Smuggling
There are three periods in tobacco smuggling in Ukraine:
1) In 1993-1996 tobacco smuggling was very high and international brands were smuggled.
2) In 1997-1998 smuggling became more dangerous and less profitable and its volume substantially decreased;
3) In 1999-2000 due to big tax differences on non-filter cigarettes in Russia and Ukraine smuggling increased and it is mainly consists of Russian non-filter cigarettes.
Estimates of smuggled cigarettes amount were up to 23 billions in 1994-1996. As it does all over the world, the tobacco industry secretly supports smugglers. In the industry magazine "World Tobacco" (N1, 1997) they state: "Future US cigarettes export will rely heavily on sales of transit traders". According to the secret report of the "Duncan-Kiev" firm issued in 1996: "All smuggling to Ukraine is undertaken with full support of the 5 TTC (Philip Morris, Reynolds, Reemtsma, BAT, Rothmans). They could stop 90% of smuggling within 10 minutes if they wish to, because they know exactly their clients involved in smuggling". The smuggled cigarettes came to Ukraine from Cyprus, Belgium, Holland, Turkey and other countries. The smuggled cigarettes were rather cheap and in Kiev they are openly sold in many places.
In 1996 the Ukrainian government undertook strong measures to control the tobacco market. They established stricter rules on the border. For example if cigarettes are declared transit goods, they should be under control of the customs service till the moment they leave Ukraine. These and other measures apparently reduce tobacco smuggling to Ukraine those times but in 1999 Ukraine experienced large-scale smuggling of non-filter cigarettes from Russia due to high excise tax difference. However the scale of this kind of smuggling was exaggerated by the tobacco industry to influence the government to decrease taxes (it actually happened in November 1999). Tobacco industry estimates smuggling based on the consumption estimates of 75 billion cigarettes per year. In this case smuggling is about 30% of consumption. However, estimations based on a much more justified figure of general consumption (65 billion cigarettes per year) show that smuggling is only 20% of general tobacco consumption.
Certainly smuggling undermines the tax policy and tobacco control efforts. However if the parliament decreased the excise tax level to zero, it would decrease the price of the cheapest cigarettes only by 20-25%. Everybody in Ukraine could agree that smuggling in this case is not decreased much.
The International Centre For Policy Studies conducted in year 2000a research on smuggling in Ukraine. While the study is paid by the PBN Company and Coalition for Intellectual Property Rights the research team was aware that these organizations are just affiliates of Philip Morris.
So role of tobacco industry in smuggling was not discussed at all. Despite the limits the researchers were professional enough to give the following main conclusion:
"In our opinion, reducing the excise rates for non-filter cigarettes, aimed at eliminating the incentive for illegal imports, will result in a significant decrease in budget revenues and will have a negative effect on society as a whole. Hence, we propose to concentrate efforts on the following measures: (1) increase the effectiveness of law-enforcement agencies, (2) simplify conditions regulating the legal retail trade of tobacco products, (3) improve mechanisms for punishing illegal distributors of tobacco products, and (4) increase protection of state borders."
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