In March 2009, parliament discussed proposals to increase tobacco excise tax from Hr 1 to Hr 2 per pack of 20 cigarettes.
Representatives of transnational tobacco companies were very critical about the proposals and alleged that Ukrainians would not smoke less, but would just switch to cheaper smuggled cigarettes while government revenues would decline.
Since that time, the excise tax rate was increased even more and, at present, the average excise tax is more than Hr 3 per pack. The figures show what eventually has happened.
Public health activists depict people “hooked” on smoking during a 2010 rally. Ukraine’s cigarettes remain among the cheapest in the world, contributing the nation’s high smoking rate and the premature deaths of 100,000 Ukrainians every year. (UNIAN)
In 2007, when the tax rate was just Hr 0.5 per pack, the government collected Hr 2.5 billion from excise tobacco taxes. Then the rate was raised several times and the revenues increased to Hr 3.5 billion in 2008, to Hr 9 billion in 2009, and to Hr 13 billion in 2010, more than five-fold in three years.
In neighboring Russia, tax rates were also raised in those years, but not so fast as in Ukraine, and the revenues also increased, but only twice: from 50 billion rubles in 2007 to 108 billion rubles in 2010.
Tobacco consumption trends are even more indicative. In the mid-2000s, daily smoking prevalence in Russia and Ukraine was very similar – about 35 percent. In 2009, the Global Adult Tobacco Survey was conducted in both countries and daily smoking prevalence was 33.8 percent in Russia and 25.5 percent in Ukraine.
Ukrainians smoke less, a main reason why cigarette production in Ukraine decreased from 129 billion in 2007 to 102 billion in 2010.
It is worth mentioning that, in 2001, only 70 billion cigarettes were produced in Ukraine and the sharp production increase was mainly pushed by the huge smuggling of Ukrainian cigarettes to the neighboring countries where cigarette prices were higher.
British member of parliament Charles Tannock stated that, out of 80 billion cigarettes illegally smuggled into the European Union in 2008, 30 billion came from Ukraine. The World Customs Organization issued a report on customs and tobacco with data on large (more than 100,000 cigarettes each) seizures.
The country of cigarette departure was identified for 2,688 such seizures, and in 1,020 cases it was Ukraine. However, in 2008, there were 573 seizures of Ukrainian cigarettes and only 447 in 2009, while seizures of Russian cigarettes increased from 48 to 84.
Source: State Tax Administration
So while Ukraine keeps the position as a world leader in cigarette smuggling, smuggling became less profitable after the tobacco tax increases and it is on the decline. This is the second reason why cigarette production in Ukraine decreased in recent years.
The tobacco industry tries to create the impression that cigarette smuggling into Ukraine is more important than smuggling out of Ukraine. Indeed, currently prices of cheap cigarette brands are higher in Ukraine than in Moldova and Russia (while Marlboro is still more expensive in Moscow compared to Kyiv).
To measure consumption of smuggled cigarettes in Ukraine during the Global Adult Tobacco Survey, smokers were asked to show the pack.
Only 1.5 percent of them smoked Moldavian or Russian cigarettes. It means that, in 2009, about 1 billion smuggled cigarettes were consumed in Ukraine, while more than 30 billion cigarettes were produced in Ukraine just to be smuggled out of it.
The recent tobacco taxation policy was really a success in Ukraine. Tax rates increased by six times and this caused a five-fold increase in revenues. Cigarette production declined by 21 percent due to the decrease of both tobacco consumption and smuggling out of the country.
However, currently the average price of Ukrainian cigarettes is just Hr 8 per pack, while in Poland it is 9 zlotys – three times higher.
In 2011, Russia increased the tobacco tax rate much higher than Ukraine. Since April 2011, cigarette tax rates in Moldova will be raised by 50 percent. These are all reasons that justify continuing with a successful policy and increasing tobacco taxes in Ukraine again.
Konstantin Krasovsky is head of the Tobacco Control Unit at the Ukrainian Institute of Strategic Research for the Ministry of Health in Ukraine.
