One Should Not Expect Radical Increase in Cigarette Prices Next Year

According to the Russian Interior Ministry estimates, the average price for cigarettes will rise next year up to 220 rubles per pack. The Ministry has calculated the new cost of cigarettes considering the rise of excise duties on tobacco products expected next year.

In accordance with the Federal Law 401 from 30 November 2016, the specific rate should increase from the current 1250 rubles per 1000 cigarettes up to 1562 rubles per 1000 cigarettes, the ad valorem rate – from 12% to 14.5% of the maximum retail price, and the minimum rate – from 1680 rubles to 2123 rubles per 1000 cigarettes.

This estimate of the average price of a pack is more than overrated. A retrospective analysis of the dynamics of prices and excise rates shows that producers (sellers) do not completely shift the tax increase on the consumer: a certain share of the tax is absorbed by companies in order to retain market. However, in order to avoid excessively optimistic estimates, we can assume the full shift of indirect taxes on the consumer. In 2016, according to the comparisons of Rosstat and Euromonitor data, the average price of a pack was 94 rubles. If we assume that the increase in excise duty will be fully shifted on the consumer, the average price of a pack should reach 105 rubles in 2016 prices.

The Interior Ministry fears that the increase in excise duties on cigarettes will encourage illegal production in the country. Note that, according to the most pessimistic estimates, the share of illegal trafficking of cigarettes in Russia in 2015 amounted to 3.1%. Among the factors intensifying the trade of counterfeit products and smuggling are the following: mismatch between the level of taxation and that of enforcement and penalty (in a broader sense), and the gap in prices between the markets of the EAEU countries, caused by the weak pace of harmonization. Taking into account these factors, as well as the experience of European countries, given the indicated increase in excise duty and prices, even if the share of illegal turnover reaches 10%, the fiscal revenues from excise taxes in 2017 will increase to 480 billion rubles, while the total market volume will shrink by 10%. According to the scenario in which the share of smuggling and counterfeit products amounts to 4.2%, revenues from excise tax in 2017 could reach 510 billion rubles.

Natalya Kornienko – Head of the Tax System Development Department

Elisey Leonov – Junior Researcher at the Tax System Development Department