The largest cigarette producer in Ukraine manufactures such global brands as Rothmans, Dunhill and Lucky Strike. But for the past two weeks, British American Tobacco’s factory in the country’s Chernihiv Oblast has stood idle after the company halted production indefinitely.
The company alleges that new tax legislation will make continued operations in Ukraine impossible. But anti-smoking activists believe that BAT is simply trying to pressure the Ukrainian president to veto a bill it doesn’t like.
The British American Tobacco Priluki factory — part of the huge BAT multinational corporation with factories in 42 countries — is one of the three largest taxpayers in Ukraine. In 2018, it payed over Hr 16 million ($639,000) into the state budget.
But a new amendment passed by the Verkhovna Rada on Oct. 4 has forced it to halt production, BAT factory director ArtemSkripka claimed on local television.
The new legislation mandates a single account for paying taxes and fees and a compulsory contribution to state social insurance. The amendment establishes a trade margin for cigarettes: 7% for wholesale and 13% for maximum retail price. This will force producers to raise prices by 20%, which will lead to a decrease in sales volume, BAT alleges.
If signed by President Volodymyr Zelensky, it will become law.
“As a company, we cannot continue to produce with something we do not know what to do with. Because of this we are halting production. The factory has been stalled for two weeks already,” Skripkz said.
In September, BAT announced that it will move its regional headquarters from Ukraine to Romania due to the “unpredictable fiscal and regulatory policies of the government of Ukraine.”
In recent years, tobacco companies have increased cigarette prices out of pace with tax rates and inflation, making more money as markets decline, according to Advocacy Center LIFE, an anti-smoking non-government organization.
But member companies of the Ukrainian Association of Tobacco Manufacturers, a lobbying group, say that the introduction of a trade margin on cigarettes for wholesale and retail trade could result in the closure of factories and the loss of 50,000 jobs in the industry.
The association was formed by four major tobacco players: BAT, Imperial Tobacco, Japan Tobacco International and Philip Morris International.
The Council of Entrepreneurs under the Cabinet of Ministers has asked President Volodmyr Zelensky to veto the bill, since it deprives enterprises of the right to set prices for tobacco products.
Opponents of the tobacco industry say that the situation is hardly so dire, and the companies simply want to extract benefits for themselves at the expense of the Ukrainian state and public health.
Konstantin Krasovsky, an expert at Advocacy Center LIFE, believes that BAT is pressuring Zelensky to veto the bill. He says this isn’t the first time that tobacco companies have threatened to close down factories —something they do in many countries.
“With every country they promise collapse, to close factories, but they never do,” he told the Kyiv Post.
BAT’s factory in Ukraine is important to the company because labor costs are low here. The company’s 3,000 workers produce 90 billion cigarettes a year. Out of those 90 billion, 30 billion are exported out of the country.
Krasovskiy believes that, by next month, BAT will actually have increased its production like it does every year around this time. Two years ago, the Ukrainian parliament adopted a 7-year plan to raise tobacco production taxes by 20% every January in order to reach EU equivalent levels, 90 euro per 1,000 cigarettes. The Ukrainian tobacco industry agreed to this plan. Since then, however, the big corporations decrease production in the early winter and ramp it up in the fall to avoid paying more taxes.
Krasovskiy does not believe the new law will hinder BAT’s production. Igor Lutsenko, a lawmaker who has actively engaged with the tobacco issue in Ukraine, also told the Kyiv Post that he thinks BAT is pressing for a veto of the bill.
However, British American Tobacco denies these allegations.
“We are saddened by the public statements of some government representatives…” Yuriy Rylach, head of public affairs at the company, told the Kyiv Post in a statement. “For 26 years, we have been working honestly, transparently and in full compliance with both Ukrainian law and our internal Standards of Business Conduct, common to all British American Tobacco offices in all countries of the world”
The company has invested over half a billion dollars in Ukrainian business since entering Ukraine, with the largest investments made in the past three years, Rylach added.
But the new law “simply makes it impossible for an enterprise to produce and sell products, we are forced to idle,” he said.
