When Ukraine’s antitrust agency imposed a record fine of $260 million in October 2019, it triggered a series of lawsuits challenging them that have carried into 2021.
The penalized entities were four multinational tobacco producers who control about 80% of the market and a distributor whom the Anti-Monopoly Committee of Ukraine (AMCU) considers a monopoly. The tobacco groups are challenging the unprecedented fines for alleged collusion.
Namely, they are being fined for engaging in “concerted practices” that enabled TEDIS Ukraine to maintain a dominant foothold in the tobacco distribution market and which led to the “creation and support of artificial barriers that prevented market entry for other companies,” an AMCU news release says from October 2019.
As recently as Feb. 2, Imperial Tobacco, one of the four fined tobacco makers failed to nullify its $18.4 million fine during a hearing at the Northern Appellate Commercial Court.
In a new release sent to the Kyiv Post the same day, Imperial Tobacco called both the ruling and AMCU’s actions “unjust.”
It likewise intends to appeal the case with the Supreme Court and is “preparing to transfer the case” to international arbitration. Imperial Tobacco CEO Rastislav Cernak said: “This scenario gives another alarming signal to the community of foreign investors about the real state of justice in Ukraine.”
Participants in World No Tobacco Day stand near mock-ups of cigarette packs near the Office of the President of Ukraine, in Kyiv on May 28, 2020. (UNIAN)
The anti-competition fines and court rulings come as Ukraine forges ahead with a combined policy of encouraging tobacco consumers to quit and adequately taxing the related products to bolster revenue for state coffers and discourage smoking. Studies show higher prices on cigarettes prompt smokers to quit or consume less.
About 23% of adults in Ukraine consume tobacco products, according to the World Health Organization (WHO).
And the price of cigarette packs averages $2 a pack, depending on the brand, excluding newer modes of transmitting the addictive nicotine drug through electronic and heat-stick devices. The price is far lower than most places in Europe or America.
British American Tobacco (BAT), which was fined $3.2 million, lost its appeal in the same court on Jan. 26. Its Ukrainian subsidiary Pryluky in Chernihiv oblast, fined for $18 million, is separately challenging the penalty in a closed court hearing at the competition authority’s request.
In an earlier news release, BAT stated it will appeal the case and is considering filing a claim in an international arbitration court. It furthermore accused the court of not properly examining all the evidence in the case.
“Such decisions undermine any plans to invest in the Ukrainian economy and cause unjustified damage to our reputation as a reliable corporate citizen,” the company stated.
Nataliia Tsuman, a spokeswoman for BAT, declined to provide comment to the Kyiv Post for this story.
Fined for a total of $47.2 million, Philip Morris in January filed a claim with the World Bank’s International Center for Settlement of Investment Disputes in Washington, D.C., for bilateral arbitration.
“The decision of the committee (AMCU) is a clear violation of investor’s rights,” CEO of Philip Morris Ukraine Kostas Salvaras said in a news release. “We believe that this dispute between the investor and the state will have an extremely negative impact on the investment attractiveness of Ukraine, as well as the country’s reputation as a while.”
JTI lost its first court case in August and has paid the $36 million fine as have the other penalized companies in order to avoid interest accruing, while BAT has said paying it was “not an admittance” of guilt.
At the center of the competition authority’s probe is TEDIS Ukraine, which had been previously fined for abusing its market position — $10.9 million in 2016, the same year it changed its name from Megapolis — and through which most tobacco products still get distributed.
It had controlled 99.4% of the market in 2013, according to the AMCU.
TEDIS also considers its courtroom losses as “unfounded and illegal,” a news release says, and the distributor didn’t respond to a request for comment.
Still, the competition authority found during its investigation that even though there were 22 distributors on the market, all cigarettes made by the four penalized tobacco companies were sold exclusively through TEDIS.
In 2008, Ukraine started to accelerate incremental price hikes for tobacco products. Currently, about 70% of a pack’s cost represents some form of taxation, mostly excise.
Over 10 years, according to the WHO, the price for packs increased 27 times and led to a 12-fold increase in tobacco excise revenues.
“This was accompanied by an impressive 40% reduction in the number of daily smokers (from 10.1 million in 2008 to 6 million in 2018)” the WHO report said.
Tax revenues from tobacco account for about 8% of Ukraine’s state budget of $40 billion.
In 2017, Ukraine adopted a plan to increase the excise tax on tobacco by 20% yearly until 2025 to “reach the European Union minimum excise tax rate and further increase revenues, decrease consumption and reduce tobacco-related mortality and morbidity,” the WHO says.
Excise revenues would reach $3.5 billion at the currency rate under the current schedule compared to around $2.3 billion under the tobacco industry proposal, which has argued that smuggling from countries where tobacco is cheaper, like Moldova, will offset market dynamics.
Yet the market has received mixed signals from the government. A Cabinet of Ministers resolution from September 2020 seeks to establish a “National Operator” in the tobacco market that could replace the monopoly position of TEDIS.
It is slated to be implemented as a pilot project by the end of this year.
“The tobacco operator will be set up to combat tax evasion, smuggling, and counterfeiting,” Deputy Minister of Economy Svitlana Panaiotidi has said, adding that it will involve a “track and trace” system of monitoring the movement of tobacco products from the producer to the retailer.
Tobacco manufacturers have argued that their inclusion in AMCU’s penalties contradicts the antitrust agency’s previous actions, notably, by allowing TEDIS to acquire more than 10 existing distributors in 2008–2010.
They furthermore have complained that commercial policies were submitted to the AMCU for approval on how to break up the monopolized distribution market as per a memorandum of understanding that was signed with the authority toward the end of 2019.
No approval has been forthcoming and there is confusion over the establishment of a national operator.
In a legal bulletin written by leading Ukrainian law firm Redcliffe Partners in January, the AMCU didn’t sufficiently prove its case of establishing collusion between the producers and distributor.
“The AMCU’s decision doesn’t provide any evidence of coordination of competitive conduct between the tobacco companies and TEDIS,” the law firm wrote.
At best, Redcliffe said, was that the antitrust agency applied the “concept of anti-competitive parallel behavior, a different type of violation, based on which concerted practices may be found if undertakings have similar conduct in the market which has led to the prevention, elimination or restriction of competition and analysis of the situation in the market shows that there are no objective reasons for such similarity.”
Mark Rachkevych, a Ukrainian-American journalist, freelances for the Kyiv Post and other publications from Kyiv.
