A considerable increase in the consumption of contraband and counterfeit cigarettes has recently been observed in Latvia. The volume of counterfeit and contraband cigarettes in Latvia increased by 5%, reaching 19.1% of the tobacco market, according to KPMG’s annual report on cigarette consumption in Europe and Latvia.
This is the second biggest ascent across the European Union. The increase is only higher than in France (9.4%). It also means that the Latvian state loses around 59 million euros in unpaid taxes due to smuggling and counterfeiting of cigarettes.
The volume of general cigarette consumption in Latvia was 2.1 billion units in 2020, which is more or less equal to that of 2019. The volume of contraband and counterfeit cigarettes, which is equal to 19.1 % of the total volume of cigarettes consumed in the world, is about 0.41 million cigarettes in absolute number. 68% of this amount was white contraband *, 12% – counterfeit cigarettes and 20% – contraband goods of another origin. It must be said that in the previous three years, a constant decrease in illegal cigarettes has been observed in Latvia. Last year, for example, the volume of illegal cigarettes in Latvia historically hit the lowest point of the past decade – 14.1%.
Most contraband cigarettes are transported to Latvia from Belarus.
In 2020, a total of 291 million cigarettes, or 67% of the total amount of contraband cigarettes, were transported to Latvia from Belarus, KPMG notes.
The main reason for smuggling cigarettes is the significant price difference. The most popular brands of cigarettes smuggled into Latvia are NZ, Premier and Camel.
Around 110 million cigarettes were transported from Latvia to other European countries legally and illegally last year. Most cigarettes were transported to Finland (31 million units), Estonia (20 million units), Sweden (13 million units), Ireland (11 million units) and Poland ( 9 million units).
In 2020, the total consumption of illegal cigarettes in Europe increased by 0.5%, reaching 7.8% of the total volume of cigarettes consumed. The losses due to unpaid taxes on the budgets of European member states are estimated to have reached 8.5 billion euros. In addition, the study shows that the consumption of counterfeit cigarettes is on the rise in Europe – 87%, which is the highest index historically.
The study estimates that the total volume of cigarette consumption in 2020 fell by 4.7% – to 438.8 billion cigarettes in the EU. Border controls imposed with the Covid-19 pandemic and travel restrictions have contributed to a rapid decline in cross-border trade, which fell 18.5% (11.9 billion cigarettes).
The total volume of cigarettes consumed in the EU decreased by 4.7% in 2020, which is higher than the trends observed in recent years, where an average reduction of 2.3% was observed each year.
The consumption of illegal cigarettes in the EU increased by 2% in 2020, reaching 32.2 billion units. Illegal cigarettes represent 7.8% of the total cigarette market.
If all illegal cigarettes were sold on the legal market in 2020 with all taxes paid, EU member states would earn around 8.5 billion euros, according to the study.
The EU has seen a dramatic increase – 87% – in counterfeit cigarettes. Counterfeit cigarettes represent 30.1% of the total volume of illegal cigarettes in the EU. Compared to 2019, the largest increase is observed in France, where the volumes of illegal cigarette consumption have increased sixfold.
“The experience of the Baltic States shows that the percentage of counterfeit and smuggled cigarettes increases dramatically than in times of economic decline. In 2010, when we experienced a considerable economic decline, the percentage of counterfeit and smuggled cigarettes increased by 32% in Latvia, 25% in Lithuania and 15% in Estonia ”, explains Professor Arnis Sauka, economics researcher. at the Stockholm School of Economics in Riga.
“A similar situation is seen now – the Covid-19 pandemic has left a negative impact on the economy, which is reflected in the form of an increase in illegal trade. In this situation, an inadequate and rapid increase in excise duties further increases the prices of tobacco products. This causes an increase in sales of illegal cigarettes and the state loses tax revenue. This is also what the KPMG study reveals, ”explains Sauka.
* KPMG defines “white contraband” as cigarettes that are normally produced legally in a country for the purpose of smuggling. While these cigarettes can also be exported legally, they normally go to their target market as contraband and are sold tax free.