Illegal Cigarettes: Why Ukraine Is Still the Leader of Smuggling to EU

December 13, 2018
Illegal Cigarettes: Why Ukraine Is Still the Leader of Smuggling to EU

Ukraine should fight the causes of the illicit tobacco trade and not its consequences.

Anti-Illicit Trade Operations Eastern Europe Director of JTI Company Eugenijus Cikockas

2.5 billion UAH of the country’s budget and 250 million euros of shadow funds. This is a generalized annual number of illegal cigarettes trade in Ukraine.

Everyday 1–2 trucks, completely stuffed with cigarettes, are taken out from Ukraine illegally. Profit from one such a track is half a million EUR.

This is a good profit for the illegal business, due to which, according to KPMG, Ukraine ranks 1 st among the supplying countries of illegal cigarettes to the European Union. And this is at a time when Ukraine is actively struggling with the shadow economy.

For us, the tobacco industry, illicit trade is one of the biggest problems, especially in Ukraine.

In addition to reputation losses due to the championship in KPMG anti-rating and the shortfall of profit in the EU markets, we also lose profits in Ukraine.

Due to the constant growth of excise rates and, consequently, the increase in the cost of cigarettes and under conditions of low purchasing power, Ukrainians are increasingly buying cheap counterfeit or smuggled cigarettes.

This year, the average indicator of the domestic market of illicit trade in cigarettes has grown to 3.7 %. It seems that it is a small indicator, but it is one third more than last year.

In cash equivalent, it is 2.5 billion UAH of uncollected taxes. The growth trend persists and next year, according to our forecasts, this figure will easily reach 3 billion USD. If, of course, nothing will be done.

We will not wait until the problem is solved by itself. We actively cooperate with law enforcement officers, help to carry out smuggling examination and determine the ways of its movement. But this is just a drop in the sea of the fight against a huge illegal market that brings millions of euros of shadow money.

Smuggling is a complex problem that requires a comprehensive solution, which, unfortunately, the state does not have. Actually, so far Ukraine is fighting not the reasons but only with the consequences of the problem. This is caused by the following facts:

  • there is no integrated state statistics on seized tobacco products and its further fate is not monitored;
  • the pseudo-destruction of seized cigarettes has become a separate business;
  • dishonest counterfeit players continue to work on the market;
  • the illegal outflow of the legal product is not systematically reduced;
  • there is no adequate response to these problems of the controlling departments

What can help in this situation?

Firstly, we need to join forces. More than a year ago, the Government approved the Strategy to counteract the illicit production and circulation of tobacco products for the period up to 2021.

This document, prepared by a working group at the State Fiscal Service (SFS) with the participation of representatives of all law enforcement agencies, must precisely ensure the application of qualitatively new approaches to solving the problem.

Unfortunately, the document itself is declarative and requires the adoption of a Plan of measures for its implementation. The plan has been developed, but still — for a year and a half — has not been approved and not adopted.

Secondly, the introduction of the general tracking system for produced in Ukraine products — each pack of cigarettes (Track & Trace). There is no need to reinvent the bike, it is enough just to turn to the European experience.

Moreover, this step is provided by Ukraine’s commitments regarding the Association Agreement with the EU.

Thirdly, it is necessary to criminalize smuggling. Now, for the detention of even a large consignment of cigarettes, only administrative liability is foreseen. And this does not scare people who earn half a million euros on each track.

All these problems and possible solutions I had the opportunity to voice at the roundtable Quality Regulation: Fight Against Illicit Trade organized by the Union of Ukrainian Entrepreneurs (UUE).

I was very encouraged by the fact that not only attendees on the part of business were very concerned about the illicit trade in Ukraine, but also representatives of state bodies, which one way or another can affect the situation.

We — JTI — are doing a lot of efforts in combating the illicit trade, we do it for a long time and have expertise that will surely help in the effective fight against illicit trade.

Business is ready to provide all its knowledge and skills. It remains only to build an effective business and state interaction and use the best practices in the world. Illicit trade is our common problem: business, state, and society. It is only necessary to unite efforts to achieve a common goal.

The article was originally published in Ekomonichna Pravda.

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