May 19th, 2016

Useless Services

Photo by Vadim Akhmetov / Znak.com

Photo by Vadim Akhmetov / Znak.com

The production of what goods and services accounts for the largest share of Russia’s gross domestic product (GDP)? That is a simple economic question. Amateurs would be wrong as usual in claiming that the right answer to this question is oil and gas. In the modern market economy – and in the last 20 years, Russia has been classified as a market economy unlike, for example, North Korea – the largest share of GDP is attributed to various services. Banking and transportation services, healthcare and education, lawyers and auditors, Internet and cell phone services together account for 55 percent of Russia’s GDP. Just for comparison, in the United States, the same services account for as much as 80 percent of the country’s GDP. The rule is simple: The more developed a country is and the higher the living standards of its population are, the larger the share of the service sector in its economy is.

Legal and auditing services without which private business cannot exist or develop occupy a special place in the variety of services. Businessmen use the results of independent legal analysis and audit to reduce risks and avoid losses. In a more general social sense, the level of independence of lawyers and auditors in their evaluations and opinions indicates the level of development of civil society institutions in the country. A demand for objective information in society usually means that there is a demand for quality legal and auditing services.

Russia’s society, however, does not seem to demonstrate such a demand.  Over the last 10 years, the steadily decreasing percentage share of legal services calculated by the Federal State Statistics Service in monetary terms  has fallen twofold. Data provided by the Federal Chamber of Lawyers of the Russian Federation proves this negative trend. Thus, in 2015, lawyers’ average monthly earnings dropped 17.5 percent. Independent experts observe a decrease in demand for legal services caused among other things by an atmosphere of almost total corruption which makes it impossible for lawyers to effectively defend the interests of their clients due to constant violations of defendants’ rights by investigators, prosecutors and judges.

A similar situation can be seen in the auditors’ community. The importance of auditors’ activity for Russian companies is decreasing while the Finance Ministry’s official statistics show an actual drop in revenues from auditing activities (the nominal revenue growth does not cover the official inflation rate). Meanwhile the number of audit companies and auditors is steadily decreasing year after year. There are currently 21,500 private auditors in Russia whereas the number of legal entities exceeds 4 million. Thus, there are 186 potential objects of examination and analysis per one auditor. An average audit of a business entity can take about a month. Consequently even if auditors carry out inspections single-handedly, which they try not to do in order to avoid mistakes, it will take them 15 years each to examine their shares of the market. If of course there is anything left to audit since the number of joint-stock companies that are required to undergo financial audit under the Russian law has been declining in the recent years.

Generally speaking, specialists notice a considerable drop in demand for professional consultants and their reorientation toward providing services to state-owned companies.

Photo by Valentin Ilyushin / "BaltInfo"

Photo by Valentin Ilyushin / “BaltInfo”

It is quite typical that the Russian authorities do not seem at all concerned about the situation in the sphere of legal and auditing services. The fact that no serious scientific research of this particular economic sphere is available and government officials make no public statements on this topic proves this point. It is no surprise since the Putin regime has no interest in providing society with objective information. The law is being increasingly replaced by lawlessness at all government levels; while audit is substituted by lies and propaganda. The professional services market is shrinking along with other spheres of private business while the Kremlin is actively seeking to replace it with “government services” such as state-owned banks instead of private ones, Russian Railways instead of highway infrastructure, the Federal Tax Service instead of audit. Of course, lawyers will not remain jobless for long. Defense attorneys will retrain to prosecutors and continue to “serve” the population on the other side of the courtroom. Until battleship Aurora fires its next shot.

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