26 January 2022, Wednesday, 13:27
Sim Sim, Charter 97!

Filled With Smoke: Russia Takes on Smuggling of Belarusian Cigarettes

Filled With Smoke: Russia Takes on Smuggling of Belarusian Cigarettes

Moscow rings the alarm.

The Delovoy Peterburg newspaper studied how the smuggling of Belarusian cigarettes affects the Russian tobacco market.

In September, 360 thousand packets of Belarusian cigarettes hidden in the lining of refrigerators were found in one of the containers at the Baltic customs. According to preliminary calculations, the cost of 7-ton smuggled goods exceeds 20 million Russian rubles. Despite the size of the booty, similar news in the federal media has recently appeared more frequently.

The DP decided to find out what was the reason for the increased activity of Belarus in the cigarette market in Russia and what impact the Belarusian smuggling might have on the legal tobacco market in the country.

"Fraternal" smuggling

The significant increase in the supply of smuggled cigarettes to Russia has a logical explanation. After August 2020, when relations between Belarus and the European Union began to deteriorate rapidly, EU customs officers began to inspect trucks that arrive from the east. Given the price difference, Belarusian tobacco smuggling was not only very popular but also turned into serious business for both suppliers and distributors of cigarettes in Europe.

After the control tightening, news about the seizure of consignments of illegal goods began to appear almost weekly. The cost of Belarusian cigarettes on the illegal market in Poland doubled. Given that the border with the EU was partially closed to Belarusian cigarettes, the smugglers decided to try their luck in Russia. How successful the reorientation from west to east has been is a rhetorical question. After all, it is impossible to calculate the volume of all smuggling.

However, the statistics of the frontier authorities is surprising: over the first 6 months of the year, only Pskov customs officers detected eight consignments of cigarettes from Belarus totalling 420 thousand packs. The estimated value of the smuggling exceeded 21 million Russian rubles. For comparison, during the same period in 2020, only two smuggled shipments of cigarettes were detected. They contained 288.5 thousand packs worth 14.5 million Russian rubles, i.e., the volume of smuggled goods has increased by 45% within one year. It is noteworthy that these figures refer only to large consignments; the number of small consignments arriving in Russia in a continuous flow is several dozen times higher.

The official website of the Northwestern Customs Directorate says only from early July to the first week of September, the Russian customs officers found more than 929 thousand packs of cigarettes with Belarusian excise duty worth 38 million rubles. Some of the goods were destined for shipment to the UK and the EU countries; the other part was planned to be sold directly in the Russian Federation.

According to a study by Kantar TNS, the share of illicit cigarettes in Russia in the II quarter of 2021 was 12.8% of the total tobacco market. Belarusian cigarettes make up a significant part of it. In the III quarter of 2020, the tobacco products of this country accounted for 52.8% of the illegal tobacco market in Russia. Such a situation is since there were two large tobacco factories on the relatively small territory of the Republic, and from 2020 three, tobacco factories.

Since 2016, the Republic of Belarus has not published statistics on tobacco, but manufacturers themselves provide some figures. For example, the Neman tobacco factory in Grodno, which held almost two-thirds of the market until 2020, publishes data on the production of its brands of 24.3 billion pieces per year on its official website. This data alone makes it clear that the capacity of Belarusian tobacco factories exceeds the capacity of the country's market. According to some calculations, the production of cigarettes exceeds the demand of the population by two times.

According to KPMG, the consumption of cigarettes in Belarus was at 16 billion units per year in 2018. According to open sources, the country exported 13 billion cigarettes last year, most of which - 8.6 billion - went to Russia.

Beat the dog before the lion

By comparison, Russia itself produced 228.3 billion cigarettes in 2019. At the same time, the volume of production decreases annually, which is associated with both the growth of industrial tobacco production and the popularization of electronic cigarettes, vapes and tobacco heating systems.

The price plays its part: from July 1, the single minimum retail price of a pack in the Russian Federation was 108 rubles. Such a measure was taken to have an indicator for both consumers and regulatory bodies, allowing to identify products of illegal origin with unpaid excise and other taxes.

At the same time, the demand on the illegal market is growing: according to analysts, the average cost of a pack of smuggled cigarettes from Belarus in a number of Russian regions ranges from 55 to 100 Russian rubles.

The official price is also a plus: according to the Numbeo.com portal, the cost of a "reference" pack of Marlboro cigarettes in Russia is much higher than in Belarus.

The anti-tobacco policy pursued by the Russian government over the past 10 years has reduced local production by half. Combined with the constant increase in excise taxes, the coronavirus year 2020, and the weakening of the Russian ruble, the production cost of cigarettes has become a minimal part of the final price.

The government's desire to care about the health of the population is understandable. However, such a tough policy with regard to local cigarette manufacturers entails both a decrease in revenue and an increase in smuggling. With further increases in excise taxes and lower real personal income, the share of illicit tobacco products on the Russian market could reach 30 per cent, according to the most pessimistic forecasts.

Therefore, it is logical, along with a domestic policy to reduce tobacco consumption, to actively promote initiatives to curb its smuggling at the level of the EAEU. In particular, to level the gap between the cost of excise taxes with other countries - members of the Economic Union.

Such measures will not only reduce the number of smuggled products but will also create equal competitive positions for manufacturers.

Elena Kiyanova, manager for corporate affairs of the North affiliated companies of Philip Morris International in Russia, says:

"The problem of illegal turnover has many reasons. There is no simple and quick solution to this problem. The joint systematic efforts of the government and business in combating illicit trade in tobacco products undertaken over the past few years have helped to reverse the trend of rapid growth in the volume of illegal trade. Nevertheless, it is necessary to continue to counteract illicit trafficking, lest this result be short-term and the growth of illegal volumes be resumed. In addition to the increased activity of law enforcement agencies and the digital labeling system, it is necessary to eliminate the key prerequisite for illegal flows - the multiple difference in the excise load between legally produced tobacco and nicotine-containing products in Russia and other EAEU member states. In the case of nicotine-containing products, this difference is particularly large. It poses a great risk of increased illegal trade. We support the plans for mandatory digital labeling of sticks for electronic tobacco heating systems, which may begin in Russia on March 1, 2022. We believe that digital labeling should cover all nicotine-containing products, including liquids for electronic nicotine delivery systems. We also believe that all current and future measures to combat illicit trafficking should be extended to all nicotine-containing products as soon as possible. The fight against the illegal market is a common task of the state, business and citizens. Continuous information work with adult consumers is extremely important in this context so that their purchasing preferences are shifted toward legal and high-quality products, thus complementing the efforts of the state aimed at combating the illegal market.