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. Last Updated: 07/27/2016

Unreasonable Tariffs: Tobacco and Alcohol

One of the main battles now under way between the Russian government and what some might choose to describe as the Russian mafia concerns the problem of importing alcohol and cigarettes into Russia.

The government has seen fit to tax these imported goods at rates well over 100 percent. These taxes, if paid, would kill off almost all demand for imported goods. Cigarettes would cost $1.50 a packet and alcohol would cost the sort of outrageous prices that are charged in hard-currency supermarkets. The average consumer could not afford it.

But the goods continue to come into the country and a visit to any kiosk will show that consumers are not paying these high prices. The reason is that Russian businessmen have found ingenious and blatantly illegal ways to avoid paying the taxes.

The Customs Committee's anti-smuggling department reckons that tax avoidance has grown to the point where tax is paid on only about 5 percent of cigarettes imported into Russia. Considering that imported cigarettes make up about 90 percent of total Russian consumption, this represents a loss to the Russian government of billions of dollars.

The huge volume of tax-free contraband is also hurting local cigarette and alcohol producers, who more or less pay their taxes. They just cannot compete.

To illustrate the size of the problem, consider a recently publicized case. Customs officials announced the biggest sting yet in their battle against the smuggling of these goods, confiscating 224 containers of cigarettes with a market value of over $10 million.

Moscow customs officials seized the cigarettes in June near the town of Klin, 80 miles northwest of Moscow. About 145 of the containers carried Marlboro cigarettes produced by Philip Morris.

The officials only became suspicious because a large number of containers was building up at the customs point. These containers had apparently been exempted from payment of import taxes on the grounds that they were in transit from Europe for Kazakhstan.

Officials discovered that the transit documents were fake. The documents bore counterfeit stamps from customs offices on the Kazakhstan border falsely indicating that the goods had already cleared customs and were now in Kazakhstan.

This is just one example of how import taxes are avoided, but we are clearly talking about a huge and systematic operation.

Russia has tried various measures to stop imports of contraband alcohol and cigarettes over the past year, including the use of Federal Counterintelligence Service agents to stop customs officials from taking bribes. The changes may soon start to show results.

But the smuggling problem also raises a difficult question of business ethics for foreign companies trying to sell alcohol and cigarettes in Russia. The Russian Customs Office has blamed the widespread smuggling partly on foreign cigarette and alcohol companies, who sell cigarettes on credit to fly-by-night companies responsible for the smuggling.

Western importers argue that they bear no responsibility. They say that they merely sell the cigarettes to Russian importers and cannot control what funny tricks they get up to.

The real point perhaps is that nobody will obey laws which are generally perceived to be unreasonable.

Russia has erected a series of huge tariff barriers for these and many other imported goods. The rationale for the tariffs is unclear and appears largely designed to raise revenue rather than help in industrial policy. Because local production simply cannot meet demand, Russian businessmen/mafia have a huge incentive to avoid the taxes. This has, so far, been relatively easy.

Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.