that many would indeed prefer to have elite real estate abroad which has become actually quite understandable and logical by now.

— Do you think that the budget will get a significant boost from the introduction of this tax?

— The European and Russian authorities have slightly different objectives in introducing the tax. The problem of social inequality is more pronounced in Russia than in Europe, but the public reaction to it is much more acute in Europe. In the case of France, for example, there is the populism of a socialist government plus the objective need to fill in budget holes. 

Russia, with its budget and flat income tax scale, has another aim. I believe that imposing higher rates on luxury cars and real estate is a kind of signal from the authorities to the society. The authorities believe that one of the reasons for growing social discontent is the substantial income stratification, or to be more precise, the outrageous bragging about the super incomes of a small number of people in front of the majority of people with average incomes. 

Thus, the wealth tax is theoretically of socio-psychological and moral-ethical importance both for the authorities who imposed it, and for the citizens, who derive satisfaction from the awareness of universal, even if tax-form, equality. And given the fact that there are still too many loopholes in the Russian legislation which allow to avoid paying this kind of tax, there is no point in waiting for serious budget revenues.


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