1. How to prevent the illicit trade
in tobacco products
“Customs and Business: International and
Regional Cooperation Aspects”, Moscow
Pete Collings
Oxford Economics
20/10/2011

2. Illicit trade in tobacco products is a serious problem
• A global phenomenon, covering all continents,
high and low income countries alike
• Approximately 11% of the world cigarette
market is illicit, representing over 600 billion
cigarettes a year and resulting in annual
government revenue losses of over US$40
billion (source: Framework Convention Alliance 2008).

3. The economic and social impact
• Lost government revenue
• National security and organized crime growth
• Diminishes respect for the rule of law
• Financial loss to the legitimate industry, trade and
employment
• Easy access to cheap and uncontrolled product

4. Economic drivers of illicit trade in tobacco
• Consumer desire to save money usually caused by
a sharp decline in cigarette affordability
 We measure affordability as the percentage of daily
disposable income required to purchase one pack (20
sticks).
• Criminals desire to make money by tax avoidance
 Today in Russia one smuggled container/truck load of 10
million cigarettes represents on average $200,000 in
tobacco taxation evasion.

5. Russia: potential sources of illicit trade
• External
 China – the leading source of counterfeit cigarettes in the
world shares a 3,605 km border with Russia.
 CIS neighbors/Customs Union partners – smuggling and
cross-border shopping if prices differences are high
• Internal
 Estimated dormant manufacturing facilities of at least 80
billion cigarettes per annum following the closure of 119
tobacco factories in the past 10 years (source: Association of
Tobacco Products Manufacturers Tabakprom)

6. How to prevent the illicit trade in tobacco products?
• Key elements of comprehensive strategy:
 Fiscal measures: balanced tobacco taxation policy
 Legislative measures: strong laws, penalties and effective
courts
 Enforcement: good border and supply chain controls
 Regional customs and industry cooperation – intelligence
sharing etc.

7. Balanced tobacco taxation policy
• There's no one-size-fits-all approach in fiscal policy - recognition
needs to be made for differences in level of economic development
and living standards.
• Particular attention should be paid to:
 Managing the overall tax level and avoiding tax shocks by
planned gradual tax increases
 Monitoring consumer affordability development, in particular for
lower income segments of population.
 Avoiding large tax discrepancies with neighboring countries
(learn from EU experience)

8. Balanced tobacco taxation policy: Russia
Particular elements for Russia to consider:
Personal Disposable Income Growth - we forecast Russia will not quite
reach the level of G8 countries in the next 20 years, with other main
CIS countries remaining far behind.
Russia’s large share of low-priced cigarettes consumption >40% of total
sales, is very different from other G8 countries where the premium
segment is dominant.
Chart 1: Forecast of Personal Disposable Income in G8, Kazakhstan and Ukraine
in USD per capita at 2005 prices
US$ (2005 prices)
35,000
G8
Russia
30,000
Kazakhstan
Ukraine
25,000
20,000
15,000
10,000
5,000
0
2005 2009 2013 2017 2021 2025
Source : Oxford Economics

9. Conclusion
• Cigarettes are the highest taxed consumer good and the
level of taxation remains the key driver of the emergence
of illicit trade
• Policy makers must take into account the key elements
outlined when developing future tobacco tax policy
• As the International Monetary Fund has stated:
“Ultimately, tobacco excise tax rates must reflect the purchasing
power of the local consumers, rates in neighboring countries,
and, above all, the ability and willingness of the tax authority to
enforce compliance.” (source: Curbing the Epidemic, 1999, the
World Bank. Appendix A, A view from the International
Monetary Fund.)

10. Thank you