With cigarettes being so cheap in Ukraine, there’s a wide margin for smugglers to make a good profit. Moreover, the low cost of smoking takes a toll on the nation’s health, with high rates of smoking-related diseases and deaths.
Yet parliament is in no hurry to increase taxes on tobacco. In defiance of calls by anti-smoking activists to raise tobacco taxes to combat smuggling and improve the nation’s health, the Rada’s tax and customs committee has been protecting the interests of the tobacco industry, as well as blocking laws to restrict cigarette advertising.
Add to that the rapid fall in the value of the hryvnia, the currency having lost two-thirds of its value over the last two years, the illicit cross-border trade in cigarettes has continued apace. In 2016, even high-level diplomats have been caught illegally transporting cigarettes to Hungary.
Tobacco lobby
After parliament’s summer break, the long-running battle resumed between the tobacco lobby and anti-smoking activists over the issue of tobacco taxes.
In 2015, a proposal for a 40 percent increase in the tax on tobacco met stiff resistance from parliament’s tax and customs committee, which supported a rise of only 20 percent. Eventually, the former Finance Minister Natalie Jaresko managed to push the increase through the Rada, bringing the budget an additional Hr 6 billion ($240 million) in tobacco taxes in 2016.
The tax lobby hasn’t given up though, activists say. Plans are afoot to block anti-tobacco laws and reduce the rates of increase of taxes on tobacco, says Andriy Skipalskyi, the president of Center for Tobacco Control.
Skipalskyi said that the head of the Rada’s tax committee, Nina Yuzhanina, a member of the pro-presidential Bloc of Petro Poroshenko faction in parliament, is on good terms with the tobacco industry. And Head of State Fiscal Services Roman Nasirov, who was head of the tax committee before Yuzhanina, is also a supporter of the industry.
“Whoever happens to be the head of the tax committee, he or she actively defends the interests of the tobacco companies,” Skipalskyi said.
Yuzhanina and Nasirov had not responded to requests for comment by the time of publication.
At a news conference of the Center for Tobacco Control on Sept. 20, anti-smoking activists said that besides fighting to keep tobacco taxes and cigarette prices down, the committee has blocked draft law banning the advertising of cigarettes on the internet and the placement of pictures of the effects of smoking-related disease on cigarette packs.
This law, which is supported by the Cabinet of Ministers, would bring Ukrainian law into line with European Union legislation. According to World Health Organization data, 6 million people die prematurely each year from the consequences of smoking-related diseases. There are around 63,000 smoking-related deaths in Ukraine every year, according to Ukraine’s Health Ministry.
“There is a conflict of interest between the tobacco industry and public health, so none of the activities of the industry would ever be aimed at reducing tobacco use,” Petro Korol, a lawyer of the Centre for Democracy and Rule of Law, said at the news conference.
Activists say the price of a pack of cigarettes in Ukraine should be the same as in the rest of Europe, which would eliminate profits from smuggling, raise more money for the budget, and decrease the number of smokers. They suggest rising the tobacco tax to 50 percent in 2016, bringing the price of a pack of cigarettes to an average of €3 (the current price in the Baltic states) by 2025.
But many in parliament don’t agree.
Samopomich lawmaker Andriy Zhurzhiy, the deputy head of tax committee, said he supports a 30 percent rise in the tobacco tax this year, which he said would signal to the industry that the tax rate is only going to rise in future. He said a gradual increase in the tax should reduce the number of smokers, while “not killing the industry.”
And the government has an interest in keeping the industry alive: Zhurzhiy said tobacco taxes bring in the second biggest share of revenues to the budget after taxes on oil. The tobacco companies paid taxes at a rate of Hr 300 per 1,000 cigarettes in 2015, which raised Hr 10 billion ($400 million) for the budget.
However, Zhurzhiy said raising tobacco taxes wouldn’t resolve the problem of smuggling; to do that, corruption at the border would have to be stamped out, he said.
Smugglers’ choice
With the steep currency devaluation and low taxes, Ukrainian cigarettes remain some of the cheapest and lowest-taxed in Europe. In neighboring European Union countries a pack costs six times more: some of the top brands sell for Hr 15-17 (60 cents) a pack in Ukraine, while the same brand in Poland costs $4.
That price difference is a boon for smugglers. In the Illicit Trade Report 2014, published by the World Customs Organization, Ukraine was named as the top country of origin of seized contraband cigarettes. According to the report, 354 cases of smuggling cigarettes were discovered in 2014. In 2016, auditors KPMG issued a report naming Ukraine the second biggest supplier of illegal cigarettes to the EU after Belarus.
Lawmaker Tetiana Ostrikova, also a member of the Committee on Taxation and Customs Policy, says tobacco is the main type of product smuggled from Ukraine. However, nobody knows exactly how many cigarettes leave the country illegally every year.
But evidence of the size of the problem can be found at the country’s border checkpoints and ports. In August, Odesa customs detained nine containers of contraband cigarettes with an estimated value of more than Hr 100 million ($4 million).
Production and consumption figures also give an indication: in 2015, the official figure for tobacco consumption in Ukraine was 73 billion cigarettes. However, the approximately 10 million smokers in the country would have actually consumed, at most, 62 billion, according to the Center for Tobacco Control’s Skipalskyi.
“That leads to a question– where did those 11 billion (cigarettes) go?” he asks. The answer is Poland and other EU countries, Israel, Egypt, and Turkey, the activists said.
Diplomatic smuggler
Smugglers evade customs (in most cases) by hiding tobacco products among other goods, like lumber, using specially designed hidden compartment inside cars and trucks, and by submitting customs documents with false data, Illicit Trade Report says.
In a more brazen case in May, Serhiy Lishchyshyn, the husband of a Ukrainian diplomat working in Slovakia, attempted to smuggle 60,000 cigarettes into Hungary, using a diplomatic passport. A court punished Lishchyshyn with a fine and seized his car.
His wife Oksana Lishchyshyn, who had signed a letter confirming that the car was transporting a diplomatic cargo, didn’t lose her job in the diplomatic corps, although she was subsequently transferred from the Ukrainian Embassy in Slovakia.
“Now, the Foreign Ministry does take care of its employees, but what a disgrace! These are diplomats, the elite, respected people!” Hennadiy Moskal, the governor of Zakarpattia Oblast, wrote about the incident on his Facebook page. “In Zakarpattia, cigarettes turn even the elite into bootleggers, plain smugglers.
According to a report by the Ukrainska Pravda news website on Sept. 26, Oksana Lishchyshyn has now been fired from the Foreign Ministry for violating her oath of service.
Paying everyone
Meanwhile, the debate continues between anti-smoking activists and the tobacco lobby about how to reduce smuggling. The tobacco industry’s supporters in parliament say the solution lies in reforming customs, putting more staff on checkpoints, installing more scanners, and introducing more automated customs procedures to cut down on corruption.
Activists insist the increasing taxes is the key, and they say the numbers back them up.
In 2008, cigarette sales in Ukraine stood at 125 billion, while by 2015 that had almost halved, to 73 billion. Over that period the tax on cigarettes has increased by almost 10 times – from Hr 29 per 1,000 cigarettes to Hr 300.
Industry expert and Ministry of Health employee Kostyantyn Krasovsky said the halving of sales of cigarettes had also halved the level of smuggling. “Naturally, the Ukrainian experience proves that smuggling from Ukraine has decreased, and the only reason for that is the tax increase,” he said.
Krasovsky said the tobacco tax should be increased by at least 50 percent. That would increase cigarette prices and cut sales, which would in turn reduce smuggling, smoking rates, and health problems.
Meanwhile, with a profit margin of between 500 and 600 percent per pack of contraband cigarettes, smuggling is still a lucrative activity, Skipalskyi said.
“They can pay everyone,” he said about the smugglers. ”So the price of cigarettes matters.”
