Doubling of Cigarette Prices by 2014 Could Lead to Fakes

The retail price of cigarettes will more than double by 2014 compared to this year, after the Ministry of Finance proposed raising excise taxes by 40 to 42 percent per year.

The ministry came up with various proposals, including one that would have seen a 100-percent increase some years. The original aim was to bring Russia into line with the average European level of excise taxes on tobacco production by 2015, but Prime Minister Vladimir Putin did not approve the strategy.

“We cannot take the burden away from businesses and transfer it onto ordinary citizens; a direct, single, rapid increase of excise taxes on tobacco will certainly lead to the rapid increase of prices for this product,” Putin said at a government presidium on March 31.

“Fortunately, of all the proposals, the Ministry of Finance finally stopped at 40 to 42 percent, which in our opinion appears to be much more balanced and realistic than the previous proposals,” said Andrew Newton, manufacturing vice president for the CIS at Japan Tobacco International (JTI) and general director of JTI’s Petro factory in St. Petersburg.

“This is the right decision, as tobacco products are harmful to society,” said Yelena Vylkova, professor of finance at St. Petersburg State University of Economics and Finance. “It is only fair that the government gets revenue from their sales.”

According to JTI representatives, under the new tax regime, the price of the cheapest filter cigarettes that currently retail at 16.50 rubles ($0.59) will be 38.50 rubles ($1.38) by 2014.

Experts warn that growth in the retail prices of cigarettes will increase the risk of the emergence of counterfeit production. The tobacco market is gradually recovering from the economic crisis.

“We cannot yet say there is strong recovery, but we are seeing some kind of recovery,” said Newton. “Consumers who had to turn to cheaper cigarettes are returning to more expensive brands, and we are observing a slowdown in the rate at which sales are decreasing.”

To protect the market and consumers, close collaboration is essential between the relevant institutions and governmental bodies.

“During the past few years, the government has had a strict policy of the gradual, step-by-step increase of excise taxes, which has resulted in a growth of revenue to the state budget from taxes. This gradual growth of excise taxes has made it possible to keep contraband cigarettes at a minimum level,” said Newton.

According to research conducted by Euromonitor International, about 2 percent of cigarettes on the Russian market are illegally imported. In Eastern Europe, the rapid increase of taxes led to negative consequences as the growth of retail prices caused some consumers to turn to cheaper cigarettes or illegal products of dubious quality.

“In Bulgaria, for example, 45 percent of all tobacco products are illegal,” said Newton. “Another example is Romania, where 27 percent of production in 2010 was counterfeit. According to expert data, Romania’s state budget lost out on 700 million to 900 million euros in excise taxes last year due to counterfeiters,” he added.

The best way to protect the market is to have a structured and balanced excise taxes policy, say manufacturers. Italy, Spain and Switzerland took 19 to 25 years to reach the current level of tobacco excise taxes, according to JTI specialists. In these countries, the illegal market accounts for less than 5 percent.

Russia should be cautious when setting excise taxes and should coordinate them with partner countries in order to restrict the emergence of contraband production, said Newton.

“If we take the most popular filter cigarettes on the Russian market, the retail price of these cigarettes is 57 percent higher than in Belarus and 85 percent higher than in Kazakhstan, and these countries are Russia’s partners in the customs union,” he said.

In Romania, according to JTI data, the volume of counterfeit tobacco production has decreased from more than 30 percent of the market to 27 percent.

“They changed the staff at customs significantly, especially those responsible for the border with Ukraine and Moldova, as the main stream of counterfeit and contraband products came from these countries. They have also started to actively prosecute those involved in contraband tobacco,” said Anatoly Vereshchagin, communications and community relations director for JTI in Russia.

“But these policy measures and collaboration with tobacco companies have only made it possible to decrease the share of contraband goods,” he said. “These regulations alone cannot solve the problem.”

By Olga Kalashnikova
The St. Petersburg Times

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