NSCC: illegal market in Russia

#industry news

On January 31, 2024, a press conference was held at the site of the Russian Interfax news agency: "Results of the V All-Russian Tobacco Market Research to determine the share of its illicit trafficking in the Russian Federation and market research of nicotine-containing products" conducted by ANO NSCC.

The participants of the event discussed the results of the V All-Russian Tobacco Market Research to determine the share of illicit trafficking in the Russian Federation and in the regions of the country, as well as market research of nicotine-containing products with the determination of the share of illicit trafficking by product types and sales channels. The research was presented by Irina Bushina, Director of the Autonomous Non-profit Organization "National Scientific Center of Competencies in the field of combating illicit trafficking in industrial products" (ANO " NSCC ").

Given the importance of the topic under discussion and the scale of the problem, the press conference was moderated by Deputy Chairman of the State Duma Committee on Economic Policy Artem Kiryanov.

"According to the results of the latest field study of the ANO NSCC, presented at a meeting of the State Commission for Combating Illicit Trafficking in Industrial Products in December 2023, the total share of illegal trafficking compared to the middle of 2023 decreased slightly, but still decreased from 13.3% to 12.6%. This is the whole country. At the same time, in some regions of the Russian Federation, the level of counterfeit goods on the market reaches about 30%," said Vladislav Zaslavsky, Director of the Department of Digital labeling of goods and legalization of product Turnover at the Ministry of Industry and Trade of the Russian Federation.

He emphasized that today the sphere of regulation of the turnover and production of tobacco and nicotine-containing products is built in the form of a single integrated system. The speaker noted that, in addition to the sectoral law adopted in 2023, the introduction of a digital labeling system for tobacco and nicotine-containing products contributed significantly to this.

Presenting the V All-Russian Tobacco Market Research, Irina Bushina, Director of the NSCC, said that the anti-leader regions with the largest share of illegal tobacco products were identified: the Ryazan Region (33.1%), the Kabardino-Balkarian Republic (32.2%), the Chechen Republic (30.5%). The federal cross-section of the study revealed an increase in the share of illicit cigarette trafficking in the Northwestern Federal District from 11.4% to 11.9% and in the Northwestern Federal District from 20.3% to 22.3% in two federal districts, the largest decrease in the share of illicit tobacco trafficking is noted in the Far Eastern Federal District from 4.5% to 1.4%.

A separate place in the comprehensive approach to counteraction is occupied by imports.

"As before, more than half of the illegal turnover (54.8%) is accounted for cigarettes illegally imported into the Russian Federation from the EAEU member states. Traditionally, this type of illicit trafficking is dominated by products of Belarusian origin — its share is 84.5% of all illegal products from the EAEU member states," Irina Bushina commented.

Deputy Director General of the CRPT (operator of the state marking system "Honest Mark") Revaz Yusupov particularly highlighted the fact that the positive effects of the introduction of labeling in the tobacco market have been observed for several years, it is this tool that helps effectively curb the growth of the gray market. In 2023 alone, the activities of 15 illegal factories producing illegal tobacco and nicotine-containing products were suspended. "The system is constantly being developed in order to whitewash markets, protect consumers and ensure fair competition. Codes are now applied to all legal tobacco products, and in the coming years we are faced with the task of expanding the functionality and capabilities of the system. Among the next changes is the introduction of traceability of tobacco and nicotine raw materials from March 2024," R. Yusupov said.

According to him, in the near future, illegal products simply will not be able to reach retail outlets. "Thus, labeling helps to effectively restrain the illegal market and complicates its turnover. Honest Sign, together with the authorities and the industry, will continue to fight gray markets and improve control tools," said Deputy General Director of the CRPT, Yusupov.

Sergey Slipchenko, a representative of the tobacco industry, Vice President for Corporate Affairs of Philip Morris International affiliated companies in Russia, stressed that the key to success in the fight against illegal trade lies in a systematic approach.

"Legislative initiatives, law enforcement and inter-country cooperation should be closely integrated with each other. The first part of this "equation" can be said to be solved. Almost all the necessary legislative framework for the successful fight against illegal trafficking has already been created, and the most urgent thing now is to strengthen the effectiveness of law enforcement of the norms of existing legislation," S. Slipchenko commented.

He also said that according to internal calculations based on data from reports of the Ministry of Internal Affairs of Russia, the Federal Customs Service of Russia, Rospotrebnadzor, media publications and official requests from law enforcement agencies to affiliated companies Philip Morris International in Russia, the total volume of seized illegal cigarettes in 2023 amounted to about 1.3 billion pieces, while the total volume of illegal tobacco products, according to various expert estimates, are estimated from 27 to 30 billion cigarettes in 2023. "Thus, in fact, no more than 5% of all illegal tobacco products in circulation are being withdrawn," Slipchenko concluded his speech.

Another important topic of the press conference was nicotine-containing products. Vladislav Zaslavsky stressed that this is an extensive segment of the smokers' market, as for the NSP, the share of counterfeit goods has decreased more significantly: from 79% to 68%. But these figures are quite high. In terms of liquids, the situation remains almost at the same level — illegal trafficking at the level of 90%.

"In the most popular sales channel among consumers (in specialized retail), the share of illegal products, although it remains the highest, has significantly decreased over the past year – from 93% to 79%. The share of illicit trafficking in electronic drugs and liquids in online commerce has decreased by almost a third - from 85.4% to 59.4%," Irina Bushina noted in the report.

In turn, Elena Dubankova, Director of External and Internal Communications of the SNS Group of Companies, called vaping a sustainable social phenomenon, saying that according to expert estimates, there are more than 5 million adult citizens in Russia who consume only vapes, and together with the so-called "dualists" (note: those who consume vapes and other types of tobacco. or nicotine. The number of "vapers" can reach about 12.5 million people.

It was noted that the indicators for the whitewashing of the vape market became possible thanks to a set of balanced regulatory measures implemented by the state in 2022-2023.

E. Dubankova also said that the vape industry is extremely concerned about the 110% (up to 42 rubles/ml) excise tax rate on liquids for ESDN increased from 2024, pointing out that at such a rate, the difference in the retail value of a legal product and an illegal one is almost twofold, against which it is extremely difficult for legal market participants to compete with illegal. A significant gap between the current excise tax rate in Russia and the rates in the EAEU countries was noted as an aggravating factor.

"The consequences of the excise tax of 42 rubles offset the effect of the measures implemented by the state to whitewash the vape market and increase the risk of its abrupt departure to the illegal sector. As a result, the state will lose control over the compliance of products with safety requirements and their inaccessibility to minors. And the losses of the state budget in terms of shortfall in Excise duty and VAT in the future 5 years may amount to more than 760 billion rubles. The costs of the state for ensuring control and supervisory activities and medical measures will also increase (in connection with the mass consumption of illegal products by the population). To avoid such consequences, an objective assessment of the impact of the current excise tax rate on the situation in the vape market and the possibility of adjusting the rate, as well as a set of balanced regulatory measures, including strengthening and expanding the risk-based approach for retail inspections, is necessary," E. Dubankova said.

The participants of the press conference came to the conclusion that the distribution of counterfeit tobacco and nicotine-containing products represents a socio-economic risk that has a negative impact on honest business and the effectiveness of public administration. An integrated, systematic approach by all market participants allows us to develop a unified strategy aimed at combating counterfeit products.

"The result that we are now seeing in 2023, in our opinion, was still achieved thanks to everyone's efforts, and first of all, the introduction of a digital labeling system," Vladislav Zaslavsky stressed summing up the press conference.