Opinion: Why do cigarettes in Belarus remain among the cheapest in Europe?

While lax regulations and low prices attract more and more young Belarusans to cigarettes, Belarusan government is reluctant to tax tobacco because of the profits it reaps from it.

While smoking is declining across Europe, a growing number of young Belarusans are turning to cigarettes due to lax regulations and low prices. Cheap cigarettes from Belarus are also being smuggled into Western Europe, involving thousands of Belarusans who regularly engage in criminal activity.

Why do cigarettes in Belarus remain among the cheapest in Europe?

Raising the cost of tobacco products – by levying an excise tax on consumers – is a simple and effective measure to combat smoking among both youth and adults.

A tobacco tax could produce economic as well as social and health benefits. At the end of the day though, the Belarusan government is reluctant to tax tobacco because of the profits it reaps from manufacturing and exporting tobacco products.

Belarusan youth are the biggest smokers in the post-Soviet space

Overall rates of smoking in Belarus are comparable to those in other post-Soviet states. But Belarus leads in the prevalence of smoking among young people. This suggests that the state has not done enough to discourage new smokers from joining the legions of the nation's smokers.

According to the World Health Organization (WHO), raising taxes on tobacco products is one of the most efficient ways of combating tobacco consumption. This measure is especially effective among young people, who tend to have lower incomes and are not yet addicted to nicotine.

WHO estimates that if all countries raised taxes on tobacco by 50% per pack, governments would earn an extra $101 billion in revenue, while decreasing the number of smokers by 49 million.

WHO recommends the tax be equivalent to at least 75% of the retail price. This policy is currently in place in 26 out of 53 countries in the Europe, including those EU countries that border Belarus (Poland, Latvia, Lithuania, and Estonia). Not a single post-Soviet country has raised taxes on tobacco products to this level, however.

Belarus offers perhaps the cheapest cigarettes in the EU neighbourhood. They cost about 13 times less than in other European states. For example, in 2012, the price for a pack of Philip Morris' Marlboro ranged from $1.50 in Belarus to $17.80 in Norway, according to a report by KPMG LLP.

Smugglers Can Earn up to 1000% in Profits

In the last ten years, as the price gap have significantly narrowed between EU countries and as Belarusan prices have remained low, the country has become the largest source of illegal tobacco in the EU.

According to a KPMG study commissioned by major global tobacco companies, Belarus’ total volume of illegal C&C cigarettes exported to the EU was around 6.9 billion cigarettes in 2013. For sake of comparison, Russia accounted for a mere 3 billion illegal C&C cigarettes over the same period of time.

The KPMG study also found that the highest levels of illegal trade incidences are found in Latvia (28.8%), Lithuania (27.1%), Ireland (21.1%), Estonia (18.6%) and Bulgaria (18.2%).

It is no coincidence that three of these five countries border Belarus. Smuggling from countries like Belarus, where a pack of cigarettes costs just over one euro, allows smugglers to earn profit margins of up to 1000%.

The real costs of cheap tobacco

Poland is another popular destination for illegal tobacco from Belarus. Passengers on a short train ride from Grodno, Belarus to Bialystok, Poland can easily illustrate just how bold some ordinary citizens can become when given sufficient financial incentives.

As soon as the train starts on its way, about two-thirds of “passengers” rush to unscrew parts of the floor, seats, and ceiling to hide their stock of illegal cigarettes. Cigarette packs can also be easily taped to passengers’ bodies. (The law permits two packs per person.)

At the border, customs officials uncover only a small portion of the hidden loot; the rest is taken out in Bialystok and sold. The few unlucky smugglers who are caught red-handed are fined, but the fine is unlikely to deter them from trying again.

The local newspapers frequently publish amusing stories about the ingenuity or the foolishness of tobacco smugglers.

These stories speak of secret compartments, double underwear, and packages with mini-antennae sent floating down the Neman river, which runs along 18 kilometers of the Belarusan-Lithuanian border.

Of course, the volume of cigarettes smuggled by these “desperate” citizens is peanuts when compared to the volumes transported by criminal gangs via more sophisticated methods.

Smuggling cheats governments and tobacco companies out of billions in profits. Aside from financial losses, cigarette smuggling carries social costs that disproportionately fall on communities living close to the EU border. Studies show that illicit trade fosters broader criminality, from stolen property to corruption to murder.

Who Invests in Belarusan tobacco?

Even though cigarette companies lose some sales through smuggled cigarettes, they can also benefit financially when investing in factories located in countries with low tax rates. These factories are used to produce brand-name products that are then sold abroad. Because of the low tax rates on tobacco products, Belarus has become an important link in the tobacco sales chain.

There are two major manufacturers of cigarettes in Belarus: the “Neman” Tobacco Factory in Grodno and the Belarusan-American joint venture “Tabak-Invest.”

Both factories have attracted big-name international investors. British American Tobacco reportedly invested 20 million Euros in “Neman”, while Japan Tobacco International is manufacturing its cigarettes via “Tabak-Invest”. In April of this year, the British company Tobacco International Enterprises agreed to invest 4.5 million Euros in “Neman” as well.

According to its 2014 budget estimates, the Belarusan Ministry of Finance projected US$400 million in excise tax revenue from tobacco products. Higher tobacco taxes would further raise revenues for many years to come, even if they would decrease the rates of smoking over time.

In some cases where a country has raised tobacco taxes, the price increases have actually increased the prevalence of smuggling cheaper cigarettes into the country, diverting money that would otherwise flow to governments in the form of tax revenues.

In Belarus, however, the situation appears to be rather different, since cigarettes are smuggled out of the country into the neighbouring EU. Raising tobacco taxes are thus likely to reduce rather than increase smuggling – a win-win scenario for government coffers and the healthcare system.

Originally published at BelarusDigest