Natalia Kornienko: “Outputs of research into current changes on the tobacco products market should facilitate fine tuning of the government excise policy

Bulletin No11, 2021 of the RF Accounts Chamber presents an expert opinion of Natalia Kornienko, Head of the Fiscal Policy Development Department, Gaidar Institute in the light of release of the RF Accounts Chamber’s report on the outputs of “The Analysis of Levying and Collecting Excises on Tobacco Products, Tobacco (Tobacco Goods), Electronic Nicotine Delivery Systems and Nicotine-Containing Liquids and Determination of the Effect of the Existing Excises Collection System and Other Factors on the Development of the Tobacco Industry in the Russian Federation in 2016–2020 and from Year 2021 to Date”, a think-tank analysis.

According to the opinion of Natalia Kornienko, Expert of the Gaidar Institute, a think-tank analysis sponsored by the RF Accounts Chamber permitted to draw conclusions about the key factors affecting the Russian tobacco products market and determine that they were generally in line with the outputs of research carried out by government and nongovernment research institutes.

As the tobacco market was shrinking owing to a decrease in price affordability, the black-market share increased gradually and starting from 2016 this process sped up mainly on the back of a growing gap between excise rates in Russia and EEU member-countries with a simultaneous increase in output capacities in those countries. The issues of excise rates growth and congestion in manufacturers’ warehouses have been successfully resolved within the legal framework. However, the market and its structure have changed; classical tobacco products are being substituted for innovative ones.

In the current environment, the main trends on the Russian tobacco products market should be assessed with taking into account trends in terms of declining price affordability, as well as factors, such as the COVID-19 pandemic’s impact and a pickup in the volumes of nontobacco nicotine-containing and other innovative products.

The pandemic-related economic shock has seriously hit this market and this should be taken into account not only in terms of a change in the level of budget revenues, but also in terms of consumers (declining price affordability and a decrease in households’ incomes both in the Russian Federation and other EEU member-countries).

In comparing the dynamics of prices and excise rates in Russia and other EEU member-countries, it is necessary to raise an issue of infeasibility to achieve the declared goals of harmonization under the existing conditions. However, the research deals only with the impact on the producer’s market and lacks data on a decrease in price affordability of tobacco products owing to a pandemic-induced drop in households’ incomes in the Russian Federation. Before the pandemic, the main prerequisites for illegal exports were tobacco products price rises owing to increased excises and the gap in excise rates and prices for tobacco products in the Russian Federation and other EEU member-countries. In the current period, a decrease in households’ incomes below the Russian level in EEU member-countries will encourage “smugglers” to increase supplies to the Russian Federation. So, the main drivers of illegal market growth and Russian budget shortfalls are currently the following:

· Gaps in excise rates in the EEU;

· Differences in the list of goods which are sold or banned in the Russian Federation unlike other EEU member-countries;

· Declining price affordability and customers’ shift to inexpensive nicotine-containing products;

· Unsustainability of the Agreement on the Guidelines for the Fiscal Policy in Respect of Tobacco Excises in the EEU Member-Countries.

It is noteworthy that this situation requires bolstering of supervision over manufacturing and tobacco and nicotine-containing products trafficking. It is crucially important to support the initiative to establish a register of technological equipment for production of tobacco products and establish control over unmanufactured tobacco imports.

Due to illegal manufacturers’ increased profit margin amid households’ declining incomes and a decrease in price affordability of legally manufactured tobacco products, it is crucial to introduce a rule for crediting tobacco excise revenues not only to the federal budget, but also to regional budgets, thus establishing a base for effective supervision by RF constituent entities over black trading.

Along with appreciation of prices for tobacco products, customers’ 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 plays an important role in 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,” Natalia Kornienko concludes.