5.10 Import of raw tobacco and export of cigarettes

Tobacco production in Ukraine was very high in the 1980s (28,190 tones in 1987). It declined in the early 1990s (9,000 tones in 1992), but TTC investment led to a total collapse of tobacco growing in Ukraine - the average annual production in 1996-1999 was less than 3,000 tons (Fig. 1.2). Foreign investors definitely prefer to import raw tobacco, and benefit from the very law import duty (1 euro per 100 kg). R.J.Reynolds even used part of its investment money to import raw tobacco. Some factories without investments (for example, the Monastyrische factory) try to support domestic tobacco growers, which even own some part of the factory shares. However, these factories also have to use imported tobacco, and, taking into account their market shares, they cannot change the situation.

All Ukrainian tobacco factories use about 50,000 tons of raw tobacco annually. For example, in 1999 Ukraine produced 3,260 tons of raw tobacco (1,580 tones was exported mainly to Russia, Moldova, Belarus and Lithuania). In 1999, Ukraine imported 49,14 tons of raw tobacco. Therefore, 97% of the cigarettes produced in 1999 in Ukraine consisted of imported tobacco. Transnational tobacco companies claim that the climatic conditions in Ukraine are not favorable and consequently they have to import tobacco from other regions of the world (Fig. 5.5). However, the main importer of raw tobacco to Ukraine is Germany (21% of all import). German tobacco is the most expensive when compared with other countries (3.23 USD per 1 kg, while average is 2.26). In 1999, Reemtsma controlled about 50% of the Ukrainian tobacco market, and the import of tobacco to Ukraine supports German tobacco exporters. The only member of the Commonwealth of Independent States (CIS) that has large raw tobacco export to Ukraine is Kyrgyzstan (11% of Ukrainian import). Reemtsma has a genuine monopoly in the tobacco sector in Kyrgyzstan. Tobacco growers there have no other choice but to sell all of their raw tobacco to the Reemtsma fermentation factories there, where the price is very low. Then Reemtsma exports this tobacco to its Ukrainian factories with a huge profit. Among other raw importers are the USA (800 tons for the price of 3.03 USD/kg) and EU countries such as Greece, Italy, and Spain. Since tar and nicotine limits are higher in Ukraine, the tobacco industry can use the EU subsidies to supply high tar tobacco to countries such as Ukraine. The result of tobacco investments is clear: the support of tobacco growers abroad, mainly in developed countries (Germany, USA, etc.), the exploitation of tobacco growers in developing countries (Kyrgyzstan, etc.) and the decline of local tobacco production.

It is necessary to add that most of the additional materials (cigarette paper, filters, etc.) are also imported, so that the price of cigarettes is highly dependent on the currency rate (see "Prices").

In 1995-1996, cigarette export was rather high (Table 1.9), but some of the exporting (in 1996 - 35%) was done at so-called "davalnitski" schemes. This means that a certain foreign firm supplies raw tobacco to a certain tobacco factory, and the cigarettes produced from this tobacco are sold to the same firm for special price. In this set-up, some taxes are not paid. This scheme encourages the export of cigarettes, but the government receives very little. All 5 factories without foreign investments (especially Kamenets-Podolsky and Dnipropetrovsk) and both Reemtsma factories used these schemes. In 1997, these schemes were canceled and cigarette export decreased and then increased annually to the point that in 2000 it was almost 7 billion pieces, but it has not reached neither the average level of 1985-1991 (13 billion), nor the average level of 1993-1996 (9 billion). Cigarettes are exported mainly (97%) to former USSR countries (Fig. 1.9). The main exporters of cigarettes are TTC (Reemtsma, JTI and Philip Morris). Export shares of factories without foreign investments decreased from 40% in 1996 (mainly "davalnitski" schemes) to 0% in 2001 (Fig. 5.6).