4.2. Large-scale organized smuggling

Globally, the vast majority of cigarettes smuggled can be accredited to large-scale organized smuggling. As demonstrated in “Tobacco control in developing countries, 2000”, tax and price differentials among countries is not the only determinant of this type of smuggling, and may be not the most important. Other factors that make large scale cigarette smuggling more likely include corruption, public tolerance, an informal distribution network, widespread street-selling, and the presence of organized crime. All of these factors are present in Ukraine.

4.2.1. Smuggling from Russia and Moldova

It is has been perceived that the bootlegging of non-filter cigarettes from Russia and Moldova, mainly brought by individuals, accounts for most of the cigarettes smuggled into Ukraine.

For example, the International Centre For Policy Studies states that “about 1,500 individuals would be able to generate the existing inflow of illegal cigarettes in Ukraine if they made two trips to Russia per day and transported two master cases (1,000 packs) of cigarettes each time.” Data from the State Customs Service for 1999 and 2000 indicate the number of disclosed attempts of cigarette smuggling into Ukraine to be 1228 and 1656. Data indicate that average value of detained illegal tobacco products was 5650 and 1940 UAH. This fact apparently supports the hypothesis of a growing number of private cigarette smugglers transporting small consignments. However, in the year 2000, only 137,337,492 cigarettes were seized (moving into and out of Ukraine combined), which is less than 1% of all estimated smuggled cigarettes.

Even if tax-paid cigarettes are illegally brought into Ukraine by individuals, it is large-scale organized activity. According to the ICPS report: Numerous wholesale cigarette markets are located in Russia nearby the Ukrainian border; individuals ship cigarettes legally purchased in Russia on the demand of small illegal groupings or legal firms. After the illegally imported cigarettes are in Ukraine, small wholesale firms sell them through open markets or street vendors. Usually, the activities of such firms (groups) within a particular region (city) are well established and co-ordinated, which gives us grounds to consider that they are organized crime activities.

According to the JTI information, in the year 2000 on average six lorries with 15,000,000 cigarettes each illegally crossed the Russian-Ukrainian border daily. That equals about 30 billion cigarettesa year. While the amount is apparently exaggerated, it shows that large-scale organized smuggling may dominate the illegal market.

According to the “LASSO-2000” report “Review of cigarette smuggling in Europe” (see http://www.ash.org.uk/html/smuggling/pdfs/lasso2000.pdf ), which is based on an analysis of 1074 interceptions and seizures of a minimum of 500,000 cigarettes from 27 European countries, Ukraine is among top ten countries in Europe on large-scale organized smuggling. Both in 1999 and 2000, 25 such seizures were registered in Ukraine with more than 173 million cigarettes seized. The number of seizures in Ukraine was more than in Belarus, Latvia, Lithuania, Estonia, Romania, Slovakia and Bulgaria combined. Among the reported 636 offenders, 5% were Ukrainians. In 66 of the seizures from all 1074 cases, Russia was reported as the country of departure, accounting for nearly 185 million cigarettes seized. In more than 30 of all 1074 cases, the Russian brand “Prima” was seized, as well as some other Russian brands and the Doyna brand, which had been produced in Moldova. The greatest amountof them was seized in Ukraine.

Some other facts also support the hypothesis of a growing number of organized cigarette smugglers transporting big consignments. More than 25 filter brands are smuggled from Russia, while there are very little tax difference incentives. The prices for smuggled cigarettes are rather similar all over Ukraine (even far from Russian border).

A special kind of large-scale organized smuggling is so-called pseudo-export. It means that cigarettes thatare produced in Ukraine are declared as exported and in this case excise taxes are not paid. In reality, the cigarettes do not leave the country and are sold at a black market. In 2000, a batch of cigarettes produced by the Dnipropetrovsk tobacco factory was confiscated when a case of pseudo-export was detected.

4.2.2. The smuggling of international brands into Ukraine

In 1994-1998, the smuggling of international brands to Ukraine was the main kind of smuggling. Due to rather strict law enforcement and low excise taxes for filter cigarettes in Ukraine, the incentives to produce international brands in Ukraine instead of selling them to smugglers have increased. However, international brands are still smuggled to Ukraine. Most street vendors usually have two versions of an international brand (like Lucky Strike): legally imported and smuggled (which they call “without stamps”). According to Tobacco Review magazine (N 3, 2001), 1,5 billion cigarettes of international brands (Marlboro, L&M) were smuggled to Ukraine in 2000.

4.2.3. Smuggling from Ukraine

Data from the State Customs Service for 1999 and 2000 indicate the number of disclosed attempts of cigarette smuggling from Ukraine to be 1500 and 2151. Data indicate that the average value of detained illegal tobacco products was 3144 and 1268 UAH. However, according to Tobacco-Review magazine (N 3, 2000), about 5 billion filter cigarettes with Ukrainian excise stamps were smuggled to other countries.

According to the “LASSO-2000” report, Germany provided records on 11 consignments routed from Ukraine. With regard to brands smuggled from Russia and Ukraine, Germany can be considered a target black market as 40 interceptions of “West” cigarettes were reported. In 1999, more than 100 of 1044 cases of “West” cigarettes were seized, and in 2000, the number of cases increased to more than 250.

“West” cigarettes are especially popular in Germany. In Ukraine they are produced by the German firm Reemtsma. In the year 2000, 3.3 billion “West” cigarettes were manufactured and 1.42 of them were exported. It means that 1.88 billion “West” cigarettes were sold in Ukraine, which is nearly 3% of total market. However, the “West” cigarettes are not very popular in Ukraine. According to our June 2001 survey, only about 1% of Ukrainian smokers prefer the “West” brand. According to the Business newspaper report from a big Kiev wholesale-retail market, “West” was only 0,5% of sales. It could indicate that a substantial part of the “West” cigarettes produced in Ukraine are smuggled to Germany. In September 2001, 180,000 packs of “West” cigarettes were seized at the Ukrainian-Polish border. Recent data from the State Customs Service indicates that “West” is number one regarding seized filter cigarettes.

Smuggling from Ukraine is done in such volume that it creates big political problems. ‘Countries that are candidates to join the European Union are strongly resisting European Commission pressure for them to bring their excise duties on tobacco and other products into line with those in the rest of the EU before they join… «Smugglers from Ukraine and other countries would get their cigarettes into the candidate countries. And those cigarettes would still make their way into the EU,» said one senior Commission official. As a result, the Commission, when it makes its recommendations to member states this month, is expected to bow to requests from the candidate countries for transitional periods.’ (Financial Times, 23 October 2001).

4.3. Ukraine as transit country for cigarette smuggling