The government's effort to increase budget revenues by raising excise taxes on alcohol has driven down sales of alcoholic drinks by about a third and is likely to further reduce them in the months to come, according to drinks producers and distributors.
When the government more than doubled excise duty on alcohol a month ago it expected to raise as much as Hr 350 million if consumption of alcoholic beverages remained at the same levels.
Today alcohol sales have shrunk dramatically provoking concern among both those who manufacture drinks and those who sell them.
The sales of alcoholic drinks produced by Rosynka, one of the largest manufacturers in the market, have fallen by 30-50 percent over the last month. The dramatic fall has plunged the plant's management into gloom.
'Our attitude towards the new tax is extremely negative,' said Roman Vrenich, commercial director of Rosynka. 'Not only us but everybody is doing very badly now,' said Vrenich. He said that consequently the plant is generating significantly reduced tax revenue for the government.
Another large alcohol producer, the Obolon company, has registered a 30 percent drop in sales over the last month, according to Tatyana Korzh, the head of Obolon's economic analysis department. Korzh said Obolon now faces difficulties paying wages to its employees. She said the only thing that has kept the sales from falling even further is hot weather and holidays. Korzh expects an even sharper fall in volumes of sales in the next few months. 'Very soon we will have big problems,' said Korzh.
Even bigger price hikes on hard liquor have also had a disastrous effect for many. The volumes of vodka sales fell by some 50 percent for Daberli, an official dealer for Nemiroff vodka and Odessa champagne, according to Steve Kotenko, Daberli's commercial director. 'The prices are up but the consumer's spending power remained the same,' said Kotenko, explaining the reasons for the sudden drop in vodka consumption. Kotenko said many stores were refusing to stock vodka because they fear they will not be able to sell it.
'We have a very serious situation now,' said Kotenko. 'If the volumes of sales go down by 50 percent, it's a disaster for any industry.'
Kotenko, a historian by training, has even formulated a conspiracy theory to explain the tax increase. He believes government officials who wanted to harm President Leonid Kuchma's re-election chances were behind the increase because making vodka more expensive has always proved politically fatal in Ukraine. 'None of the governors who raised the price of vodka has ever been re-elected to his post,' said Kotenko. He thinks the price increase could become a decisive factor that will prevent the voters from supporting Kuchma in the 1999 presidential elections.
However, a fall in the consumption rates did not come as a surprise for the government. 'It's an inevitable reaction of the market,' said Volodymyr Parnyuk, the head of the Economic Ministry's tax and budget department. Though Parnyuk has not received a monthly report on the income from the sale of alcoholic drinks, he said they expected a fall in the consumption rates for the first couple of months, albeit a temporary fall that would stabilize after 4-5 months.
He said the biggest threat to Ukraine's alcoholic drinks market now is the huge amount of cheap smuggled alcoholic drinks that cross the Ukrainian-Moldovan border. 'There is practically no control over the Moldovan border,' said Parnyuk. 'If the border guards take measures there will be no alternative for the consumers then to buy the drinks legally sold in the stores.'
Parnyuk said that other countries make much more money through taxes on alcohol than Ukraine. Nevertheless, he noted that if the income from the sale of alcoholic drinks continues to fall the government may reconsider the regulation.
