A comprehensive approach to combat the shadow market

#industry news

To effectively combat illegal tobacco trafficking, a set of measures at the national level is needed — from controlling the movement of tobacco products across the territory of the EAEU countries to transferring part of the revenue from excise taxes on cigarettes to the budgets of the regions.

The share of illegal tobacco on the Russian market in 2022 was 12.1%. These are the results of a research by the National Scientific  Cente of Competencies in the Field of Combating Illicit Trafficking in Industrial Products (NCCR), which covered more than 1 thousand settlements with a population of 87 million people. Budget losses, according to the NCCR, amount to 76.2 billion rubles (for the first half of 2022 — 38.7 billion rubles). Honest retail market participants lose more than 10 billion rubles a year. The main source of illegal tobacco is the countries of the Customs Union: their contribution increased from 6.7% to 7.5% compared to last year. Up to 92% of the products coming from the EAEU member states are of Belarusian origin. Counteraction measures (mandatory digital marking, a single minimum price, limits on the movement of unmarked products by individuals for personal consumption, etc.) plus the effective work of law enforcement agencies significantly affect the situation, but they are not able to reverse it.

Market participants are counting on the speedy consideration of the draft law on state regulation of the tobacco industry, initiated by the Ministry of Finance of the Russian Federation. In addition, a constant dialogue is needed between representatives of supervisory agencies, government institutions, the tobacco industry and public organizations. One of such discussion platforms was the round table "Illegal tobacco trafficking in the Kurgan region: growth risks and effective counteraction measures", organized by the Expert-Ural magazine and the "Expert" AC.

Less law—abiding retail - more counterfeit

The main prerequisites for illegal trade in tobacco products are in the economic component: the difference in excise rates in Russia and the EAEU countries creates benefits for illegal trade in products produced in the EAEU in the territory of the Russian Federation. This is especially true for border areas, including the Kurgan region, which, in fact, acts as a "shield" for counterfeit goods.

The first barrier in the way of contraband tobacco are the units of the Federal Customs Service. "In the area of activity of the Tyumen customs, more than 46 thousand packs of cigarettes without marking have been identified. Compared to 2021, there is a decrease. It is quite possible that the movement of unmarked tobacco products is carried out by individuals within acceptable norms. And then it may well end up in one of the trade pavilions," suggests Alexander Voronov, Deputy head of the Tyumen Customs.

— The high share of illegal products is explained by the fact that the Kurgan region borders with Kazakhstan. And if customs works on the border, then we stop cases of counterfeit goods that have already entered the territory of the region. We conduct an antimonopoly investigation, audit, initiate cases of unfair competitive behavior and apply penalties, — says the head of the Kurgan Federal Antimonopoly Service of Russia Tatiana Sobolevskaya. — The work is going on in tandem with customs, which informs us about cases of illegal goods being imported into Russia. We can apply measures up to the issuance of an order to withdraw illegal products from circulation.

— Mostly illegal products are sold in small retail points. Before the moratorium on inspections of trade enterprises came into force in 2022, we inspected 19 facilities where 1028 packs of tobacco products were examined. Violations were detected at 16 sites. More than 750 packs of tobacco products were seized. The cases were sent to the court, which imposed a fine on each case, and decided to destroy the seized tobacco products. In addition, according to the materials of the police, 72 cases of administrative offense were initiated on the fact of illicit trafficking in tobacco products. According to the results of their consideration by the court, fines totaling 276.5 thousand rubles were imposed on business entities, almost 4 thousand packs of illegal tobacco products are subject to destruction, — said Danil Vildyaev, head of the consumer protection Department of the Rospotrebnadzor Administration for the Kurgan region. — For comparison, in 2021, when there was no moratorium on inspections, we inspected 152 enterprises, and found violations in 110. We explain to entrepreneurs what responsibility awaits them for the sale of tobacco products that do not meet the requirements of technical regulations, are sold without excise stamps and without marking by means of identification. We warn consumers about the danger of consuming products that do not pass quality control.

— Illegal tobacco is also a huge social problem. The buyers of counterfeit goods are often minors. Where illegal tobacco is sold, no one is interested in the age of the buyer. The ban on the sale of tobacco to persons under 18, which has existed in the country since 2001, is ignored. Our research proves this. We analyze the dynamics of the availability of illegal tobacco to children and teenagers in the regions of Russia. The last measurements were made in September of this year. For example, in Krasnodar and Rostov-on-Don, illegal tobacco was sold to minors at all points that participated in the research. A year ago, the situation was better.

Now we are strengthening, among other things, our training programs for retail with issues of illegal products, reminding of prohibitions and responsibility for their violation, — emphasizes the chairman of the "Public Council on the Problem of Teenage Smoking" Svetlana Chernyshova.

Vladlen Maksimov, President of the Association of Small Format Trade, urged the supervisory authorities to take a balanced approach to the points of sale of legal tobacco products:

— Previously, there was a WHO recommendation that the fewer legal points of sale, the better. It turned out it didn't work. The less law-abiding retail, the more counterfeiting flourishes. Sometimes the requirements for the objects of trade are absurd. For example, a ban on the sale of cigarettes 100 meters from health, education, culture and sports facilities loses its meaning if the point of sale is separated from the back fence of the school by a river or an 8-lane highway. Yes, an entrepreneur loses revenue, even if the margin on legal cigarettes is low, but that's not even the point. Tobacco is the most important traffic—forming category of goods, it should be in the assortment of the store. And if a buyer notices that there are no cigarettes in one point or they are significantly more expensive than in a neighboring one where counterfeit goods are sold, he generally stops shopping with a respectable businessman. Such a point is closed. Only because it was selling legal products and did not violate the law. And the owner of the pavilion will not go to complain about the neighbors to the regulatory authorities, department for Combating Economic Crimes and Rospotrebnadzor, he will not waste time on this.

Tobacco excise tax revenues — to regional budgets.

According to Baysolt Khamzatov, the first deputy director of the NCCR, the share of illegal trafficking in the Kurgan Region is 18.5%: "This is twice as much as in the Ural Federal District as a whole. The Kurgan Region has risen from 82nd to 56th place in the rating of the subjects of the Russian Federation on the degree of effectiveness of the work of authorities in the field of combating illegal trafficking in industrial products, which is compiled according to 15 indicators. First of all, due to the revealed administrative offenses based on the results of appeals from the population. Violations have been identified in legal points of sale, criminal cases have been initiated."

— According to open sources and the media, over the past four years, almost 990 thousand packs of illegal tobacco products have been seized in the Kurgan region. These products are in circulation in such retail sales channels as non—stationary retail facilities, non-chain stores, shops within walking distance, and have one or more signs of illegality: sale at a price below a single minimum (at prices of 50-80 rubles per pack), the absence of mandatory marking on the pack by means of identification (digital DataMatrix code) and special (excise) stamps of the Russian sample or health warnings in Russian, — Anastasia Belenkova, Corporate Affairs Manager of the region of affiliated companies of Philip Morris International in Russia, told.

— According to the results of 2021, the Kurgan region entered the top three among the subjects of the Russian Federation in terms of the volume of seized and confiscated tobacco products. This is 5.3 million cigarettes. The constant increase in the excise tax rate contributes to an increase in the price gap between legal products and products coming from the EAEU countries, — said Sergey Gorbunov, Acting Deputy Director of the Department of Economic Development of the Kurgan Region — Head of the Department of Industry and Transport of the Department.

— It is necessary keep working on improving the system of legal regulation at the federal level, to increase measures to counter the gray market.

— The situation in the Kurgan region is changing due to the comprehensive work of law enforcement agencies, for example, in October, 50 thousand packs of unmarked cigarettes were destroyed. In order to consolidate the positive trend, it is necessary to transfer part of the revenue from tobacco excise tax to the budgets of the regions, at least 10-15%, this motivates them to more actively struggle against illegal products. Such an initiative has been discussed for two years. Its implementation will be able to change public opinion, because additional income will increase the salaries of state employees, repair kindergartens and schools. And most likely, federal budget revenues will not decrease, as the total amount of excise tax receipts will increase due to an increase in the legal sale of tobacco, — Chairman of the Economic Policy Committee of the Kurgan Regional Duma Yevgeny Kafeev is convinced. — Another effective measure may be the refusal to increase the excise tax on cigarettes. If it grows in the Russian Federation, but does not grow in neighboring countries, this creates the ground for the import and distribution of counterfeit goods. And people will buy it because their incomes are not growing as fast as excise taxes.

— Excise taxes are rising to such a level that millions of people cannot afford legal cigarettes. The state expects them to quit smoking, but this does not happen because there is an illegal, cheap product on the market. There are more than 4 million consumers of counterfeit goods and contraband in the Russian Federation, — says Igor Cherkassky, head of the department for combating illegal trade of the BAT Group of companies.

— From 12.1%, the share may increase significantly due to the fact that legal cigarettes have risen in price by 25% since January last year. Now two-thirds of the cost of a legal bundle is excise duty and VAT, which is about 90 rubles. The uniform minimum price per pack is 112 rubles, and contraband or counterfeit cigarettes are 60-70 rubles. Literally over the past few years, a new criminal business has been created from scratch, which is engaged in large criminal groups. The expert believes that it is necessary to take tough sanctions against freight forwarders and transport companies that are used as a logistics arm for the distribution of illegal cigarettes in Russia: "It is necessary to confiscate vehicles that are engaged in illegal deliveries. From Belarus, for example, contraband goods are transported by trucks. The route is clear — the M1 highway. The volume is also 60% of the 1.5 billion illegal packs. Measures are needed."

— Effective tools have been created in Russia, which allows for an effective fight against illegal tobacco trafficking. But no matter how perfect the legislation is, everything depends on the final enforcement by control and supervisory and law enforcement agencies," Roman Troshkin, manager for work with public authorities at JTI Russia, believes. — For example, in July of this year, FL-313 was adopted, according to which customs officers are authorized to independently stop vehicles with a maximum weight of 3.5 tons or more outside customs control zones throughout the territory of the Russian Federation.

Previously, this was allowed only in a number of regions, and in most cases it was about checkpoints across the customs border. Now customs can provide control throughout the country. A year earlier, a single minimum price for cigarettes was introduced, which serves as an indicator for detecting illegal products in retail and can be used by law enforcement agencies to assess the cost of damage caused as a result of illegal trafficking. In addition, Article 14.53.1 of the Administrative Code has come into effect, according to which responsibility for the movement of unmarked tobacco products by individuals across the territory of the Russian Federation in excess of the established limit has been established. This is very important, especially for border areas, where the shuttle method of importing illegal products from the EAEU member states was very common and was actively used to saturate the Russian market with illegal products. Now the loophole is closed. The Decree of the Government of the Russian Federation No. 542 of March 31, 2022 was also adopted, according to which tobacco and alcohol products will be included in the list of strategically important goods and resources for the purposes of applying Article 226.1 of the Criminal Code of the Russian Federation from next year, which will ensure more effective counteraction to the illegal import of tobacco products from the EAEU member states.

Nicotine-containing products need marking

Experts also paid attention to the problem of illegal trafficking in the market of products that contain nicotine, but are not tobacco: as the market for these innovative products grows, so does the interest in it from the illegal market.

— Examples of illicit trafficking in tobacco and nicotine—containing products can be found in such types as tobacco sticks, disposable electronic cigarettes, electronic nicotine delivery systems of open type and liquids for them, - Anastasia Belenkova explained.

— In particular, we observe the flow of sticks for tobacco heating systems intended for sale in Kazakhstan and Armenia to the territory of the Russian Federation for our products. The main reason for such a flow is the same as in the case of illicit trafficking in tobacco products: a significant difference in excise taxes, reaching up to 90%. Due to illegal turnover, the Russian budget loses tens of billions of rubles a year. In addition, when selling such products at retail, there are also a number of violations: the packaging of tobacco sticks does not contain information that is mandatory for application in accordance with Russian legislation. The situation is further aggravated by the fact that there are no mandatory requirements for applying special stamps to the packaging of heated tobacco products. We welcome and unequivocally support the planned early introduction of mandatory marking of liquids for electronic nicotine delivery system, including nicotine-free, in cartridges, capsules, as well as as part of single-use electronic nicotine delivery system. This is important from an economic point of view. It is obvious that such a decision will provide additional tax revenues for the state budget. According to expert estimates, the introduction of full traceability of nicotine-containing products, primarily containing liquids, can already bring more than 15 billion rubles of additional revenue to the budget annually, and enhanced control over their introduction into circulation will improve the quality and safety of products on the market.

— Mandatory marking of different types of nicotine—containing products, which are widely represented on the Russian market, will fully combat the gray market, - confirms the head of the All-Russian Anti-Dealer movement Denis Terskov. — In the Kurgan region, the work of law enforcement agencies, customs, and the Ministry of Internal Affairs to combat illegal cigarettes is noticeable. We see positive dynamics in comparison with other regions. There are counterfeit cigarettes, but in small quantities. But there are quite a lot of sticks without marking.

There is also concern about the rapid growth of such a product category as liquids for electronic nicotine delivery system, disposable electronic cigarettes or open-type electronic nicotine delivery system. The market volume of such products is estimated at about 1 billion milliliters.

— Now the import of nicotine into the EAEU is possible on the basis of a license issued by the authorized bodies of the EAEU member states. In practice, the opposite happens when nicotine is imported by private individuals without presenting the goods for customs control. Users who produce an open-type electronic nicotine delivery system liquid from highly concentrated nicotine do not pay excise tax, which leads to lost federal budget revenues. According to industry experts, the amount of underpayment is about 13 billion rubles annually. To date, most of the legislative measures to combat illegal tobacco products have been adopted, which have been discussed recently and which representatives of the industry have also called for. In order to prevent further growth in the volume of illegal products, it is important to ensure that the adopted legislative norms work fully in practice. It is necessary to strengthen control, supervisory and law enforcement measures to curb the illegal turnover of all nicotine-containing products within the framework of current legislation," Anastasia Belenkova emphasizes.