Sin taxes set to rise as producers warn of impact

President Medvedev's cabinet will discuss raising taxes on cigarettes, fuel and alcohol on Monday, in a move to cover the budget deficit.

Russia’s finance ministry is suggesting a 30% jump in excise duties on alcohol, a three-fold increase in beer taxes, and steady increases in cigarette duty. Officials hope the additional taxes could bring in more than $8 billion.

However, experts warn the move may lead to lower tax revenues. Alexander Lioutyi, Corporate and Regulatory affairs Director at cigarette manufacturer, BAT, claims that sharply increased duty could actually result in the State pulling in less money.

“On Russia’s borders we have countries in which the level of prices of tobacco products is similar to Russia. If the gap in prices between Russia and those markets is increasing, then there will be an incentive to bring products from neighboring countries such as China, for instance, into Russia. As a result of this the Government may get even less tax revenue because the legal market will shrink.”

Cigarettes are very cheap in Russia: an average pack costs no more than €1. Producers say that's why illicit tobacco accounts for less than 1% of the country's market, the lowest in Europe. The situation is different for alcohol, where almost half of Russia’s vodka production is illegal. Maksim Kashirin, Managing Director at Russian wine giant, Simple, says higher taxes will only boost the illicit market.

“If you start to think about how to collect more money from excise, it’s a really different story because in this case the solution is to decrease the excise, not to increase. Because all the statistics shows that after every increase of excise, the illegal market grows.”

Experts say excise duties are a useful tool for boosting government revenues in smaller European countries, but Russians won’t ever be able to drink and smoke enough to cover the huge shortfalls in falling oil and gas earnings.