Tamozhenniye l'goti (Russia)

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Tamozhenniye l'goti
Location: Russia
Russia map.png
Author: Anna Bailey
Affiliation: School of Slavonic and East European Studies, University College London, UK

Original text: Anna Bailey, PhD alumna, School of Slavonic and East European Studies, University College London, UK

Tamozhenniye l’goti refers to a practice in 1990s post-Soviet Russia, whereby certain ‘privileged’ charitable organisations were awarded the right by the federal government to import products – typically alcohol and tobacco – without paying excise duty. The practice can be seen as an instance of the ‘state capture’ that plagued Russian state institutions in the 1990s: the ability of private individuals and firms to extract preferential treatment from the state for little or nothing in return[1].

The word l’goti (singular form: l’gota; Cyrillic: льгота) literally means ‘benefits’ or ‘privileges’, while tamozhenniye is the plural adjectival form of the noun tamozhnya (customs). The term l’gota can be used in a wide range of contexts, for example sotsial’naya l’gota (‘social benefit’, such as veterans’ entitlement to free public transport), and nalogoviye l’goti (tax breaks). Often when the context of use is clear, the term l’gota is simply used, without an adjective.

The phenomenon of tamozhenniye l’goti began with Presidential Decree No. 1973 of 22 November 1993, which granted the National Sports Federation (NSF) exemption from customs payments on goods imported for ‘international sports tournaments.’ An executive order of 13 May 1994 then extended the exemption to all goods purchased by the Federation, including vodka, which was the preferred good imported by the NSF, mainly because of the super-profits it generated (despite the fact that the NSF sold it substantially below the average market price in Russia). Such privileges were later extended to other charitable organisations – including the Russian Orthodox Church – all of which took advantage of the enormous profits to be made by importing excise-free vodka and cigarettes[2].

Inevitably, the super-revenues that tamozhenniye l’goti offered to the charitable foundations meant that the mafiya was quick to infiltrate the practice. Some mafiya groups posed as qualified charities and foundations, and they ultimately took control of the customs privileges owned by the genuine foundations too. Mafiya groups have been described as ‘functionally integrated’ into the Russian market at this time[3], and they bought themselves well-connected ‘roofs’ (kryshi), either through the law enforcement agencies or politicians and government officials[4]. In short, the mafiya effectively infiltrated both state and civil society organisations in this period[5].

Infighting between mafiya gangs competing to secure control of the wealth generated by tamozhenniye l’goti led to a string of successful and attempted assassinations of prominent members of charitable foundations in the 1990s. The chairman of the Russian Foundation for Invalids of the War in Afghanistan (RFIVA), Likhodey, was killed in 1994 by a bomb outside his apartment. In 1997 mourners were gathered at the Kotlyakovskoye cemetery on the anniversary of Likhodey’s death for a memorial service when a bomb went off, claiming fourteen victims including the RFIVA’s new president, Trakhirov. This bombing was apparently connected to a struggle between warring mafiya factions over control of the Foundation’s vast fortune accumulated from tamozhenniye l’goti, valued at $200 million USD[6]. Altogether the RFIVA suffered 34 killings and 62 woundings in such violent incidents. The president of the Russian Ice Hockey Federation, Sych, was shot dead, while the first deputy president of the NSF, Fedorov, narrowly escaped an assassination attempt. According to the Prosecutor General’s Office, the murder of Sych was a result of an internal struggle in the Federation relating to control by organised crime groups over its finances[7].

Tamozhenniye l’goti represented just one manifestation of a general trend of ‘state capture’ in 1990s Russia[1]. There was however resistance from within the state to the ‘capture’ of l’goti: the Ministry of Finance (Minfin) initiated a decree (No. 1787) passed on 29 August 1993, which would annul all such l’goti from 1 September 1994. Yet even Minfin was not strong enough to withstand the forces of state capture at this time. A succession of further decrees repeatedly postponed the expiration of the l’goti, the bulk of which were only eventually brought to an end in 1996[8].

The use of tamozhenniye l’goti led to the so-called ‘Tobacco scandal’ that engulfed the Russian Orthodox Church (ROC). The ROC’s benefits were introduced – apparently at the request of Patriarch Alexy II – in 1996, and were cancelled in November of the same year by presidential decree (No. 1363). The affair was exposed in 1997 by the journalist Sergei Bychkov in a series of articles published in the Moskovsky Komsomolets newspaper. The Church’s import business was conducted through its Department of External Relations, dealing mainly in the import of duty-free cigarettes, but also vodka. The Department of External Relations was headed at this time by Metropolitan Kirill of Smolensk and Kaliningrad. Bychkov dubbed him the ‘tobacco metropolitan’ (a headline from one of his articles) – a nickname which stuck. Kirill went on to become Patriarch of the ROC in 2009, and while the ‘Tobacco scandal’ does not seem to have harmed his career, critics have not allowed the affair to be forgotten. The sociologist Mitrokhin estimated the profits the Church made from its tamozhenniye l’goti operation at $1.5 billion USD, while Moskovskiye Novosti journalists suggested a much higher figure of $4 billion USD[9].

Charitable foundations and mafiya groupings were not the only actors who benefitted from tamozhenniye l’goti. The practice provided a means for broker companies involved in importing alcohol to avoid excise duty: they could simply pay a foundation or charity a fee to import the alcohol on their behalf, the fee being a fraction of the duty avoided. The scope for super-profits was much less in the beer market than for hard spirits, due to higher production costs per gram of pure alcohol. Nevertheless, even some beer importers made use of charitable foundations’ customs privileges to avoid excise duty. This was at a time when domestic beer production in Russia had not yet taken off, and the novelty of imported foreign beer provided a lucrative niche market, especially in Moscow[10]. Thus, the impact of state capture in the form of customs privileges reached far beyond the official beneficiaries (the funds and charities). It transformed the entire structure of the alcohol market: even legally operating firms were forced to resort to informal grey practices just to remain competitive[2].

It is difficult to estimate the total loss to the Russian budget of tamozhenniye l’goti in the 1990s. One estimate puts the cost of lost excise revenues at 4 trillion roubles in 1994 alone[11]. According to the vice chairman of the Accounting Chamber, just to bring the practice to an end the government was forced to spend $9 billion USD to buy off the remaining contracts the foundations had in place[12].

The practice of tamozhenniye l’goti illustrates the ambivalence of the concept of ‘informal’. In what sense should the l’goti be considered an informal practice if they had a formal legal basis? On the one hand, the practice was instituted by government decrees and associated with formal organisations. On the other hand, this legislation was brought about through non-transparent processes at a time of widespread state capture. At best, the practice was camouflaged by the rhetoric of support for organisations such as war veterans; at worst, it was secretive and corrupt, in the sense that the formal state mechanisms of government and law were hijacked by individual private interests for personal gain. The practice had the aura of a ‘open secret’ that was officially decreed, yet needed to be concealed, as evidenced by the fact that the exposure of the ROC’s l’goti led to the ‘Tobacco scandal’. Moreover, the practice effectively became a cover-up for mafiya enrichment – an informal means of diverting revenues that were due to the state treasury into the hands of criminal structures. Tamozhenniye l’goti therefore represented a somewhat paradoxical phenomenon: an informal practice being perfectly legal yet ethically dubious, using the formal instruments of the state yet serving private, if not criminal, elite interests, thus fitting the concept of legal corruption[13].

Notes

  1. 1.0 1.1 Frye, T. 2002. ‘Capture or Exchange? Business Lobbying in Russia’, Europe-Asia Studies, 54(7): 1017-1036
  2. 2.0 2.1 Bailey, A. 2016. Alcohol and Politics in Post-Soviet Russia: Policy and Corruption under Putin. London: IB Tauris
  3. Volkov, V. 2000. ‘Organised Violence, Market Building, and State Formation in Post- Communist Russia’, in Ledeneva, Alena & Kurkchiyan, Marina (eds.), Economic Crime in Russia, (London: Kluwer Law International): 43-61
  4. Galeotti, M. 1998. ‘The Mafiya and the New Russia’, Australian Journal of Politics and History, 44(3): 415-429, pg. 424.
  5. Ledeneva, A. 2000. ‘Introduction: economic crime in the New Russian Economy’, in Ledeneva, A. and Kurkchiyan, M. (eds.), Economic Crime in Russia, (London: Kluwer Law International): 1-15, pg. 4.
  6. Harper, T. 1999. Moscow Madness. Crime, Corruption, and One Man’s Pursuit of Profit in the New Russia (London: McGraw-Hill), pg. 232
  7. Fituni, 2000, pg. 18.
  8. Nemtsov, A. V. 2009. Alkogol’naya Istoriya Rossii: Noveyshiy Period (Moscow: Librokom), pg. 102.
  9. Ofitserov, A. 2008. ‘Bozhestvenniye golosa’, Novoye Vremya, 15 December, http://www.newtimes.ru/articles/detail/3187/
  10. Harper, T. 1999. Moscow Madness. Crime, Corruption, and One Man’s Pursuit of Profit in the New Russia (London: McGraw-Hill), pg. 162-3.
  11. Nemtsov, A. V. 2009. Alkogol’naya Istoriya Rossii: Noveyshiy Period (Moscow: Librokom), pg 101.
  12. Nemtsov, A. V. 2009. Alkogol’naya Istoriya Rossii: Noveyshiy Period (Moscow: Librokom), pg. 102.
  13. Kaufmann, D. and Vicente, P. C. 2011. ‘Legal corruption’, Economics and Politics, 23(2): 195-219

Further reading:
Takala, I. R. 2002. Veseliye Rusi. Istoriya alkogol’noy problemy v Rossii (St Petersburg: Zhurnal Neva)