At the end of last week, enforcers halted the United Tobacco factory in Zhovti Vody (Dnipropetrovsk Oblast) that was considered one of the largest producers of counterfeit tobacco goods in Ukraine.
According to Danylo Hetmantsev, Сhairman of the parliamentary Committee on Finances, Tax and Customs Policy, the factory since 2015 "has been flooding the market with excise-free tobacco with the tacit consent of all law enforcement officers who were blind to the work of the powerful enterprise." In fact, the enterprise in Zhovti Vody has been operating semi-legally for at least 10 years and was considered an untouchable reality of Ukraine's tobacco market. Therefore, its liquidation is an event for the industry that can be compared to the nationalisation of PrivatBank for the banking sector or Ukrnafta for the energy one.
Mind explains what the liquidation of the largest "illegal" means for the tobacco market, and why it will benefit not only the state.
What happened? The wording "ceased to exist" in relation to the factory in Zhovti Vody implies the dismantling of equipment – both installed and imported for further use. We are talking about seven ultramodern cigarette production lines and two more that were imported to Ukraine but not installed – now the latter ones are wanted for seizure.
Previously there were two months of searches by the SBU officers in Dnipropetrovsk Oblast and several unsuccessful attempts of the very operation; it was disrupted every time, including by the use of force.
How did the operation unfold? The active phase of the operation began in late August 2022, when the security forces requested a search for technical specialists who had expertise in working with complex electronic equipment and would be able to dismantle it.
The first group of contractors arrived in Zhovti Vody on 29 August 2022 to assess the scope of work. When they were returning back, their car was stopped by unknown SUVs a few kilometres from the enterprise, and the specialists were assaulted. After that, further visits were supported by the SBU.
The second group of contractor representatives arrived at the factory the next day. They encountered about 300 employees of the enterprise who protested and prevented their access, "defending their right to work". They were able to get inside only a day later – accompanied by the SBU Alpha special force.
The factory's legal protection was provided by seven lawyers who managed to get one of the two specialists rejected, arguing that he had participated in previous investigative actions at this enterprise in 2021, when these actions were conducted by the State Fiscal Service.
One of the experts, who remained under tremendous pressure, dismantled 15 electronic control units in three working days, without means of production – nearly with his bare hands. During one night, control units disappeared from two other lines.
The third attempt to dismantle was carried out by a group of five specialists, wiring electricians, from 5 am to 1 am on October 1, 2022, in near combat conditions. They were blocked by the protesters, threatened, and they were pursued by unknown persons during evacuation to another city.
The protests of the factory workers continued in November – journalists of the Priamy TV channel who recorded them in the course of their work on the story, were also attacked.
Finally, by November 11, all the equipment was dismantled. Where it is located now is not reported, probably for security reasons.
What is the position of the plant representatives? Several criminal proceedings allowing searches in Zhovti Vody were opened against the distributor Trading House United Tobacco, and the Chervonogvardiysk District Court of Dnipro authorised the search.
At the same time, according to the company's lawyers, the address searched belonged to the manufacturer – United Tabaco that has other details of the factory and is engaged not in distribution, but in the actual production of tobacco products.
"There are no concrete accusations against us. The legal grounds for their being here are unknown. All this looks like complete arbitrariness on the part of law enforcement agencies," the media quoted Vyacheslav Vershut, Director of the United Tobacco, as saying.
Who was "covering up" this business? The enforcers. At least, according to Danylo Hetmantsev, it was the selective "blindness" of law enforcement agencies that provided the company with a trouble-free existence.
This is also indicated by the events of the last two months. That, in particular, it was proposed to involve the National Police from cities other than Zhovti Vody to unblock the enterprise.
How much did the budget receive less? According to the experts of the Parliamentary Committee on Finance, Taxation and Customs Policy, as a result of the work of the enterprise, the state budget was underpaid more than UAH 5 billion of excise tax. The total estimated losses are more than UAH 7 billion for 2022.
Now every fifth pack of cigarettes sold in Ukraine is illegal. It is worth noting that tax savings are beneficial not only to the manufacturer but also to consumers, as the output of excise-free cigarettes is 20-30 UAH cheaper than legal ones.
According to the State Statistics Service, the price of a pack of medium-class cigarettes increased from UAH 59 in January to UAH 67.5 in September during 2022. At the same time, the cost of a similar package on the illegal market is UAH 30-40 or even cheaper when buying online.
What are the losses for legal market players? According to Kantar, the share of illegal products in the tobacco market of Ukraine in 2020–2022 almost quadrupled to 21.9%. The total annual budget losses of Ukraine (excise tax, retail excise tax, VAT) from the consumption of illegal cigarettes are estimated at UAH 20.7 billion.
According to preliminary estimates, as of August 2022, about 8% of the cigarette market in Ukraine are illegal tobacco products (with or without counterfeit trademark) with the plant's in Zhovti Vody branding.
Does the shutdown of the plant in Zhovti Vody mean that the illegal cigarette market in Ukraine has been eliminated? No, it does not. The plant in Zhovti Vody was the largest, but not the only player in the shadow tobacco market.
Thus, according to the SFS, similar suspicions exist in relation to enterprises in Lviv Oblast.
There are three versions of the reason for this: conspiracy, political and economic. As large an event as the shutdown of the "perpetual" factory in Zhovti Vody has given rise to several basic versions of what happened. Mind cites the main ones, while emphasising that we support only one of them, the last one.
Conspiracy. The company was driven from the market in order to "clear" it for an equally illegal competitor.
Political. The company was controlled by a disgraced businessman, and the attack on his asset was a part of the political struggle.
Economic. The difficult situation with enriching the state budget forced the authorities to conduct a real, not a sham campaign to allocate the market. In 2021, tobacco excise brought UAH 51.3 billion to the budget (from cigarettes produced in Ukraine). This is 28.5% of excise tax revenues in total.