Standoff In Smuggler's Paradise

When Cary Languirand, who distributes Mexico-brewed Corona beer in Russia, checks the price of other imported beers at street-side kiosks in Moscow, he's always amazed. Given that the import tax alone comes to $1.40, rival beers should cost at least $2.50 a bottle. Instead, Languirand can usually pick one up for about $1. But his own Coronas sell for up to $5. What's going on?

That brain teaser reflects one of the toughest problems facing the Russian economy today. The sharp variations in retail prices of imported goods--from beer to luxury cars--reflect the sorry state of Russia's customs authorities. They are budgeted to collect $2.7 billion in taxes and duties this year. But because of corruption, smuggling, and poor organization, they'll be lucky to gather in a third of that.

FRENZY. Now, under pressure from the International Monetary Fund to pump up its revenues, Moscow is toughening up. It's cracking down on some of the most obvious scams. Imported cigarettes and alcoholic beverages must now carry a government tax stamp or face confiscation. But critics question whether top Kremlin officials, including President Boris Yeltsin himself, have the nerve to shut down the smugglers completely. Says Vladimir Drebentsov, a Moscow-based trade economist for the World Bank: "Every time a scheme is stopped, another takes its place."

Undercut by competitors with sweet customs deals, honest importers are forced to shave their margins to stay competitive. "It's like a feeding frenzy across the country to find out where you can get the best deal," says Languirand. Take cigarettes. In Moscow, the minimum price for a pack of prime-quality cigarettes should be more than $1. But the price is often as low as 50 cents, because shady importers bribe customs officials or use semilegal ruses to avoid full taxation.

The scams extend to the luxury-car market, where import taxes should add 100% to the sticker price. Yet dealers estimate that a third of the cars sold have been smuggled in tax-free. Max Dajnowicz, a Moscow-based vice-president for General Motors Overseas Corp., says dealers have even approached him with smuggled cars. "They offered me a BMW roadster for $40,000," he says. The car should legally cost twice that.

Smuggling in Russia starts small, with "shuttle traders"--individual tourists who travel from hot trading spots such as Turkey or Poland carrying suitcases full of cigarettes, electrical goods, and beer. They bribe or argue their way past low-paid customs officials. Bigger-time traders have developed more regular smuggling channels. They are helped immensely by Russia's thinly policed 16,000-kilometer border, where customs posts sometimes lack even telephones.

But the biggest rip-off by far involves import tax exemptions that are approved by top officials. One famous case involves Yeltsin himself. Always a tennis fan, Yeltsin this year granted huge exemptions to the National Sports Fund (NSF), an umbrella organization for sporting clubs. The deal was pushed by Yeltsin's regular tennis partner and former champ Shamil Tarpishchev, who also heads the fund.

The exemptions have paid off big for the sports clubs. They now import 60% to 80% of all cigarettes and alcohol, costing Russia about $1 billion annually in lost taxes. Meantime, the clubs expect to earn some $250 million this year using the exemption. Although Yeltsin signed a law passed by the Russian Parliament to do away with the clubs' tax exemption this summer, he then used his powers to extend the exemption until at least November.

Meanwhile, importers, including some U.S. companies, continue to benefit. The NSF allows them to become honorary members carrying a tax-free import status in exchange for hefty commissions. Officials insist that such deals help fund sports. "The good that we do compensates for the fact that we import beer," says Valentin Balikhnichev, head of Russia's Track & Field Assn.

A CRIMP. While the import situation remains murky, Russia seems to be making progress in stemming illegal exports. Mysterious trainloads of raw materials, especially copper and aluminum, still make their way across the border to entrepots in the Baltic and the Russian Far East. But other commodities such as oil are being smuggled out less often, as domestic prices come in line with world prices, removing some of the incentive for smuggling.

To put a crimp in illegal importing, U.S. executives argue that taxes should be lowered to encourage compliance and thus raise revenues. Lower tariffs would also help Russia in its current bid to join the World Trade Organization, they claim. But Russian finance officials insist they need massive revenues in a hurry. Trouble is, nobody seems willing to come down really hard on the smugglers and corrupt officials.