_ Alexey Popovichev, Rusbrand; Sabina Kasparova, KPMG. Moscow, 22 May 2019.
For 2018, the Eurasian Economic Union (EAEU) member states sustained circa USD 1 bln of tax losses, largely impacting Russia, due to growing illicit cigarette sales. That is the conclusion analysts from KPMG arrived at via KPMG’s methodology for measuring illicit cigarette consumption, which is replicated in over 50 countries around the world.
Illicit cigarette consumption has grown rapidly in the Eurasian Economic Union from 2015 to 2018 rising from 0.6% to 6.8% of total consumption in the past 4 years, representing over 20bn cigarettes in 2018.
Sources of illicit tobacco products
Belarus is the primary source of illicit tobacco products both for the EAEU and the EU. Each year no less than 13 bln cigarettes are coming from Belarus for illegal sales, of which 8.6 bln cigarettes flew to Russia in 2018, thus representing 39% of total tobacco products sold illegally in the country. Another key region for illicit cigarette supplies from Belarus is the EU. During 2017, over 4.4 bln cigarettes manufactured in Belarus were illegally sold in the UK, Germany, France, and Poland.
An average price per pack of Belorussian cigarettes is the lowest in Europe – RUB 45. Just for reference: the same in the UK is 16 times higher – RUB 732 (GBP 8.7), in Germany – almost 10 times higher (RUB 446, or EUR 6.2), in Russia – almost 2.5 times higher (RUB 116).
The second largest source of illicit tobacco products was Kyrgyzstan, with one third of cigarettes sold in Kyrgyzstan carried outwards for illegal reselling. These products are primarily supplied to Russia and Kazakhstan. An average price per pack in Kyrgyzstan in 2018 amounted to approximately RUB 60.
Armenia was the third largest source amid the EAEU member states for illicit tobacco product supplies: 10% of all cigarettes are illegally resold outside the country. 85% of the aggregate illicit flow of cigarettes from Armenia come to Russia, with the remaining 15% flowing to the EU. An average price per pack of Armenia-manufactured cigarettes amounts to RUB 53.
A lower excise gap between Kazakhstan and Russia helped lower flows of illicit tobacco products between the two countries. Since 2015, a price per pack of cigarettes in Kazakhstan has gone up one-and-a-half times, from RUB 53 to RUB 78, however it is still one third less than the price per pack in Russia. During 2018, 95% (0.63bn of 0.66bn) of all outflows from Kazakhstan were to Russia.
Illicit tobacco products in Russia – a changing landscape
The dominant factor having a bearing on the growth in illicit tobacco product flows in Russia is that of supplies from the EAEU partner states. However, illicit tobacco product volumes in Russia are also impacted by cigarettes with fraudulent or suspicious tax stamps. In 2018, Russian products with suspicious tax stamps comprised 13% of illicit flows.
The most popular brands in this category are ‘2222’, ‘Khortitsa’, ‘Bile Sontse, ‘Stolichnye’ and ‘Cosmos’. These products are sold in Russia only and are not supplied to neighboring countries.
Following an established and rigorous quantitative methodology which has already been applied to over 50 countries around the world, KPMG conducted a range of statistical analyses for each of the countries studied, underpinned by Empty Pack Surveys, undertaken in 2015 to 2018 in Russia and Kazakhstan and for 2018 in the other EAEU countries. These examine the prevalence of illicit cigarette consumption in each country, the origins of non-domestic inflows, the destinations of outflows, as well as the main brands involved.