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Health Ministry for higher tobacco excise tax, experts warn of social discontent risks

October 09, 2012, 15:35 UTC+3 Alexandrova Lyudmila

Russia’s Health Ministry has continued systematic attempts to make Russians drop their smoking habits. In the latest move it has addressed the government with a proposal for raising the excise duties on tobacco eleven times by 2015. The Health Ministry expects that the price hikes will cause tobacco consumption go down by a third. And the budget will get one trillion rubles in extra revenues. Experts doubt this initiative will be successful, though. Also, they have warned of the risk of the grey market’s expansion and soaring social discontent.

In her message to the government Health Minister Veronika Skvortsova says that Russia’s consumption of tobacco is one of the world’s highest, and tax policies, one of the mildest. Whereas now the excise duty on cigarettes is 360 rubles per 1,000 (50 standard packs), next year, as follows from the Health Ministry’s proposals, it is to go up to 4,000 rubles for 1,000. Then the minimum excise duty on one pack of cigarettes by 2015 will be about 78 rubles. The cheapest pack of cigarettes will cost 140-150 rubles (about five US dollars). Now the prices of tobacco remain one of the world’s lowest.

Health Ministry specialists expect that the measures taken will be pushing down tobacco consumption by 10 percent a year for three years to come. In 2013, according to the Health Ministry, cigarette consumption will be down to 17.1 billion packs against 19 billion in 2012. But even in a situation like this the budget will still get an influx of an extra one trillion rubles. The Health Ministry plans to spend the money raised in that way on struggle against smoking.

The Health Ministry’s proposals are even more radical than those of the Finance Ministry, whose bill on excise duties in 2013-2015 was recommended for adoption by the State Duma’s committee for budget and taxes on Monday.

The idea of a drastic rise in the excise duties on tobacco is not new. Earlier, it was proposed by Alexei Kudrin, a former finance minister. At the beginning of 2011 the Finance Ministry had the intention of raising excise duties by 60 percent in 2012, while by 2015 the excise duties were to surge up eleven times. The Finance Ministry drafted a corresponding bill.

However, Vladimir Putin, who then led the Cabinet, opposed the measure. He warned that the economic effect of tightening excise policies may prove insignificant, while the social reaction to the tobacco price rises may be angry and negative. As a result, the government has opted for a smooth rise in excise duties by 40 percent a year. The Health Ministry argues that from the standpoint of struggle against smoking a smooth rise in excise duties is senseless.

Many experts are pessimistic in their comments on the Health Ministry’s initiative. They point to a variety problems.

“Indeed, to fight against tobacco properly excise duties must be raised. But if the price of cigarettes goes up by 5-10 rubles, this will not stop the smokers. Only a sharp rise in excise duties will be able to reduce the number of smokers. Besides, a number of other measures must be taken, such as a ban on smoking in public places, promotion of healthy lifestyles and a ban on the advertising of tobacco,” the daily Nezavisimaya Gazeta quotes Irina Vorobyova, an expert at the assessment department of 2K Audit – Business Consulting/Morison International, as saying.

A grey market growth would be the worst negative effect, Vorobyova warned. “One should remember that if we keep using grey market growth fears as an excuse for not doing anything and for keeping excise duties low, then we shall be unable to change the smoking situation for the better.

The general director of the group Development, Viktor Kukharsky, believes that the very idea of fighting smoking, as well as heavy drinking, by raising excise duties is utterly wrong.

“Excise duties are not a tool to make the people drop bad habits, but a means to raise budget money. Its rate should be established from the standpoint of purely economic criteria.

“Smokers is a group of people that is too large and too diversified to be treated like kids at school,” the analyst warned. “For most people this bad habit is not a luxury, but part and parcel of their lifestyle. An artificial rise in tobacco prices in a situation like this will cause massive anger and various forms of self-organization. In case of an eleven-fold increase in the excise duties the emergence of both grey and black markets of is more than guaranteed.”

In the meantime, the Health Ministry says that the Russian rate of excise duties would merely go up to the European level. In Russia, according to Health Minister Veronika Skvortsova, the tax on tobacco is one of the world’s lowest not only in contrast to those in the European Union, but in the other former Soviet republics, too.

The chairman of the international confederation of consumer societies, Dmitry Yanin, is quoted by the RBC Daily as saying if the Health Ministry’s proposal is ignored, Russia will remain one of the world’s most smoking countries, and the budget will miss an income of 600 billion rubles from the world’s four largest tobacco companies. “The winner in this excise war is known well in advance. It is the tobacco industry,” the analyst said with certainty.

The chief of the center for studies of interaction between business and government, Pavel Tolstykh, has told the daily Moskovsky Komsomolets, he is certain the proposal will not be approved by the authorities.

“It will not be implemented for purely political reasons,” the expert warned. “A sharp rise in the excise duties will cause anger and tobacco riots.”

Russia is the world’s second most smoking country, as follows from statistics made public at the 15th conference Tobacco or Health, which was held in Singapore last April. In 2011 Russia was number three on the list of smoking countries.

According to the latest Global Adult Tobacco Survey, held in 2009-2010, about 62 percent of Russia’s men and 21 percent of the country’s women smoke. According to the consumer rights watchdog Rospotrebnadzor, the number of smokers in the country has grown by 440,000 over the past twenty years.

MOSCOW, October 9