Russia's economy appears frozen somewhere between communism and capitalism. Not only is it dominated by a handful of very rich bankers, but much of the actual commerce that takes place is in the form of barter. Cash is rarely used--and for good reason. Banks extend very little credit. Even if they did, barter would be preferred to cash. Why? Taxes. A crazy-quilt of exorbitant taxes is levied on corporations and individuals, driving most participants to a "virtual economy" of barter. Unless Moscow simplifies and lowers taxes, barter will continue, and government services will suffer from a lack of revenues.

Call it a virtual, black, or gray economy, it is where two-thirds of all Russian transactions take place. In lieu of cash, there are promissory notes, tax offsets, and other nonmonetary forms of payment--as well as the simple exchange of goods. Moscow promoted this system by substituting tax credits for government outlays. With taxes so high, the credits became instantly appealing. Then the big energy companies got into the barter business to keep their major industrial buyers alive.

Moscow now wants a more transparent economy. It has outlawed tax credits and ordered that taxes must now be paid in cash. Energy companies are also demanding cash. But more must be done. Until a reasonable tax code is passed, companies will avoid giving up all their profits to the government by sticking to barter. To get more, Moscow must demand less.

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