Smuggling of Cigarettes Burns Down the State Budget

Smuggling of cheap cigarettes is on the rise in Romania since the taxation on the merchandise went up. Estimates say cigarettes smuggled from Ukraine and Republic of Moldova take 5% to 9% of the market and cost state coffers 30 to 40 million euros. Plugarul, Doina, Saint George are some of the brands which have no match in price on the local market: a pack of 20 of Plugarul or Doina goes for 13,500 to 14,500 lei, while the cheapest local brand, Carpati, goes for 22,000 lei, of which 15,000 are taxes.

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High taxes in Romania make smuggling of cigarettes very profitable; thus 1,000 cigarettes of the Saint George brand sells legally for 30 euros in Romania, for 10 euros in Russia, and for 9 euros in Ukraine.

Same problems were experienced by Hungary and Bulgaria, so much so that both put a cap on taxes. Some 45% of the Hungarian market was swamped with smuggled cigarettes when the authorities decided this year to keep the taxes flat and ask the European Union to allow the move. Bulgarians, for their part, reinstated the lower taxation of the previous year.

The steep hike of the taxes starting in Romania with 1 April this year gave a severe blow to the cheaper brands sold legally, like Carpati, Snagov or Winchester.

Another blow for these cheaper brands resulted from the convergence of prices between the lower and the medium priced brands as a result of a change in taxation calculus.

This resulted in paying the same tax of 9.1 euros per 1,000 cigarettes, be they Marlboro or Carpati brands.

The Romanian consumers follow the international trend and switch to light and super light brands. Starting with 2007, when Romania presumably will accede to the European Union, all cigarettes will have lower levels of nicotine and tar, hence names of "light" and "super light" will become superfluous.

Estimates show that in 2010, when taxes will reach 64 euros per 1,000 cigarettes and in line with EU recommended levels, consumers will be even more supportive of the smuggled, thus cheaper brands.

Romanian authorities are aware of the magnitude the smuggling of cigarettes reached, but are unable to drastically curb it. Trains coming from Republic of Moldova and trucks coming from Ukraine are the transportation medium of choice for the smugglers.

Fiscal authorities also tried to curb the illegal making of foreign brands, as it was performed, for instance, at the cigarettes factory in Timisoara, where L&M and Marlboro brands were illegally produced.

The Romanian cigarettes market fared 1 billion euros and sold 35 billion cigarettes last year. The big cigarettes’ makers, like JTI, PMI and BAT, take 88% of the market, followed by the former national cigarettes company, Galaxy Tobacco, with 6% to 7% of the market, and Gallaher, with 1.2% of the market. Then come in line the local makers, with some 4% of the market.

In all, there are 19 cigarettes’ producers operating in Romania.