Natalia Kornienko on Growth Drivers of Illegal Trade in Tobacco Products in Russia

Natalia Kornienko, Head of the Fiscal System Development Department, Gaidar Institute commented to the Profil magazine on growth drivers of illegal trade in tobacco products in Russia.

Over five years, the share of the illicit market of cigarettes increased ten-fold. Due to that, the state treasury short received Rb295.6 bn. Regional authorities are not interested in fighting tobacco products trafficking because all tobacco tax revenues go to the federal budget. In 2021, this sum will amount to Rb710 bn. The situation can be changed for the better if regions start receiving 10%-15% of tobacco tax revenues. The RF Accounts Chamber came to this conclusion based on the analysis of the system of taxation of tobacco and nicotine-containing products.

According to Natalia Kornienko, the tobacco products market experienced an economic shock induced by the COVID-19 pandemic. It is necessary to take into account not only changes in the level of budget revenues, but also a decline in households’ incomes and decrease in price affordability of tobacco and nicotine-containing products. A pickup in tobacco products trafficking was driven by appreciation of prices for tobacco products before the pandemic, while the current decrease in households’ incomes below the Russian level in the EEU member-countries is bound to encourage “smugglers” to increase counterfeit supplies to Russia.

“Along with tobacco products price rises, customer preferences have changed since 2016: a shift to consumption of non-tobacco nicotine-containing products as more affordable and less hazardous to consumers and others affects the eventual outcome, that is, budget revenues from relevant excises. It is important for the government to initiate research into current changes on the tobacco products market, that is, replacement of traditional tobacco goods with electronic nicotine delivery systems and non-tobacco nicotine-containing products for oral consumption. Research outputs are expected to facilitate fine tuning of the government excise policy,” the expert believes.