The Excise Policy Forces Russians to Choose Vodka

The “lack of system” in Russia’s excise policy with regard to the alcohol industry can by no means be regarded as a factor that will make the consumers give up spirits. The current difference in the excise loads on beer and strong liquors, in terms of per liter of pure alcohol consumption, is only 25%. 
Not so long ago, in 2009, the situation was fundamentally different: the level of taxation levied on beer amounted to nearly one-third of that on spirits. Everything changed when, from 2010 onwards, the rates of excises on beer became subject to regular indexation. As a result, the excise loads on spirits and beer became almost identical (per liter of pure alcohol), which eliminated any price incentives for consumers to switch over to beverages with low alcohol content. Such a policy made them more sensitive to the price of beer (which now had become a relatively more expensive commodity), and less sensitive to the price of vodka. Therefore the indexation of excises on spirits at an accelerated rate by comparison with that applied to beer will be well-substantiated – it is recommended that the rate of excise duty should be raised 2.5–3 times on its 2012 level, in comparable prices.

Meanwhile, the rates of excise duty on beer still have some growth potential. According to our estimations, the highest justified indexation level for the excise duty on beer must be no higher than 1.5 times of the 2012 level, in comparable prices.

Alongside its fiscal effect, this taxation model will also be conducive to the greatest decline in the volumes of spirits consumption. At the same time, it may result in that industry’s shrinkage due to the closures of breweries producing ‘standard’ products, and the reorientation of legal production towards a more expensive segment (premium class).

It should be noted that the following proportion can be accepted as an ‘ideal consumption structure’ with the least negative effect on a nation’s health (Edwards et al., 1994): 50% (beer), 35% (wine), 15% (spirits). However, Russia in 2011 had a different structure of overall alcohol consumption: 39% (beer), 14% (wine), 56% (spirits).

The fiscal rationality of raising the excise duty on beer is also open to doubt. In reality, the fiscal effect of the higher excise rates is terms of budget is rather modest due to the low share of the excise duty on beer in the overall volume of tax and non-tax revenues. Thus, in 2011, only 73 subjects of the Federation received any revenues from excise duties, while only in 7 regions the share of excise duties on beer in their tax and non-tax revenues amounted to more than 5%. Its average level is, in fact, only 1.39%.

I. A. Sokolov -  Candidate of Economic Sciences, Head of the
Budget Policy Department