There is lack of political will. Why Ukraine continues to lose tens of billions of hryvnias due to illicit tobacco
Why Ukraine continues to lose tens of billions of hryvnias due to illicit tobacco
Whilst MPs are taxing everything they can get their hands on, the long-suffering Ukrainian budget – which has been in chronic deficit since the start of Russia’s full-scale invasion – continues to lose billions of hryvnias due to the black market in cigarettes. And that’s not to mention vapes, 93 per cent of which are illegal.
A unique situation has arisen in Ukraine regarding ‘black’ tobacco – everyone knows about it and is trying to tackle it, but it does not have much of an impact on the market or, more importantly, on revenue for the state budget.
Experts estimate that budget losses resulting from the black market trade in cigarettes amount to at least 28 billion hryvnia a year. This is twice as much as the expected impact of abolishing the tax exemption on international parcels worth up to 150 euros.
Vapes cost the state coffers a further 10 billion UAH a year, says Artem Konik, CEO of Philip Morris Ukraine.
In other words, nearly $1 billion goes up in smoke every year, instead of being channelled into the Defence Forces or social programmes.
Overall, Philip Morris International (PMI) states that no systematic efforts are being made to eliminate the black market, primarily due to a lack of political will at the highest levels of government. In other words, as soon as international donors turn their attention to the problem, they begin to chip away at the tobacco hydra’s head, bit by bit. Without a systematic and consistent approach, it is more like tilting at windmills.
No, there are certainly attempts, but that’s not enough.
One example is the tobacco factory in the village of Hoscha in the Rivne region. After the president grew tired of being put on the spot by international partners – in particular, G7 ambassadors and representatives of the American Chamber of Commerce, who insisted that counterfeit tobacco was a huge problem – the factory had its licence revoked.
"The size of the legal market began to grow at that time, almost for the first time in history," Maksym Barabash, Vice-President of Philip Morris International, told BusinessCensor.
Incidentally, this is yet another unique feature of the black market for cigarettes in Ukraine – they are manufactured at fully licensed factories. By day, they produce legal goods, but by night, ‘the mafia comes out to play’.
The ‘garages’ typical of Europe are not a Ukrainian phenomenon. Even if enterprising businessmen were to set them up, they wouldn’t last long, as competition here is cut and dried – in the style of the turbulent 1990s. This is hardly surprising, given that millions of dollars in ‘profits’ are at stake – in some cases, more than the legal industry as a whole earns.
So what should be done? In their usual manner, lawmakers are proposing to pass new laws that will increase the penalties for the manufacture and sale of illegal tobacco products. However, according to Maksym Barabash, the current legislation is entirely sufficient. It simply needs to be strictly enforced.
Any ‘tightening of the screws’ hits legitimate producers hardest. There are already enough restrictions on the market – from the advance payment of excise duties to round-the-clock CCTV surveillance in production halls. Those operating in the ‘shadow economy’ have not complied with these regulations and will not do so in future. So, once again, it is the ‘legitimate’ businesses that will bear the brunt.
However, in all fairness, it should be noted that the growth of the illicit share of the tobacco market is a pan-European problem, as confirmed by the statistics.
France – the queen of the black market
In early June, the international audit firm KPMG presented its 20th anniversary report in Brussels on the use of illicit cigarettes, heated tobacco products (HTPs) and oral nicotine products (such as pouches or snus), based on data from 2025.
According to the report, the consumption of illegal cigarettes – both counterfeit and smuggled – on European markets led to a loss of around 22.4 billion euros in tax revenue in the form of excise duty and VAT last year. Compared with 2024, this figure rose by 3 billion euros, representing an increase of just over 15 per cent.
Western Europe, specifically France (41.4%), Belgium (24.8%) and the Netherlands (22.1%), has the highest rates of illicit consumption. In France alone, the volume of counterfeit cigarettes reached around 10 billion.
"France remains Europe’s largest illicit market, accounting for 41.4 per cent (20.5 billion cigarettes). Counterfeit cigarettes alone accounted for almost 9.7 billion cigarettes (around 19 per cent of total consumption). France recorded the highest growth in illicit cigarette consumption in Europe in 2025," the report states.
Overall, the highest proportion of illicit tobacco consumption was recorded in seven markets – France (41%), Ireland (35%), the United Kingdom (32%), Belgium (25%), Cyprus (24%), the Netherlands (22%) and Lithuania (21%).
"Counterfeit cigarettes have become the main driver of the illicit cigarette market in the EU, supported by criminal supply chains designed to deliver counterfeit products to consumers in high-profit markets, which undermines the European economy and fuels wider illicit activities", explained Christos Harpantidis, Director of Corporate Affairs at Philip Morris International.
Incidentally, Lithuania is plagued by tobacco smuggling from Russia and Belarus. Smugglers use drones and hot-air balloons to deliver illegal goods into the EU.
Last year, Ukraine showed an improvement in the consumption of illicit tobacco amongst the 38 countries surveyed – 27 European Union member states, as well as Albania, Bosnia and Herzegovina, the United Kingdom, Kosovo, Moldova, Norway, North Macedonia, Serbia, Montenegro, Switzerland, and Ukraine itself.
According to estimates by KPMG analysts, the share of the illicit tobacco market in Ukraine stood at 15.9 per cent, with a total volume of 5.1 billion cigarettes. Compared with 2024, the figure fell by 1 billion cigarettes, which, according to experts, is remarkable given the extremely challenging operational and security environment.
However, despite this positive trend, Ukraine has become one of the top three countries in Europe in terms of the volume of counterfeit tobacco brands, behind France and the United Kingdom.
Furthermore, according to BusinessCensor, the black market for tobacco in Ukraine is showing an upward trend this year. And based on the figures for 2026, our country risks finding itself in second place once again in terms of the size of the illegal market.
Moldova, which has long suffered from the problem of illicit tobacco, particularly due to the Transnistria factor, could serve as an example for Ukraine. However, as Artem Konik, director of Philip Morris Ukraine, says, Moldova must not only pass the necessary laws but also demonstrate the political will to enforce them.
According to a KPMG report, the black market for tobacco in Moldova is currently estimated at 6.5 per cent.
What about the drains?
The situation with e-cigarettes is currently much better than that with cigarettes. For the second year running, the KPMG study has covered this product category and has so far not recorded any changes regarding counterfeiting – there simply isn’t any.
As Maksym Barabash, Vice-President of Philip Morris International, explained to BusinessCensor, this is because, firstly, there are no freely available machines capable of manufacturing heat-not-burn sticks, and secondly, the induction heating technology used to produce them is quite complex and protected by patents held exclusively by Philip Morris.
Smuggling is the main driver of the illicit consumption of heated tobacco products. According to a KPMG report, it accounted for 1.2 per cent of total consumption of heated tobacco products. Germany, Austria and the Netherlands were among the countries most affected by the smuggling of these products.
"The presence of contraband highlights that, although the scale remains limited, no category of product is immune to illegal trade," KPMG emphasises.
To tackle the black market, we need to address the root cause
According to Philip Morris, the key to success in combating the shadow economy lies in political will and the systematic elimination of the causes behind the existence of the illegal market. Each law enforcement agency – the police, the Economic Security Bureau, the tax authorities, and customs – must carry out its duties conscientiously.
First and foremost, customs, as counterfeit cigarettes require raw materials that are imported from abroad. This applies not only to the tobacco itself, but also, for example, to filter rods, which are not manufactured in Ukraine at all. Unknown companies import quantities of filters into the country comparable to those of Philip Morris itself.
In an interview with Censor.NET, the Head of the State Customs Service, Orest Mandzii, recently drew attention to an interesting trend. According to him, between January and April 2026, customs duties on imports of cigarettes and cigarillos fell by almost 2.2 billion hryvnias – in other words, there was a sharp drop in imports of finished tobacco products into Ukraine’s customs territory.
"If we look at imports of raw materials into Ukraine’s customs territory, we can see a trend whereby the volume of raw tobacco has increased 1.7-fold. It is difficult for me to say to what extent production is growing within Ukraine. But the patterns here are quite worrying," emphasised Mandzii.
Investigative journalist Yevhen Plinskyi previously reported that customs authorities had taken an interest in the activities of ‘Lux-Trade Kommerz’ Ltd, which imports significant quantities of Indian tobacco from Bulgaria, but it is not known what happens to this tobacco afterwards. According to the journalist, monthly imports amount to 22,000 kg – that is two lorries. This quantity of tobacco is enough to produce 35 million cigarettes.
Orest Mandzii clarified that, following an analysis of the tax records of certain importers, it had become apparent that, despite receiving tax breaks amounting to billions, neither the manufacture of finished tobacco products nor their subsequent sale to companies resident in Ukraine was taking place.
"There is a situation where these surplus goods are stored up, reaching grotesque proportions, and the State Customs Service has no idea what happens to them afterwards," he noted.
At the same time, according to Mandzii, all such raw materials are imported into Ukraine legally. This is because they are imported duty-free, so there is "no point" in importing them illegally.
"When it comes to tax exemptions on defence-related goods, this is an objective necessity. Tax exemptions on goods for the restoration and repair of energy infrastructure are also needed. However, I cannot understand why, in the context of the war, we should grant tax exemptions on tobacco imports," said Orest Mandzii.
According to him, last year tax concessions on excise goods (tobacco) were granted to the tune of 62.7 billion hryvnias to support the production of tobacco products in Ukraine.
According to Maksym Barabash, law enforcement agencies should be working together. For example, customs should notify the tax authorities that a huge consignment of tobacco has entered the country. The tax authorities should then check what happens to this tobacco next. However, there is no such cooperation, and the illegal market continues to thrive, costing the state budget tens of billions of hryvnias.
