Illicit Trade: Can Science Tackle It?

November 2023
A round table discussion on the "Effective methods of combating illicit trade: science and international practice" took place in Kyiv on November 13, featuring experts from Ukraine, Georgia, Kazakhstan, Moldova, Turkey and Azerbaijan. The event gathered participants both off – and on-line.

These are the countries facing shared challenges, such as high tobacco consumption, particularly among men. For instance, in Georgia, male smoking is the highest in Europe, at 57%.

The regulatory decisions of these countries aim to increase the cost of legal cigarettes and nicotine-containing products. However, these efforts are complicated by the tolerance of the illicit tobacco trade. People who smoke continue to have easy access to cheap cigarettes, undermining their attempts to quit.

In 2021-2023 experts from the NGO "Healthy Initiatives" conducted a research on illicit trade in Ukraine, Georgia, and Kazakhstan searching for solutions based on science. The findings have indicated quite a significant distribution of illegal products. Before the Russian invasion of Ukraine in February 2022, “Healthy Initiatives” worked closely with various stake holders in Ukraine to develop a Road Map on Combating the Illicit Trade which now is to be reconsidered.

Today illegal cigarette packs in Ukraine and Georgia are about 70% cheaper than legal ones. Telegram channels, illicit street vendors, and duty-free shops have become primary channels for these products. Experts recommend a complete ban on the production and sale of domestically produced tobacco through duty-free shops in Ukraine. By comparing production and sales volumes, the experts revealed glaring violations: a significant portion of the products intended for duty-free "disappears" without a trace on the route to stores, and fictitious purchases occur within duty-free territories. As an illustration, the average purchase in a duty-free store amounted to 30 packs or more, far exceeding the norm for transporting tobacco across the border, which is limited to no more than 2 packs. This exemplifies how tax and excise tax evasion schemes work.

An analysis comparing the taxation of a ton of tobacco and raw material waste from various manufacturers revealed significant variations, indicating illegal production in certain enterprises.

In Georgia, despite the increased excise duties on tobacco products, raw tobacco prices remain relatively unaffected. This has led to self-rolling becoming a solution for smokers after cigarette prices rose. Harm reduction products continue to become more expensive, hindering widespread substitution and tobacco cessation in Georgia.

In Kazakhstan, the situation regarding illegal trade appears more favourable due to the lower VAT rate compared to neighbouring countries. The profitable registration of imported products in Kazakhstan enables their entry into the markets of neighbouring countries within the customs union. However, the availability of cigarettes in Kazakhstan is considered a temporary phenomenon. Currently, the cost of a pack of cigarettes in Kazakhstan is equivalent to 8% of a day's earnings, while in Ukraine, it corresponds to 30%. If the government decides to raise excise taxes simultaneously on both cigarettes and harm reduction products in Kazakhstan, it could encounter the same challenge of illicit trade. As demonstrated by the example of snus, which is prohibited in Kazakhstan, experts from the NGO "Healthy Initiatives" illustrated that bans do not necessarily restrict availability, as the product continues to thrive within the developed illegal market.

Cross-border illicit trade plays a significant role, with channels from Romania and Ukraine competing for consumers from Moldova. Concerns also arise regarding the growth of tobacco cultivation in Moldova and Ukraine and the establishment of artisanal production.

Summarizing the discussion results, representatives from a number of international think tanks, business associations, and public organizations agreed to continue exchanging data and best practices in the fight against illegal trade.
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