Ukraine - Cigarette smuggling still hurting state coffers (fwd)

[Robert Weissman <rob@essential.org>]

Cigarette smuggling still hurting state coffers
By VITALY SYCH, Kyiv Post,
Issue 33 August 19, 1999
at www.thepost.kiev.ua

Post Staff Writer
In the past few  years,  foreign  cigarette-makers  have poured investment 
into Ukraine's tobacco  industry,  seeking to capture a share of the 
 sizable  market.  Production  has been on the rise, with the quality of 
 domestically-produced cigarettes improving dramatically. But  cigarette 
 smugglers are still a major player on the market,  and  the  flood  of 
cheap  products  they  bring  into  Ukraine  is  endangering domestic 
producers' expansion plans.
Even  by  the  most  conservative  estimates,  smugglers brought about 15 
billion cigarettes into Ukraine last year - about a fifth of the  overall 
 annual  domestic  demand  for tobacco. And although illegal tobacco 
 imports  have  halved since 1996, according to experts, they still 
continue to rob state  coffers  of  more  than  a  hundred  million 
 dollars annually in uncollected excise duties.
"That's a fantastic amount  of  money,"  said  Oleksandr Nechyporenko, a 
senior account executive at PBN.  PBN  is  a consultant to the Ukrtobacco 
association,  which  represents more than 5,000 employees at 10 tobacco 
factories throughout the country.
According to the experts' math, Ukraine  lost  about  Hr 500  million  in 
 uncollected  excise  duties  from  tobacco smuggling last year - more that 
it raised from privatization over the year. And the figure is expected to 
be even  higher in 1999.
Since  the  economic   crisis   undermined   Ukrainians' purchasing power 
last  fall,  cheap  smuggled  imports  have flooded the country. The State 
Tax Administration  has  sold only 30 million excise stamps  (which  every 
 legal  tobacco product must bear) to tobacco  importers  during  the 
 first three months of this year, down from the 90 million it  sold over 
the same period last year.
"The flow  of  contraband  cigarettes  from  Russia  has considerably 
increased since the crisis," said Nechyporenko.  "If earlier the smugglers 
were bringing in mostly  expensive cigarettes, now they are focusing on 
cheap brands."
He said the production cost of a pack of  cigarettes  in Russia is 
generally about 30 percent lower than in  Ukraine.  Smuggled cigarettes are 
often cheaper and poorer in  quality than legally traded brands, he said. 
 Moldova  is  Ukraine's second largest supplier of smuggled tobacco 
products.
Not  that  all  of  the  profits  are  going  into   the smugglers' pockets 
 though.  "Charitable  contributions"  to customs officials have reportedly 
become a rule.
"There are already market rates established for  getting smuggled goods 
past the border posts," Nechyporenko alleged.
He said the smugglers use any of  several  hundred  dirt roads to enter 
Ukraine unnoticed from Moldova. Most  of  the contraband  from  Moldova 
  arrives   via   the   separatist Transdniester region, which has a very 
 porous  border  with Ukraine, he said.
The government isn't the only one hurt  by  the  illegal tobacco trade - 
domestic tobacco manufacturers say that  are also affected smuggling.
"Smuggled cigarettes reduce our  sales  and  change  our investment plans," 
said Yuri Kishko, spokesman for Germany's Reemtsma, largest cigarette-maker 
in Ukraine.  Reemtsma  has so far invested DM 120  million  in  tobacco 
 production  in Ukraine and says it plans to invest another DM 45 million 
by the end of this year.
    Other  companies  cite  the  flow   of   cheap   Russian
cigarettes  into  Ukraine  as  a   major   disincentive   to
investment. U.S. cigarette maker Philip Morris put plans  to build  a  $200 
 million  tobacco  factory  in   Ukraine   on indefinite hold because of 
worries over  tobacco  smuggling.  Philip Morris' decision is a serious 
blow to Ukraine,  which has attracted a meager  $3  billion  in  foreign 
 investment since gaining independence.
Pressure is mounting on the government to crack down  on the problem.
Domestic tobacco-makers and consultants have  long  been pushing  for 
 severe  punishments  for  the  smugglers,  and tighter controls over 
tobacco sales.
"All the smuggled tobacco has to  be  confiscated,  even from the babushkas 
[old women]  selling  cigarettes  in  the streets,"  said  Nechyporenko. 
 "The   argument   that   the babushkas are just trying to make some money 
by selling  the smuggled cigarettes is  a  lame  one.  The  half  a 
 billion hryvnas made on excise duties would be good compensation for all 
the negative effects [of a crackdown]."
Tobacco manufacturers are also calling on the government to significantly 
reduce excise duties  on  tobacco  products made in Ukraine.
"It would be economically unprofitable to  sell  Russian cigarettes  here, 
 if  Ukraine  reduces  excise  duties  [on domestically made cigarettes]," 
he said.
Kishko said that the excise duty on tobacco products  in Russia is 
significantly lower than that of Ukraine.
He said that Ukraine charges ten times as much as Russia in  excise  duty 
 on  some  brands,  which  makes  it   very profitable to sell Russian-made 
cigarettes in Ukraine.
The tobacco industry, one of the first industries to  be privatized in 
Ukraine, has attracted over  $200  million  in foreign  investment  since 
 independence.  Domestic  tobacco production has risen for the past three 
 years,  peaking  at almost 60 billion cigarettes last year.
The country's tobacco market is dominated by four  large foreign tobacco 
companies. Two of them - Reemtsma of Germany and Philip Morris of the 
United States - accounted for about 51 percent and 16 percent of tobacco 
production  in  Ukraine respectively, according to a Ukrainian News report.