Rise in alcohol excises threatens to flood the market with counterfeit

Is there point in replenishing the budget this way?

Minimum consumer prices for hard drinks in Russia from January. A draft of the Ministry of Finance’s order has been published on the federal website of regulations. The first rise in consumer prices in the last two years was on 1 January 2020, the second was in early 2021. Over this time, prices for vodka rose from 215 to 230 rubles, cognac did from 388 to 420 rubles. The finance ministry’s order at the beginning of the year envisaged the conservation of fixed prices till the end of 2026. But as we see, the decision changed, the government of the country is driven by several goals — a fight against alcoholism in the population and additional replenishment of the budget due to higher excises, notes Realnoe Vremya’s columnist Artur Safiulin. The economist with long-term banking experience explains what it can lead to and what reactions the upcoming increase of prices caused among alcohol market players.

What is offered?

The minimum price for vodka will rise by 7,4% to 261 rubles per 0,5 litre, the cost of cognac will increase by 7,6%, to 480 rubles for the same volume. Other alcohol will also become expensive — brandy and other distilled products will go up by 7,4%, to 348 rubles per 0,5 litre, while alcohol above 28 degrees will by 7,3%, to 205-372 rubles per 0,5 litre. These are retail prices, VAT and excise included.

A law on new alcohol excise rates was adopted in the spring of 2021. From January 2022, the excise will grow by 4%. The other growth in consumer prices is conditioned by inflation, pricier feedstock. Wheat in particular has risen by 50% over the year, the cost of wooden pallets (products are supplied on) has become 200% more expensive.

Some experts think that producers would have to work at a loss without the rise in prices, and minimum consumer prices are just bringing manufacturers’ expenses to conformity. However, statistically, alcohol has risen by 2,25% since early 2021. This is much lower than the growth pace of consumer goods, which was 8,13%.

Consequences and reaction of market players

On the one hand, producers are happy because the rise in the prime cost has to be somehow compensated. On the other hand, they aren’t enthusiastic, frozen excises for 2-3 years would be the best solution for them. The increase will bring to a bigger amount of supplies from the Eurasian Economic Union, manufacturers are afraid of dishonest competition.

A lot of specialists think the production ramp-up of counterfeit alcohol is the main risk. The illegal turnover will soar due to the higher excise and consumer vodka price. Moreover, since our excise is much higher than in countries of the Eurasian Economic Union (EAEU), supplies from these countries are augmenting, both officially and unofficially. Kyrgyzstan in particular has five times fewer excises, Belarus has 20% fewer, Kazakhstan does 50%. The Russian market is becoming a kind of El Dorado for all kinds of businesspeople. Some experts think the rise in minimum consumer price an initiative of the Ministry of Health Care, which sees only legal sales. But it doesn’t see that people switch to counterfeit alcohol and don’t drink less. The initiative seems to be good, but the nuances of our mentality impose restrictions: the number of deaths of people who consume uninspected alcohol rises. The most interesting thing is that from 2015 to 2018 when the growth of excises was frozen, payments made to the budget increased, while the share of illegal alcohol in the market fell. Is it a coincidence? Unlikely.

On the other hand, it is thought that the higher consumer price doesn’t cause a real growth of retail prices but is indicative for businesses and inspectors. If products are sold cheaper than the established level, it means they are illegal.

The Federation Council’s specialised Committee for Budget and Financial Markets offered the Finance Ministry to fix the excise rate to reduce the growth pace of alcohol prices and start to harmonise the rates in the EAEU. As for other proposals of the Ministry of Finance, the Federation Council will back the ministry up. We are talking about changes in the alcohol market. It is offered to issue licences on retail sale to sole traders and introduce state regulation of moonshine still production and turnover, even ban the open sale of equipment.

The growth of moonshine production in Russia will amount to 20% this year. Is not this a result of the third rise in the last two years? In nine months this year, more than 700 illegal factories have been closed. Bootlegging blossoms in garages, industrial zones — fake hard drinks are produced there to the full. It is a very dangerous tendency, we must say. The number of search requests about the purchase of moonshine stills in 2020 increased by 30% than in 2019. All this happens amid a reduction in the number of shops that have a licence to sell alcohol in retail stores from 2012 to 2017 (from 305,000 to 215,000 stores). It turns out that 45% of 160,000 rural settlements don’t have licensed stores. People have to drink moonshine or illegal alcohol.

It is considered that the rise in excises will not be cancelled, though the state has huge reserves to make an income — to keep records of beer production and turnover more effectively, cancel benefits on the excise on pseudo-medical goods, perfume (including those “potable lotions”).

Also, it is necessary to make the most of opportunities in the fight against illegal alcohol production. The illegal turnover of original glass containers, labels, closures of the most famous brands isn’t prosecuted in Russia. Flavourings used to imitate renowned cognacs and whiskey are on sale. Flavoured methanol can also lead to tragic deaths.

The current hard alcohol production regulation is a big problem for small manufacturers. 10 litres of products are made from a cubic metre of feedstock, which can be sold only legally, while the licence costs 10 million rubles. The answer to the question if such a manufacturer will obtain a licence is simple, no. Perhaps, we should have a look at the experience of other countries when it comes to the permit to sell individually produced alcohol.

We run the risk of seeing counterfeit production rising

In conclusion, I would like to note that the authorities, first of all, see the excise hike as an opportunity to fight the population’s alcoholism. The additional budget income isn’t big: alcohol, including all excises and VAT, account for just 1% of the country’s budget incomes. Moreover, the budget is now balanced, the National Wealth Fund became strong enough. There is no urgent need to look for sources of additional income.

Moreover, as it has already been said above, we run the risk of seeing counterfeit production and supplies of illegal products from EAEU countries rising, including fakes. As for the ban on the use of moonshine stills, it is very hard to just physically regulate such equipment. There is an opinion that the smallest threshold for control must be 30-50 litres. But if the maximum capacity of the equipment allows making thousands of litres, the production needs to be authorised and licensed. Perhaps, the duty should reduce to legalise small-scale production. People say if you cannot win, lead them for a reason.

Artur Safiulin

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The author’s opinion does not necessarily coincide with the position of Realnoe Vremya’s editorial board