Interview of General Manager Ales Strumisky on price wars in the tobacco market

16.01.2016

Ukraine continues to reap the bitter fruits of back-room bidding that accompanied the adoption of amendments to the Tax Code and the State Budget 2016. The scandal with the amendment which endangered the visa-free regime with the EU had barely abated but a new one came on the scene. Also related to European integration. This one also has the back-room games behind it. Core of the problem: they got the provision into the Tax Code that violates our country's obligations under the Agreement on the EU-Ukraine Association. This is about the minimum prices for tobacco products.

We asked Mr. Ales Struminsky, Director General of Imperial Tobacco Ukraine, to comment on the looming conflict:

 - The minimum tobacco prices are a test of how serious Ukraine is in fulfilling its obligations under the European integration. The fact is that such prices are banned in the EU by a variety of European Court rulings. They kill competition in the market and lead to its monopolization. The introduction of minimum prices is contrary to the EU Directive No. 64 on the regulation of the tobacco market. Ukraine undertook to introduce the relevant provisions of this Directive by November 1, 2016.

- But instead of the EU Directive provisions something direct contrary came to be in the Tax Code...

- Not only EU legislation is violated, but also to the national legislation of Ukraine: laws on prices and pricing, protection of economic competition, the Commercial Code. And this gives full play to corruption! Because minimum prices would be determined by the official who can be “inclined for cooperation” in making decisions...

Minimum prices, with the support of some deputies and state officials, are being promoted by our competitors. In this way, they intend to share out the market. The business model of our company allows us to manufacture products cheaper than others do. Why should our competitors, getting the state do their dirty work, punish us for business efficiency, making it impossible to set prices independently and forcing to artificially overprice?

Following this logic, low-cost airlines should be banned or minimum prices for cars should be introduced. By setting a minimum price of 50 thousand dollars you would hardly make all the population switch to Mercedes...

- The Fiscal Service considers that this way the state budget will be filled in.

- Public revenues from the tobacco market should be regulated by excise policy but not by administrative methods. Excise duties should be increased to get more public revenues. This is only possible, the European path. But even here the government does not work properly. As a result of explicit lobbying efforts of our competitors, Verkhovna Rada did not support the proposal of the Ministry of Finance to increase the ad valorem component of excise duty for tobacco. And the result of their vote has deprived the state budget of hundreds of millions UAH, no matter how the deputies would justify their actions.

- But how could the anti-European amendment on minimum prices get support from the pro-European coalition in the Parliament?

- I, the EU citizen, was shocked by the way in which this provision was got into. This immediately recalled of the dark days before the Revolution of Dignity. I work in the tobacco industry for 14 years, I was engaged in the business in ten countries, but I've never seen such a lawlessness. The Tax Committee of the Verkhovna Rada haven't made any decisions on minimum prices. But before the vote, the deputies were presented the proposal as the Committee's decision. The Chief Scientific and Expert Department of the Parliament did not make a legal assessment of the situation.

At an incredibly high speed the draft Resolution of the Cabinet of Ministers on the introduction of minimum prices was tabled by the State Fiscal Service of Ukraine at the Cabinet meeting on December 30, although the law binding the Cabinet of Ministers to introduce minimum prices was officially published only a day later. The draft Resolution on minimum prices has not gone through the expert examination of a single state body!

By the way, on the dark times. In December 2013, the Parliament, with a “criminal” majority of Yanukovych rejected the introduction of minimum prices for cigarettes. And there have been neither the Association Agreement, nor the democratic coalition in place...

- But is there is any way back to the European standards?

- Everyone has heard about the scandal with the amendment to the Law on the state budget which can deprive Ukraine of visa-free regime. The government has already promised to come up with a legislative initiative to abolish the amendment. The situation with minimum prices is similar. The Prime Minister scheduled to meet with the tobacco industry to discuss the problem. At the meeting, we will demand that the Cabinet of Ministers do not enact the illegal Resolution and introduced a draft law on the abolition of the minimum prices.

If this is not done, we will challenge the decision of the Cabinet in Ukrainian and international courts. We will resort the EU Delegation in Ukraine, Embassy of the United Kingdom and the United States, the Mission of the IMF and other international institutions. Investors' community will receive comprehensive information about the features of the investment climate in the country. And we will ask the National Anti-Corruption Bureau to verify whose interests are behind the illegal initiatives.

Imperial Tobacco is one of the largest taxpayers in Ukraine. Last year, we paid more than 6 billion UAH of taxes. And do insist that our legitimate demands are heard by Ukrainian authorities.