Ukrainian detectives from the Economic Security Bureau of Ukraine and the Territorial Department of the Security Intelligence Service are searching a tobacco factory in the Lviv region upon suspicion of untaxed tobacco products.
Company officials are suspected of manufacturing and storing tobacco products without excise tax stamps; accounting and tax records do not show the economic transactions, and income received was not declared.
Tobacco companies have called on the government of Ukraine to crack down on the illegal cigarette trade, reports Interfax Ukraine.
Speaking during a roundtable discussion organized by the American Chamber of Commerce in Ukraine, Philip Morris Ukraine General Manager Maksym Barabash noted that war, inflation and the associated drop in consumer incomes had accelerated the growth of the illegal tobacco market in Ukraine.
In August 2022 alone, the share of illegal tobacco products grew by 5 percentage points to 21.9 percent from 16.9 percent in 2021. According to Barabash, the state misses out on UAH44 ($1.19) from each illegal pack of cigarettes. To date in fiscal year 2022, the state budget has already lost UAH20.6 billion in unpaid tobacco taxes.
To facilitate the fight against illegal cigarettes, tobacco companies proposed the creation of a joint working group with a coordination center in the Office of the President.
“Countering illegal turnover of tobacco products belongs to the competence of several regulatory and law enforcement agencies,” said Svitlana Sharamok, general manager of Japan Tobacco International Ukraine. “However, due to the unclear division of powers, these agencies do not always work in a coordinated manner and sometimes even compete with each other.”
Sharamok added that the work of the new group should not be judged by the number of raids or confiscated cigarettes but by the decrease in illegal sales.
The share of illicit tobacco products in Ukraine reached its highest level since the country’s independence in 1991, reports Interfax Ukraine.
According to an October study by the Kantar Ukraine Institute, illicit products accounted for 21.5 percent of the Ukrainian tobacco market in August 2022, up 5 percentage points over the average annual indicator for 2021.
The survey shows that Ukrainian smokers bought 8.46 billion illegal cigarettes since the beginning of 2022, equaling the volumes for the whole of 2021, and caused the government to miss UAH20.65 billion ($558.71 million) in tobacco tax payments.
Kantar Ukraine specified that fake cigarettes in Ukraine accounted for 8 percent of Ukraine’s tobacco market in August 2022 compared with 6.6 percent in August 2021.
Philip Morris International is expanding the production capacity of its factory in Klaipeda, Lithuania, following the suspension of its operations in Ukraine, reports Interfax, citing a company statement.
The multinational will reportedly construct a new production building connected to its existing storage facilities.
The Klaipeda factory will manufacture products intended for Ukraine, the company said. The project will cost €3.5 million and is expected to be completed toward the end of 2023.
On Feb. 25, PMI announced the suspension of its activities in Ukraine, including at its factory in Kharkov, due to Russia’s military invasion.
Ukraine accounted for around 2 percent of the multinational’s cigarette and heated-tobacco shipments in 2021 and less than 2 percent of PMI’s total revenue, according to the company.
By Derek Yach
Vladimir Vorotnikov, writing in Tobacco Reporter’s August 2022 issue, outlined how Russia’s invasion of Ukraine has upended well-established supply chain and business relationships that have been in effect for decades. In fact, a careful read of Balkan Smoke by Mary C. Neuberger traces the roots of these relationships way back to Bulgaria in the 1920s. Vorotnikov discussed the impact of sanctions on Russian tobacco production, the emergence of illicit trade in the region, and more recently, the reestablishment of cigarette production in Ukraine.
He does not discuss the massive growth over the past few years in new reduced-risk nicotine products—led by IQOS—across eastern and central Europe. The editor makes the point that Russia is (was) one the largest markets for IQOS. My own observations during a visit to Kyiv in late October 2021 were that a range of vape products and heated-tobacco products were readily available across the city despite posters funded by Bloomberg Philanthropies near the Parliament proclaiming that they were dangerous.
This is a time of profound transition for the region. Amid the horrors of war and the human tragedies it continues to bring to the people of Ukraine are opportunities to reduce future deaths from the single largest cause of premature death in the region—and especially among men—combustible tobacco products. As rebuilding begins—as it inevitably will—government, business and health professionals need to grasp the chance to avoid rebuilding the tobacco industry in the image of the past and rather take the high ground of health and make reduced-risk products the easily available option while phasing out combustible sales.
For governments, this means adopting risk-proportionate regulations that build on the approaches proposed by the recent Javed Khan report for the United Kingdom, and on the authorizations of a range of reduced-risk products by the U.S. Food and Drug Administration. Ukraine and the neighboring countries relied on FDA guidance in relation to Covid vaccine advice—now is the time to draw upon their guidance to accelerate access to reduced-risk products, citing the FDA’s comments that they are deemed “appropriate for the protection of public health.”
Tax and other regulatory approaches could be applied to accelerate the transition. Further, governments of the region need to step up investments in customs and excise oversight to stop large-scale illicit trade taking hold—as it has in the occupied territories of Georgia following Russian invasion in 2008.
The Russian government also has an obligation to protect the health of its people and take regulatory steps to ensure that the progress made by Philip Morris International, Japan Tobacco International and BAT is increasing their revenue from heated-tobacco products at the cost of combustibles. Slippage with regard to these gains will translate into a return to the very high smoking rates, and associated death rates, of the past.
Government actions will be limited, though, unless the three leading tobacco companies (PMI, JTI and BAT) active in the region commit to take concerted efforts to accelerate their transition out of combustibles and publicly clarify what “withdrawing from Russia” means. Are they continuing to profit from Russian cigarette sales albeit through local companies? Are those companies obliged to push ahead with reduced-risk products, or will they revert to cigarettes?
Outside of Russia, leading tobacco companies could communicate the benefits of switching, take measures to clamp down on illicit trade and tighten youth access to all nicotine products, through joint action. Such bold actions would give them a chance to show their seriousness to transformation—something investors should reward.
United Nations agencies have a role to play at this time. Evidence emerging from inside Ukraine suggests that smoking rates have increased among those in the military and possibly among displaced peoples. This is understandable given the unprecedented stress to which people are exposed. The current U.N. response has been to ignore this reality and simply continue to support policies that ban cigarette sales during conflicts—something that is probably ignored. A far better way forward is to support people who smoke or seek nicotine to have ready access to nicotine-replacement products and approved reduced-risk nicotine products. This would mean that a generation of people may well emerge from the war with lower overall risks to their health.
War and tobacco use are intimately linked and currently interacting in dangerous ways to the health of populations. We should not wait for the transition to peace and health to begin before taking steps to accelerate the transition of smokers away from combustibles.
The government of Ukraine has changed the definition of “tobacco product” to include heated-tobacco products (HTPs), making HTPs subject to the same restrictions as combustible cigarettes, according to the Framework Convention on Tobacco Control.
As a result, it is now illegal to smoke HTPs in public places. Moreover, the new rules prohibit smoking rooms on company premises and empower local authorities to establish additional smoke-free places.
Smoking of tobacco products, hookahs and e-cigarettes has been prohibited in Ukrainian workplaces since 2012, but until recently, smoking areas were still permitted.
The new law holds both smokers and businesses responsible for compliance.
Earlier this year, Ukraine started requiring manufacturers of e-cigarettes and e-liquids to print health warnings covering 30 percent of the packaging.
Starting on July 11, 2023, it will also become illegal to promote e-cigarettes, e-liquids and HTPs or to sell such products with flavors.
From Jan. 11, 2024, traditional, combustible cigarettes will be required to carry pictorial health warnings covering 65 percent of both sides of their packaging.
According to the World Health Organization, up to 85,000 Ukrainians die from smoking-related diseases each year. Experts estimate smoking to result in annual economic losses equivalent to 3.2 percent of Ukraine’s GDP, in part due to the cost of treating smoking-related illnesses.
Philip Morris Ukraine will start producing some of its cigarettes at Imperial Tobacco’s factory in Kyiv this month, following a deal between the two companies, reports Interfax Ukraine.
The arrangement allows Philip Morris to continue supplying customers even as production at its Kharkiv factory remains suspended in the wake of Russia’s military invasion. It also enables Imperial Tobacco to better utilize its production capacity, some of which has been idle due to the difficulty of exporting cigarettes.
“Since the beginning of the war, we have been looking for alternative ways to ensure the supply of products,” said Philip Morris Ukraine Managing Director Maksym Barabash. “We are very pleased that we have found a mutually beneficial solution with Imperial Tobacco, which will produce products in accordance with PMI’s high-quality standards. For Philip Morris, this is a temporary measure. We hope that we will be able to resume production at our Kharkiv factory as soon as it becomes safe for workers.”
“The Imperial Tobacco factory in Kyiv has a significant production potential and a strong professional team to ensure the production of additional volumes of products with high quality and in the right time,” said Halyna Vorobyova, head of Imperial Tobacco’s board in Ukraine. “Since the beginning of the war, our company cannot carry out export deliveries; therefore, the agreement with Philip Morris will allow us to load our capacity.”
Philip Morris employed about 1,300 people prior to the war. Its Kharkiv factory exported cigarettes to more than 20 countries, including major markets such as Japan and Egypt.
By Vladislav Vorotnikov
Russia’s invasion of Ukraine has wreaked havoc on the tobacco industry in the post-Soviet area, prompting the world’s largest cigarette companies to shut down Ukrainian factories and curtail investments and marketing activity in Russia. The current crisis is also likely to provoke a dramatic rise in the illegal segment of the tobacco market in this part of the world.
Since the beginning of the conflict, BAT, Japan Tobacco International and Philip Morris International faced mounting public pressure to sever their ties with Russia.
On March 23, Ukrainian Finance Minister Serhiy Marchenko appealed to Western tobacco companies to stop doing business in Russia. Marchenko wrote in a statement posted on his Facebook page that all cigarette manufacturers had pledged to suspend new investments, while BAT considered transferring business to a third party. However, he added, those steps were clearly not enough.
“My conviction is that there can be no compromises and smoothing alternatives,” Marchenko wrote.
Since Feb. 24, more than 1,000 multinational businesses have said they’re curtailing, suspending or severing ties to Russia compared to only the few hundred that abandoned South Africa over Apartheid, research conducted by the Yale School of Management showed. The Russian government responded to the mass exodus of Western brands by threatening foreign firms leaving the country with forced nationalization of their production assets.
On May 16, Russia went through with its threats and nationalized a major factory that belonged to French car maker Renault, sending a clear signal to all Western companies that curtailing operations in the current conditions would come at a heavy cost since it would mean losing their production capacities.
The Russian authorities are keen to avoid a shortage of cigarettes on the domestic market as it would spark social unrest, something the country had already seen during the final days of the Soviet Union.
“In 1990, a shortage of cigarettes led to massive strikes and even to plant and factory shutdowns,” said Ekaterina Pozdeeva, an analyst of the Moscow-based think tank Finam. “In Moscow, more than 100 cases of riots over tobacco were registered. The workers demanded at least two packs per hand. The USSR was forced to buy $300 million worth of cigarettes from the USA.”
On the other hand, over the past 25 years, Western tobacco companies invested roughly $5 billion in the Russian tobacco industry, Pozdeeva said. Losing this money would be quite painful, so most companies opted for transferring their businesses to local market players.
For instance, BAT has transferred business management to its Russian distributor and partner, SNS Group, which plans to maintain the same level of production and supplies. Philip Morris International also said it considered options for restructuring and transferring assets but has not yet made any concrete decisions.
Imperial Brands said in a statement on April 21 that it had transferred its business in Russia, including its Volgograd factory, to local investors and would write off €225 million ($294 million) of its tobacco assets in the country. Japan Tobacco International also suggested that it would change the Russian owner of its local business.
With annual sales ranging between 200 million and 230 million cigarettes, Russia is among the world’s largest tobacco markets. In 2020, the value of the Russian cigarette market was estimated at RUR1.4 trillion ($23 billion), bringing RUR600 billion of taxes to the federal budget, the Russian federal statistical service Rosstat estimated.
The Russian cigarette industry, however, is likely to feel the sting of sanctions as all tobacco and almost all raw materials are imported to the country, according to Maxim Korolev, head of the Russian Tobacco informational agency, adding that it is not clear whether import replacement in this field is even possible.
“On the one hand, paper-based aluminium foil supplied by a Russian company, after several years of quality improvement, has become widely used by many Russian tobacco factories,” Korolev said. “On the other, the domestically produced polypropylene film has not reached the required quality level in terms of some key parameters, and none of the tobacco companies uses it.
“Factories also use domestic corrugated cardboard for master cases, but we do not make coated cardboard for the cigarette packs,” he said, adding that fast import replacement is not anticipated in this field.
On top of that, Russia experiences problems with leaf tobacco imports. Over the past few months, Russian businesses complained about a lack of tobacco for homemade cigarettes.
Igor Moiseev, chairman of the Pogar Cigarette and Cigar Factory, commented that the supply disruptions are primarily attributed to logistics issues. Moiseev said that before the Russia-Ukraine crisis, Germany, Denmark and the Netherlands were the main suppliers of tobacco for homemade products, and most tobacco was delivered by road through Belarus.
“Today, even with an advance payment, no one can guarantee that the cargo will be delivered [from Europe to Russia],” Moiseev said. “Difficulties in making wire transfers also affect import. And the majority of suppliers operating in this segment of the tobacco market are small[-sized] and medium-sized companies with limited resources.”
Korolev said that Imperial Tobacco was forced to stop the operation of its factory in Russia due to a lack of tobacco, estimating that other market players may have stocks of tobacco large enough to maintain operation for up to six months. On the other hand, Korolev added, most tobacco for cigarette production is imported into Russia from South American and African countries that have not publicly supported Western sanctions against the country, so there are good chances that the supply disruptions could eventually be sorted out.
Oleg Barvin, a spokesperson for BAT, confirmed to the Russian newspaper Kommersant that all market participants experienced logistics problems with delivering tobacco and other raw materials for cigarette production to Russia. Barvin added that despite these challenges, the company ensured uninterrupted production and distribution of products.
On the other hand, the sanctions are not expected to impact the Russian e-cigarette market. As explained by Kirill Plokhikh, director of the business faculty at Synergy University, Russia imports most e-cigarettes from China. Plokhikh added that some share of nicotine-containing liquids for vapes was supplied to Russia from Western countries, but in this segment, too, buyers could swiftly shift to Chinese suppliers.
The Russian invasion forced all Ukrainian cigarette makers to pull the plug on operations, but several have already relaunched production, with some even eyeing restoring production performance to the pre-war level.
Galina Vorobieva, director of Imperial Tobacco Production Ukraine, said that despite fears voiced by Western officials since October 2021 about the upcoming Russian invasion, nobody in Ukraine took it seriously.
“Although we assumed such a course of events, we did not believe until the very end that it [the Russian invasion] could happen,” said Vorobieva. “We had a plan on how to act in the event of a real threat to the enterprise and personnel. And it is very good that we had it. In the early morning [of Feb. 24], we turned off the equipment, asked people to hop on buses and took them home.”
Imperial Tobacco considered moving its Ukrainian factory to Western parts of Ukraine even though it would take at least six months to relocate equipment.
“When we realized that the situation had become more or less controllable, we decided to resume production. It was not an easy decision because we understand that there are still risks,” Vorobieva said, estimating that the factory was out of service for 46 days.
With much of Ukraine’s tobacco production offline, demand is met primarily by imports from the European Union, according to the Ukrainian tobacco association Ukrtabak.
The current crisis promises to dramatically boost the size of the illegal cigarette market in the region. A quarter of Russians have already switched to illegal cigarettes, a survey conducted by the analytical agency Ipsos in April showed. In early April, nearly 25 percent of respondents admitted buying illegal tobacco products, 8 percent more than in mid-March.
Not only consumers and retailers suffer from illegal products. From 2016 to mid-2021, the federal budget “lost” almost RUR300 billion in tax revenues due to illegal tobacco products, the Russian Accounts Chamber calculated.
The Moscow-based think tank Kantar TNS Russia estimated that the share of the illegal sector grew tenfold, from 1.1 percent to 10.7 percent, recently. In 2021, the share of illegal tobacco products on the market reached at least 11.5 percent, according to a study by the government’s National Scientific Competence Center.
The main supplier of illegal tobacco products to Russia is Belarus. Before the adoption of the first Russian anti-tobacco law, Belarus produced 15 billion cigarettes a year with a population of 10 million. Today, the population remains about the same, but cigarette production has grown to 35 billion sticks.
Ukrainian volunteers have started using e-cigarette batteries to help power drones deployed in the war against Russia, according to a report in The Independent.
The batteries are being used to power release systems attached to drones so that they can carry and drop anything from medical supplies to grenades. The release systems are built using 3D printers.
The initiative was developed in response to the rising price of lithium batteries. War-related airport closures have driven up the cost of many imports. To collect disposable e-cigarettes and retrieve lithium polymer batteries, the volunteers set up drop-off bins outside the Kyiv Polytechnic Institute
“Lithium batteries used to cost $1 each but went up five times in price adding significantly to our costs,” says engineer and PhD student Maksym Sheremet. “So we started powering dropping systems from the batteries in disposable e-cigarettes. It’s free, easy to repurpose and environmentally friendly because we are recycling.”
A team of around 60 volunteers are making the drone systems, with 30 working specifically on the e-cigarette plan.
In four months they have built 4,000 dropping systems – which cost under $30 – and are sent to the front. They are also building drones from scratch and repurposing existing commercial drones to go with their dropping systems.
Seriously outgunned by Russia, Ukraine relies heavily on drones, which allow its forces to spot artillery and so direct fire efficiently, saving ammunition.
BAT Ukraine has resumed manufacturing operations at the Pryluky tobacco factory in Ukraine as of April 25, reports InterFax Ukraine.
The company has reportedly decided to resume manufacturing at the factory in phases after making a thorough risk and threat analysis.
The operations at the Pryluky factory comply with all applicable security and safety requirements, curfew and other restrictions proper to martial law, according to BAT.
BAT Ukraine is monitoring the security and safety situation in Pryluky and the Chernihiv region and plans to adapt activities as the situation changes.