Ukraine Faces Rise in Illegal Tobacco Trade

Ukrainian authorities should now begin taking systematic measures to counter illegal tobacco operations, as the share of illegal tobacco products has increased by 5 percentage points (p.p.) since 2021, reaching 21.9% in August 2022. This trend has been ongoing since 2016.

The decline in citizen income, inflation, and war have only accelerated the growth of Ukraine's illegal tobacco market. The state budget experiences a loss of 44 UAH (approximately 0.88 RMB) from each pack of illegal cigarettes. The total estimated loss to the state budget in 2022 is 20.6 billion UAH (approximately 3.986 billion RMB). Therefore, it is extremely important to begin systematically combating the illegal tobacco industry. "It is important to start systematically combating the illegal tobacco business now," said Maxim Barabash, general manager of the Philip Morris Ukraine branch, at a round table discussion about the issue of illegal tobacco trade in Ukraine organized by the Ukraine-US Business Council.

In addition, representatives of tobacco companies have proposed the establishment of a joint working group with the coordination center in the President's office.

Combatting the illicit trade of tobacco products falls under the jurisdiction of several regulatory and law enforcement agencies. However, due to unclear lines of authority, these agencies do not always work in a coordinated manner and may even compete with each other. Therefore, we are calling for the establishment of a joint task force and the creation of a coordination center within the President's office," said Svitlana Sharamok, General Manager of JTI Ukraine, during a roundtable discussion.

She added, "We believe that the indicator for measuring the effectiveness of this small group's work should not be the number of surprise inspections or confiscated cigarettes, but rather the actual decrease in levels of illegal transactions - reaching a certain established benchmark within a certain period of time," she said.

The American Chamber of Commerce stated that its members are continuing to operate, pay taxes, provide employment opportunities for Ukrainians, and are preparing to actively participate in the country's post-war economic reconstruction. As such, it is necessary to exert maximum effort to ensure an attractive investment environment and a fair competitive environment.

Andy Hunder, President of the Ukraine-USA Business Council, stated that effective communication and coordination between all participating government authorities and businesses are crucial for implementing effective measures to combat the illegal trade of tobacco products.

During the conference, attendees mentioned research data from Kantar Ukraine for the month of October, which showed that the total amount of illegal cigarette sales in Ukraine has reached 8.46 billion since the beginning of 2022, equivalent to the entire amount for 2021. Additionally, in August 2022, counterfeit cigarettes made up 8% of the total market share in Ukraine, compared to 6.6% in November 2021, 5.6% in August 2021, and 4.2% in February 2021.

In August of this year, the share of cigarettes that were labeled for export and for sale in duty-free shops, but were illegally sold in Ukraine, accounted for 12.2% of the entire Ukrainian cigarette market. By November 2021, this figure had decreased to 10.9%, while in August it was 9.8%, and in February it was 6.9%.

According to data from the research institute, in 2022, 56% of tobacco products sold illegally as exports or tax-free products were marked as being produced by Vinnytsia tobacco factory (located in Vinnytsia Oblast), and were not intended for sale in Ukraine. This is a decrease from 62% in 2021. The share of unidentified manufacturers was 24%, up from 23% in 2021, and the share of Joint Tobacco Limited Liability Company (located in Zhovti Vody, Dnipropetrovsk Oblast) was 19%, up from 15% in 2021.

On the other hand, the proportion of smuggled cigarettes in August 2022 decreased to 1.8%, compared to 2.9% in November of last year and 2.7% in August 2021.

In the illicit trade of cigarettes, 15% come from Belarus's Grodno tobacco factory (down from 45% in 2021), 14% from Moldovan factories (up from 15%), and 70% from unidentified manufacturers. The most commonly smuggled brands are Brut, Ritm, Marshall, NZ, Bacio, and Williams.

According to a study, the average annual level of illicit tobacco sales in Ukraine in 2021 was 16.9%, a 10% increase from the previous year's 6.9%. In 2019, it was 6.6%, also a decrease of 10.3 percentage points, and in 2018 it was 4.4%, a decrease of 12.5 percentage points. The lowest recorded level of illicit cigarette sales in the past ten years was in 2016, at 1.1%.

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