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. Last Updated: 07/27/2016

Controls on Alcohol Called Problematic

The Russian government's plan for a monopoly on production and sales of alcohol, which is to go into effect Oct.1, is likely to boost illegal vodka output and will do little to raise the government's revenue from excise taxes, industry sources said Friday.

The alcohol monopoly is one of the priority projects of Yevgeny Primakov's Cabinet. Government officials hope it will provide much-needed revenue for the federal budget, bringing in an additional 15 billion rubles by the end of this year.

According to Deputy Prime Minister Gennady Kulik, illegal trafficking in alcohol currently costs the Russian budget 30 billion rubles ($1.8 billion at Friday's exchange rate) a year.

A draft government program for establishing the alcohol monopoly, a copy of which was obtained by The Moscow Times, calls for tougher licensing practices for alcohol production and a state monopoly on the export and import of most sorts of alcohol.

Only state-owned factories are to be allowed to produce ethyl alcohol, from which vodka is made. A federal law is to be drafted to force alcohol producers who have tax debts to issue new shares and hand them over to the government as payment.

The State Tax Service, the tax police and the Interior Ministry have received orders to check every company licensed to produce alcohol for compliance with licensing requirements and federal tax laws.

The proposed measures will amount to effective nationalization of some of the existing alcohol businesses and the closure of many others, said Pavel Shapkin, executive director of the National Alcohol Association.

"This is a plan for a gradual repeal of private operators' licenses over several months," he said.

According to Shapkin, there are now more than 3,000 holders of liquor production licenses, about 90 percent of them private companies.

The government has been trying to regain control over the lucrative alcohol trade ever since the Soviet-era state monopoly on alcohol, which brought in about a quarter of state revenues, was abolished in 1992. However, the attempts have been unsuccessful.

Vladimir Rebrikov, an adviser to the State Duma's economic policy committee, said 70 percent of Russia's alcohol market is illegal.

According to official statistics, a total of 860 million liters of vodka was produced or imported in 1997, but the figure for the first eight months of 1998 is only 280 million liters.

It is not that Russians are drinking less vodka, Rebrikov said: The figures indicate that illegal vodka output is on the rise, hurting the government's excise revenues.

"Legal producers are being throttled by high excise and so they are forced to go underground," he said.

Rebrikov said the new government program does not address the problem of tax collection. Illegal producers, who have no licenses and pay no taxes, enjoy an unfair advantage over legal factories, and taking away licenses does not eliminate that advantage.

The only way to do it would be to switch the excise tax burden from producers to wholesalers, but there is no mention of this in the government proposal.

According to an alcohol industry source who did not wish to be identified, the government proposal may create more problems than it solves because the closure of some production facilities will make the market less competitive, driving vodka prices up. That may result in a new increase in the illegal output of low-quality vodka.

"Many unscrupulous operators will be tempted to produce cheap stuff without any regard for quality," the insider said.