Economics of Tobacco Taxation in Russia

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Economics of Tobacco Taxation in Russia

Dr. Hana Ross, Samina Shariff, …

Draft for Review

Nov 2007
Table of Contents





I.Introduction 6

II.Data and Methods 8

III.Demand for tobacco products and tobacco tax policy 10

a.Tobacco use prevalence and intensity, type of tobacco products consumed 10

b.Prices of cigarettes, their affordability, and price elasticity 16

c.Expenditures on tobacco products and costs of smoking 21

d. Tobacco tax level, tobacco tax structure and tax collection mechanism 23

IV.Supply of tobacco products and industry regulations 27

a.Production, import, export 27

b.Structure of the tobacco market 32

c.Tobacco tax revenue and its relative importance for the state budget 35

d.Regulations of the tobacco industry, political power and image of tobacco industry 37

V. Tobacco tax policy options and their impact 40

a.Impact on Consumption and Prevalence 41

b.Impact on Government revenue 42

VI.Other implications of tobacco tax policy 43

a.Smuggling and product substitution 43

b.Employment and poverty 43

c.Economic growth, trade and foreign exchange 45



VII.Discussion 46

VIII.Appendices 50

IX.References 54

Executive Summary
Russia has about 44 million smokers and one of the highest rates of male smoking prevalence in the world. More than 60% of adult males consume tobacco primarily in the form of cigarettes. Female smoking prevalence had traditionally been lower, but started to increase following the collapse of the Former Soviet Union. Just between 1992 and 2004, female smoking rates more than doubled from 6.9% to 15%. Youth smoking prevalence is also alarmingly high with 47% of young adult males and 36% of young adult females consuming cigarettes. There are very few quitters among the population, an indication of underdeveloped tobacco control measures. Tobacco related diseases are responsible for between 330,000 and 400,000 premature deaths in Russia each year and also contribute substantially to the declining life expectancy and the demographic crisis. In order to reverse the current life expectancy and demographic crisis trends, this report examines the potential of using taxation as an effective tobacco control measure, taking into account the historical and socio-economic perspectives.

The Russian cigarette market has changed significantly since the entrance of the transnational tobacco companies in mid-1990s. These companies now control over 90% of the market. The largest share of the market, 35%, belongs to Japan Tobacco International. Other important investors are Philip Morris and British American Tobacco. The majority (98.5%) of cigarettes is domestically produced, but use primarily imported tobacco leaves. The import of raw tobacco is encouraged by low import duties.

Smokers increasingly prefer filtered cigarettes over the previously common papirosy and non-filtered cigarettes. They also have a wider range of cigarette brands and prices to choose from. Cigarettes are available in the high (at least 30 rubles or 1.10 USD per pack), middle (10-29 rubles or 0.37-1.10 USD per pack) and low (9 rubles or 0.33 USD per pack or less) price categories.

Cigarettes in Russia are becoming cheaper over time and are more affordable compared to other basic goods. Just between 2000 and 2007, the real cigarette prices fell between 40% (foreign brands) to 50% (local brands). The affordability of cigarettes is further enhanced by rising income in Russia where wages are increasing by 12 - 15 % a year. However, tobacco expenditures in some households still compete with basic items such as food. Overall, Russians spent 83.4 billion rubles (2.9 billion USD) or 0.39% of the gross domestic product (GDP) on cigarettes in 2005. This amount represents the opportunity cost of smoking.

In addition to the opportunity costs, there are other economic losses associated with smoking. Just the productivity loss due to smoking-related premature mortality reaches at least 24.7 billion USD, or over 3% of GDP a year. The losses due to smoking-related morbidity and health care expenditures must be enormous, but their magnitude is yet to be determined.

The Russian government has adopted some tobacco control legislation. For example, the federal law prohibits the sale of tobacco products to people younger than 18 years, bans the sale of cigarettes in packs of less than 20, partially bans outdoor advertising, and limits smoking at workplaces and in public transportation facilities.

However, the law is rarely enforced as there is no federal funding for implementing and enforcing these measures.

The system of cigarette taxation in Russia is characterized by a differential treatment of filtered and non-filtered cigarettes. In 2007 the specific excise tax on filtered cigarettes was 100 rubles per 1,000 cigarettes, while the ad-valorem excise tax was 5% of the maximum retail price. The total excise tax could not be less than 115 rubles for 1,000 cigarettes, or 2.3 rubles per pack (0.09 USD). For non-filtered cigarettes the excise tax was 45 rubles per 1,000 cigarettes plus 5% of the maximum retail price, such that the total excise tax is not less than 60 rubles for 1,000 cigarettes, or 1.2 rubles per pack (0.05 USD). The excise tax represents about 12% and 28% of the retail price for filtered and non-filtered cigarettes, respectively, far below the level recommended by the World Bank to control tobacco use. The low tax rates also result in relatively low cigarette tax revenue and represent a missed opportunity to begin to recover the economic costs imposed by smoking.

To reach the recommended cigarette tax level so that the excise tax comprises two-thirds of the retail price, the total tax per pack of medium priced filtered cigarettes would need to increase from the 2007 level of 4.5 rubles to 22.0 rubles. If the tax increase were passed fully onto the consumer, the retail price for this type of cigarettes would increase from 15.6 rubles to 33.1 rubles per pack, or by approximately 113%.

The response of the population to such price increase depends on price sensitivity of consumers. Only few studies estimated price elasticity of cigarette demand in Russia and they generally found relatively low price and income elasticity among males, and slightly larger price responsiveness among females. The low level of price sensitivity may be the result of the wide range of cigarette prices allowing smokers to cope with the impact of a tax increase by switching to a cheaper brand. Another factor might be high social acceptability of smoking and the limited public health effort to curb smoking.

Assuming the lower bound of price elasticity estimated in low- and middle-income countries ranging from -0.1 to -0.2, the proposed tax/price increase has the potential of reducing cigarette consumption between 11.3% and 22.6%. Smoking prevalence could decline by 5.7% -11.3%, which translates into 2.5-4.9 million fewer smokers. The reduced smoking rate could potentially save between 1.4 billion and 2.8 billion USD just from reducing the productivity lost due to smoking. Apart from saving lives and reducing the costs associated with tobacco use, the proposed tax increase would also generate additional income for the government increasing the excise cigarette tax collection by 276% - 331%, bringing in an additional 80-96 billion rubles (3.1 billion – 3.8 billion USD) a year.

Given the potential impact of cigarette tax policy to improve public health and to reduce the costs associated with smoking, the public health community should advocate for a sizable tobacco tax increase. Experience in both low- and high-income countries confirms that increasing tobacco tax is among the most effective and practical interventions to reduce tobacco use. Tax increase, however, needs to be accompanied by other tobacco control measures such as smoke-free air laws as part of a comprehensive tobacco control strategy in Russia.






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