Illicit cigarettes flood into EU from eastern neighbours

Illicit cigarettes flood into EU from eastern neighbours
By bne IntelliNews July 10, 2017

Ukraine has replaced Belarus as the top source of illicit cigarette imports to EU countries, as the countries on the EU’s eastern borders continue to be the main source of counterfeit and contraband (C&C) cigarettes. 

This is driven primarily by the huge price differential between a pack of cigarettes in countries like Belarus, Moldova, Russia or Ukraine, and the EU member states immediately to their west. Increased cross-border mobility, in particular for Ukrainian nationals, is also a factor. 

The latest annual Project Sun report prepared by KPMG for the Royal United Services Institute for Defence and Security Studies (RUSI) found that the price of a packet of cigarettes in Belarus, Moldova, Russia or Ukraine  was as low as one quarter of the price in some EU member states. A similar — though less pronounced — phenomenon is seen between the Western Balkans countries and their EU neighbours.

The weighted average price for a pack of 20 cigarettes was as low as €0.52 in Ukraine and under €0.70 in Belarus and Moldova. For the same product in the four EU member states that border Ukraine, the price ranged from €3.06 in Slovakia to €3.55 in Hungary. 

Cigarette prices in Ukraine are now the lowest on the continent, and it has become the top source of C&C cigarettes consumed in the EU, “driven by larger numbers of Ukrainians travelling to the EU combined with price reductions and currency depreciation in Ukraine which pushed prices on the domestic market below those in neighbouring Belarus,” the report said. 

In recent years this has pushed up the number of illicit cigarettes brought into the EU from Ukraine more than tenfold, from just 500mn in 2014, to 3.2bn in 2015 and 5.8bn in 2016. 

The sharp hike in the volume of C&C cigarettes from Ukraine bucks the overall trend of a fall in consumption of illicit cigarettes in the EU28, Norway and Switzerland. Overall in 2016, according to the newly published report, C&C cigarette consumption dropped 8.8% y/y to 48.3bn in 2016, though it still accounted for a hefty 9% of total consumption. This represented a tax loss of €10.2bn across the 28 member bloc. 

The recent decline in the illicit cigarette trade in recent years, at a time when overall cigarette consumption has remained relatively flat, is partly because of Europe’s emergence from years of economic crisis, meaning people are less inclined to buy low cost illegally produced or imported cigarettes. Notably, Greece, which is still struggling with crisis and austerity, was one of the few countries where C&C consumption increase in 2016.

“Positive macroeconomic factors and a stable pricing environment contributed to reducing demand for illicit products,” said the report. 

The other side of the coin is the effort by law enforcement agencies and border controls to prevent illicit imports into the EU, which has also served to bring down the amount of C&C cigarettes consumed in the bloc. 

On the other hand, billions of illicit cigarettes are still consumed in the EU - 8.96bn in France in 2016, followed by the UK (6.16bn) and Poland (5.55bn). 

21st century criminals 

Part of the reason why the illicit cigarette trade is still going strong is that it has considerably lower risks than other forms of organised crime such as drug trafficking, while the profits can be just as high. 

“[T]he largely invisible nature of the illicit cigarette trade means that it has often not received the same level of attention as other forms of crime. Competing imperatives and financial austerity in many states have seen the issue remain low on priority lists.” says the report. 

“Fundamentally, the rewards for engagement in the illicit cigarette trade remain too high and the risks too low. Until this balance is altered, the trade will remain a key focus of organised crime activity across Europe.” 

Criminal groups involved in the illegal cigarette trade have also shown themselves to be remarkably adaptable and quick to take advantage of innovations intended to promote legal international trade such as free trade zones, online marketplaces, and postal and courier services. “[Organised criminal groups] involved in C&C smuggling exploit opportunities presented by 21st century commerce and the global architecture designed to facilitate large-scale distribution of goods,” says the report. 

In addition, they typically use a “little and often” approach to smuggling, that allows them to “slip under authorities’ thresholds for investigation and to adapt routes in response”. 

Eastern exposure

In terms of the proportion of illicit cigarettes smoked as a percentage of the total, almost all the countries where this figure was over 15% were along the EU’s eastern borders. The only exceptions were Ireland and Norway, where the cost of a pack of cigarettes was high enough to boost the illegal trade. 

Across the EU, Latvia had the highest rate of C&C cigarettes as a proportion of total consumption across the EU, at 22.6%, although the ratio has declined steadily since 2014. This is a pattern seen across the Baltic countries, “against a backdrop of increased border security with Russia”, the report says. In Lithuania the ratio fell to 17% in 2016, while in Estonia it dropped to just 13.2%. In all three of the Baltic states the lion’s share of C&C cigarettes are from Belarus and Russia. 

Elsewhere along the border between the EU and its eastern neighbours, Lithuania, Romania and Poland all had illicit consumption ratios of between 15% and 20%. While this ratio fell in the Baltic states, both Romania and Poland saw the ratio increase, Romania by a steep 7.1pp, the highest across the bloc. This represented a rise to 16.4% of total consumption in Romania, or 4.41bn cigarettes. The majority were either illicit whites (with no country specific labelling), or lower priced cigarettes from non-EU Eastern European countries such as Ukraine and Moldova, both of which border Romania. 

“The country’s northeastern borders with Ukraine and Moldova pose particular challenges – both are major source countries, with crossings through terrain that is challenging to patrol. As a result, Romania’s northeast is most strongly affected by the illicit cigarette trade, accounting for 42.9% of the total illicit market in March 2017, according to Novel Research.”

But in addition to land borders, illicit cigarettes have also been detected at Romanian airports and arrivals by sea mainly from Dubai and the Far East to Constanța port, which saw the seizure of 14mn cigarettes in March. As the KPMG report commented, 

“OCGs operating in Romania are highly inventive in their methods for concealing illicit cigarettes. Recent cases have uncovered C&C in consignments of cement, brown wrapping paper and Xerox paper.” says the report. 

In addition, it points out that, “Romania forms an important transit point for C&C. It's often-unmonitored land borders offer particular opportunities for cigarette smuggling; Romania shares 1,877 km of its 3,149 km border with non-EU states – one of the longest EU external borders,” says the report.