Introduction. The underground economy as an economic system is investigated in the article. According to some estimates, the underground economy volume in Russia amounts to 46% of GDP. The purpose of a scientific article is to study the institutional mechanism of transformation of the underground economy system.

Theoretical analysis. The author explores the systemic signs of the underground economy, among which there are: integrity, openness, adaptability, reproducibility, structure, and hierarchy. The structure of the underground economy, including three sectors: socially dangerous (criminal) forms of the underground economy; various forms of opportunistic behavior of economic agents and socio-benign forms of underground activities (e.g., home economy), is examined. The main and derivative contradictions of underground economy are revealed. The institutional mechanism of transformation of the underground economy is studied; its options and contradictions are considered. The author analyzed two directions of transformation of the underground economy: restriction (liquidation) of socially dangerous forms and legalization (legitimisation) the most «healthy» elements.

Results. 
The author makes a conclusion about the necessity of state strategy of institutional transformation of the underground economy. The principles and objectives of institutionalization of the underground economy system in Russia at the present stage are defined.