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. Last Updated: 07/27/2016

Exemptions Gone, Booze Still a Drain

It's been many months since the abolition of the high-profile exemptions on imported liquor granted to the National Sports Fund, or NSF, but industry sources say duty-free alcohol continues to pour into Russia, leaving government coffers short trillions of rubles.

Importers have found new ways to bypass customs duties, such as routing shipments through neighboring Belarus or less conspicuous Russian charitable funds, Western industry sources said.

The NSF -- whose close Kremlin ties have become unraveled in internal dissent that resulted in a near-fatal attack on its former head -- controlled an estimated 80 percent share of alcohol imports into Russia and reaped profits estimated at $200 million a month in 1994-95.

An NSF official said Tuesday that the organization has withdrawn entirely from the business, following the abolition of its exemptions at the beginning of the year.

Government officials, however, acknowledge that black and gray imports continue to inflict huge losses on Russia's already strained federal budget.

"Given the open borders, incomplete unification of the activities of [the CIS] customs authorities, the influx of contraband goods, particularly alcohol and cigarettes, remains large and the budget is incurring losses, of course," said Anatoly Kruglov, chairman of the State Customs Committee.

The exact size of the losses suffered by the budget is a murky point, as are the mechanisms employed in obtaining exemptions -- an issue neither exporters nor officials are inclined to talk about.

Players on the domestic alcohol market say that prices of many imported products are rising, an indication that the elimination of the NSF's exemptions has had an effect. It is clear, however, that imports at reduced duties continue nevertheless -- both through exemptions and smuggling.

"It is a massive phenomenon," said a spokesman for the State Customs Committee, who said the committee has no overall estimate of the losses incurred by the budget.

Vladimir Yarmosh, head of the Spiritprom association, said Russia lost nearly 20 trillion rubles ($3.8 billion) on duty-free alcohol imports in the first half of the year, Interfax reported.

A recent document from Russia's Economics Ministry, obtained by the Russian weekly Kapital, said 40 to 50 percent of the vodka and other spirits traded in Russia had "clearly criminal origins."

The imports are now chiefly taking place through other republics in the Commonwealth of Independent States, particularly Belarus, or -- to a lesser extent -- through funds that have maintained duty exemptions, Western exporters and economists said.

"Importers started hauling large amounts of goods through Belarus when the Sports Fund exemptions were abolished," said a senior economist, who asked not to be identified.

In one raid last month the Moscow police organized crime unit seized three trailers of vodka, with an estimated value of $150,000, smuggled in through Belarus. The unit also confiscated 600 million rubles ($110,000) and $55,000 in cash, which according to Andrei Pashkevich, a spokesman for the unit, amounted to this particular operation's "earnings for two to three days."

But this is only the tip of the iceberg, Pashkevich said. "There are dozens of such firms in Moscow," he said.

The Economics Ministry report estimated the profits of organized crime on the sale of moonshine and smuggled alcohol at 1 trillion rubles ($190 million) a month.

According to official trade figures, registered alcohol imports from other CIS republics increased by 120 percent in the first five months of this year.

The Russian authorities are now trying to close this loophole by setting up checkpoints on the border with Belarus, and are likely eventually to introduce quotas on the imports of foreign liquor, the economist said.

Another channel for imports at reduced duties is through Russian distributors, often charitable funds, that have maintained "privileged relations" with the authorities, exporters said.

A source at a large Western exporter of alcoholic beverages, speaking on the condition of anonymity, said certain distributors are still paying "reduced duties or no duties," but that the authorities have started rolling back such deals.

"Special deals are still in existence, but our distributors find it increasingly difficult to renew their agreements," the source said. "More and more importers are now paying full duty."

Different taxes and duties amount to between 40 and 50 percent of the retail price of, for example, a liter of Western vodka, typically retailing at between 90,000 and 150,000 rubles.

Importers have to pay a duty of 2 ecus ($2.54) and excise taxes of 3 ecus on 1 liter of vodka, according to information from the State Customs Committee. A 20 percent VAT is also levied on alcohol products.

With legal exemptions running out, some importers try to avoid registering imports with the authorities. That in turn means trade statistics have become less reliable.

"It is becoming more attractive for importers not to register their imports at all," said a Western economist. He added that recent months have seen increased underreporting on the part of importers.

Official statistics show that in the first five months of the year the import of alcoholic beverages from countries outside the Commonwealth of Independent States declined by 31 percent from 1995 figures.

While an end to duty-free imports may in the short term hurt the competitive position of imported liquor as prices go up, some exporters to Russia said this could be outdone by the positive effects.

"The National Sports Fund basically destroyed the market," said one exporter. "It eliminated all competition."

"As a Western company operating in Russia we are interested in the liquor market being normalized," said Aleksej Leppanen of the Primalco exporter in Helsinki.

A source at another Western exporter said the many and chaotic duty exemptions had complicated operations for international exporters on the market, for example, when it came to managing their prices.

"The level of duties was literally changing from week to week, depending on the deals cut by the distributors," the source said.