Smoking in Russia may soon become an extremely costly activity. The World Health Organization (WHO) proposed the Russian authorities to raise the price of tobacco products seven times, which would bring the cost of a pack of cigarettes to over 200 rubles (approximately $7). The WHO believes that the country would improve with this initiative, but in reality, a sharp increase in taxes may jeopardize the Russian market.
Black market is the main argument of the opponents of raising excise taxes on tobacco products. Indeed, the threat of growth of uncontrolled market of tobacco products is extremely high. "Quitting" Europe, where the market for illegal cigarettes is developing by leaps and bounds, is a good example.
In Spain, for instance, smokers were cornered by a major increase in cigarette prices and the economic crisis. Not everyone can pick up cigarette butts in the street and make hand-rolled cigarettes from the remaining tobacco. According to local tour guides, the population of the country is forced to do it (which is witnessed by some tourists). The only honorable way out for them is to buy smuggled cigarettes. As a result, the percentage of illegal tobacco over the last five years in Spain has soared from one to 15. It turns out that the biggest winner from the increase in excise tax rates by the Spanish government is Gibraltar that, according to Kommersant, is the main source of unlicensed tobacco products.
In this sense, Belarus is likely to become the Russian "Gibraltar." Cigarettes there have always been significantly cheaper than in Russia. If Alexander Lukashenko does not agree to "keep company" with the Russian authorities on raising excise taxes, the Belarusian cigarettes would flood the ill-fated black market. However, experts assure that it is time to finish the discussion on this issue. Regardless of the wishes of WHO and the resistance of the opponents, by 2020 the excise rate on tobacco products in Russia will be increased and amount to a minimum of 50 euros for 1,000 cigarettes.
"The increase is inevitable because such is the global trend," an expert of the consumer market Marina Petrukhina explained Pravda.Ru. "Smokers should be prepared to the limitation and higher prices, because the limitation cannot physically take place without a drop in sales. This would entail a change in excise revenue to the budget. Since the entire world is actively combating smoking, to prevent the decline in excise tax to the budget revenues, the excise tax will be increased. Naturally, the prices would increase. Despite the fact that sales could fall, the budget should not suffer. Tobacco companies will be affected the most."
At the same time, the expert pointed out that the rapid growth of the black market in Russia can be avoided if the threat is treated with caution and the Russian tobacco market and society's response are thoroughly examined. "I do not think there will be growth of illegal tobacco trade. So far their share in the country has been small. For example, in Europe counterfeit tobacco products due to the high prices is a known problem. Will we have the same situation with non-excise tobacco products when excise taxes are increased in 2020? It is unlikely, but I do not rule out that it is exactly what can happen if the desire to consume will not match the ability. In this case, there must be a balance between the desire to consume and the ability of consumers to buy the product," Marina Petrukhina said.
Consequently, the WHO's proposal to raise cigarette prices in Russia to 90 euros per 1,000 cigarettes is likely to trigger the growth of smuggling, which could negatively affect the main purpose of the Ministry of Health - to protect public health. Meanwhile, the WHO reinforces its claim of confidence in positive outcomes with reduction of tobacco consumption in Russia and rising revenues from excise taxes to the budget. Some representatives of the tobacco industry see in the suggestion of the WHO personal goals of the EU rather than concern for the Russian citizens. For example, "RBK Daily" quoted the opinion of the manager of some large firm, according to which European governments are trying to solve their own problem of contraband cigarettes from Russia and the CIS through the WHO. By agreeing to the requirements of the organization, Russia would take the hit, because it will be cheaper, easier and closer for the CIS producers to supply illegal cigarettes to the Russian market than to Europe.
In any event, experts believe that by increasing taxes on tobacco products, the Russian authorities should insure themselves in the case of a possible activation of the black market. "We should establish a separate public service that would regulate the tobacco sector. Now the situation in Russia is close to that in America, because in the United States tobacco, alcohol and even weapons are controlled by one agency, that is, the most difficult and dangerous criminal businesses are under the same control," concluded Marina Petrukhina.
In a weary world of endless US military interventions, sanctions, trade tariffs and chaos, let’s pause and take stock of the shining house on the hill