Kazakhstan continues to struggle with a growing shadow market for cigarettes, which in 2023 alone grew one and a half times to 9.5% of the total tobacco market. According to experts, Kyrgyzstan is one of the most popular smuggling routes.

According to Nielsen research agency, the volume of the shadow cigarette market in Kazakhstan grows annually, and in 2023 the share of smuggling increased one and a half times. According to experts, this phenomenon has a negative impact on the country's budget, which is short of significant amounts of excise taxes.

In an interview with Dmitry Zhukov, Executive Director of the Kazakhstan Association of Producers and Importers of Alcoholic and Nicotine Containing Products QazSpirits, we discussed the reasons for the growth of smuggling, its impact on the economy, and possible measures to reduce the shadow cigarette market.

A punch to the state budget and an increase in crime

— Dmitry, please tell us, what is the latest data on the volume of the shadow cigarette market in Kazakhstan? How does it affect the country's budget?

— According to Nielsen, the volume of the shadow market is increasing annually and last year it exceeded 9% of the total number of cigarettes sold. Some areas of the country also report a much higher share of illegal cigarettes: about 10%. This has a negative impact on the country's budget. Of the nearly 400 billion tenge (about $900 million) in excise taxes, associated VAT and indirect taxes (salaries, taxes) collected in 2023, the state has under-received more than 32 billion tenge (almost $66 million), which goes to the black market. Worse, it creates organized crime and corruption, which is then very difficult to get out.

At the mercy of populists

— According to the NielsenIQ report, there was an increase in the share of smuggled products in Kazakhstan in 2023. In your opinion, what is the reason for this?

— The growth of contraband sales in 2023 was almost one and a half times - from 6.4% to 9.5%. Yes, this is a low base start - earlier there was almost no cigarette smuggling in Kazakhstan. But once established, the market for illegal cigarettes almost doubles every year. The reason, as it often happens, is that regulators do not want to understand the economic realities and go along with populists or international organizations pursuing their own goals. At the same time, all less harmful alternatives are “extinguished”: for example, vape devices and nicotine-containing packets were banned to please WHO. Fighting objective economic laws is like fighting gravity, roughly. It requires constant effort, and eventually you'll either collapse to the ground or float off into space. Be that as it may, this situation cannot be stable.

— Where do the main smuggling flows into Kazakhstan come from?

— As far as we know, the main flows now come through the Chinese and Kyrgyz borders with Kazakhstan. However, this may change depending on where it is more convenient for smugglers to circumvent the laws at the moment. You have to take into account corruption, the technical equipment of the checkpoints, and many other factors. And with the ban on vape devices, we will soon have homemade products of our own production without any smuggling.

— What measures should be taken first of all to reduce cigarette smuggling in Kazakhstan?

— First of all, it is necessary to make a decision that the excise policy with regard to nicotine-containing products is based on a scientific basis, not on hysterical cries of populists and people with a dubious agenda. The rest will follow.

On the pros of a balanced excise policy for the EAEU

— How will the reduction of smuggling affect the domestic market in particular and the country's economy in general?

— The reduction of smuggling should be a consequence of the step I described above. And this in turn will lead to the following positive consequences:

• Increased excise revenues to the budget.
• A controlled market for the consumption of nicotine-containing products, which can be led towards harm reduction and reduced smoking.
• Decrease in the level of organized crime and its corresponding risks for the country.
• Increased investment of companies in the market of nicotine-containing products: from manufacturers to small businesses — sellers.

— How to fight illegal cigarettes in the economic space — what measures do you consider effective and promising for the EAEU countries?

— Measures should be comprehensive. As I said above, there should be a balanced excise policy on a scientific basis. Even the base of calculation based on the euro today causes surprise: where is the euro and where is the EAEU? There should be constructive work on technical regulation. Today, meetings to discuss technical regulations resemble a bad circus: employees of the Health Ministries of the Union countries voice the political agenda of WHO regardless of the subject of discussion, as if they get bonus points for it. It is surprising to see how market participants, companies producing nicotine-containing products, have a more responsible and long-term position than those who are supposed to take care of our health.