On December 16, 2016, after a 14-month investigation, the AMCU officially announced the existence of a monopoly on the Ukrainian tobacco market in the person of the company TEDIS Ukraine, and issued the company an astronomical fine of almost 430 million hryvnias, reports the publicationGrushevsky, 5″.
This little-known but highly influential company, with an annual turnover of approximately 40 billion hryvnias, plays a key role in the entire tobacco industry, and its shareholders appear to have influence over the parliament, which has already been renewed after the revolution, suggesting to deputies the "correct" decisions regarding taxation of the entire tobacco industry.
Thanks to strong post-Maidan patrons, the tobacco monopoly, created during the turbulent "family" times, was able not only to survive the change of power and patriotic attacks on the presence of Russian arms barons among the company's shareholders, but also to annually increase its revenues, strengthening its position and influence in the market.
The AMCU's decision was the first sign of a possible redistribution of the tobacco distribution market, which occurred against the backdrop of a weakening position for TEDIS's political backers.
Who's in the tobacco field?
Ukraine was one of the world's heaviest smoking countries. For example, in 2006, it ranked sixth in the world for smoking prevalence. The explanation for such widespread tobacco use is quite simple.
In the first years of independence, this country of 52 million people in central Europe, following the collapse of the USSR, exposed its free markets to foreign tobacco companies. The Soviet tobacco legacy was insignificant compared to Western giants, their high-quality products, production technologies, and, most importantly, marketing.
Today, Ukraine is home to a collection of global tobacco giants, also known as the "Fab Four." These include Philip Morris International, Japan Tobacco International, and British American Tobacco, all three of which have been operating in Ukraine since approximately 1993. The fourth, Imperial Tobacco, has formally been present in Ukraine since 2002, but in reality, it simply acquired the German corporation Reemstma, which purchased the Kyiv and Cherkasy tobacco factories in 1994.
Controlling 99% of the Ukrainian cigarette market, this "Fab Four" produced approximately 93 billion cigarettes in 2015, 24 billion of which were legally exported to Japan, Georgia, Moldova, and other countries. Including imports, 75 billion cigarettes were sold in Ukraine in 2015.
At the peak of smoking popularity in 2007-2008, production was around 130 billion cigarettes, and sales were 125 billion cigarettes, which generated colossal profits for the tobacco industry.
Price issue
The tobacco market's size is truly impressive; in 2016 alone, it amounted to approximately 50 billion hryvnias, and the State Fiscal Service annually reports that tobacco companies are the leaders in tax contributions to the budget.
On the one hand, this is true: formally, all tobacco companies are annually among the top twelve largest taxpayers in Ukraine. On the other hand, this is not entirely true: the main tax on cigarettes—the excise tax—is paid not by tobacco companies, but by smokers. Tobacco companies simply pay the excise tax when a pack leaves the factory, then factor the excise tax into the price of the cigarettes and recoup it from the consumer's pocket.
Thus, in 2015, the State Fiscal Service collected 22,2 billion hryvnias in excise taxes from tobacco companies, which in turn collected the same from cigarette buyers. Therefore, the loud claims of cigarette manufacturers about paying colossal sums into the budget are manipulative.
The only thing that tobacco producers actually pay is income tax.
But it turns out that the country's "largest taxpayers" are good at optimizing their taxes. You'll be surprised, but two out of four factories operating in this field are unprofitable.
Thus, PJSC Imperial Tobacco Production Ukraine incurred a net loss of UAH 718,81 million in 2015, which is 13,5% more than in 2014.
The tobacco factory "V.A.T.-Pryluky" (produced by British American Tobacco) declared an even larger loss in 2015 of UAH 1,291.676 million, which is 2,5 times more than in 2014. Philip Morris Ukraine declared a profit of UAH 5,44 million, a 137-fold decrease compared to 2014. And JT International Ukraine, a subsidiary of Japan Tobacco Inc., was the most profitable tobacco company in 2015, declaring UAH 1.06 billion in profit.
According to Konstantin Krasovsky, the tax optimization scheme is simple. Transnational tobacco companies have branches all over the world, and profits are channeled to the right branches by reselling raw materials and production supplies through their branches, artificially inflating their prices and siphoning off profits to the most profitable country in the world at the time—not Ukraine.
Who makes money then?
The colossal volumes of cigarettes sold by the "magnificent four" in Ukraine—approximately 75 billion pieces per year—have in recent years passed through the hands of a single company, TEDIS Ukraine, formerly known as Megapolis Ukraine until May 2016. Its annual turnover, essentially earned through cigarette speculation (buying and selling), amounts to approximately 40 billion hryvnias. TEDIS is the single tobacco distributor, bypassing which you cannot buy cigarettes from the factory, whether you're a giant like Auchan or a private entrepreneur from Vasylkiv.
As the AMCU told me, tobacco companies justify working with a single distributor by saying that TEDIS provides first-class distribution, guarantees proper storage conditions, and timely delivery of cigarettes to points of sale.
But while these claims may sound convincing in relation to small retail, the refusal to supply directly to giant chains like Fozi, Auchan, and Metro, which have logistical capabilities no worse than TEDIS, is difficult to explain.
While preparing materials about the tobacco industry, I tried to discuss TEDIS with both tobacco companies and large retail chains by sending them written inquiries, but they all refused to talk about it, citing commercial confidentiality.
Off-camera, cigarette retailers explained that the country's entire tobacco market is under TEDIS's control, and that any retail chain could risk both higher supply costs and a significant reduction in product volume by saying too much about it. Meanwhile, they have no one to complain to, nor are there any advocates among market players. What seems rather odd about this situation is that tobacco companies themselves refuse to enter into direct supply agreements with chains or other distributors.
Tobacco producers, declaring their massive failure to meet the high distribution requirements, which, incidentally, several dozen companies easily met before the appearance of Megapolis-Tedis in Ukraine.
TEDIS's monopoly position, as well as its price manipulation and regulation of supply volumes according to the "I'll give it to you, I won't give it to you, I'll give it to you, but less" scheme, were confirmed by a nearly one-and-a-half-year investigation by the Antimonopoly Committee of Ukraine, which concluded on December 16, 2016, with the following resolution:
- for the violation of the appearance of setting such prices for wholesale and retail traders, which would not have been possible to establish in the minds of meaningful competition, in the cigarette distribution market, a fine of the size of 429,306,740 UAH;
— for damage to the appearance of a private product during the sale of goods due to the availability of alternative devices for their performance, a fine of 1,892,710 UAH was imposed.
The main mystery remains: why did MEGAPOLIS-TEDIS suddenly become all-powerful, and why did all the world's leading tobacco companies voluntarily submit to it?
Why, while fighting for every penny of profit, did the "magnificent four" tobacco companies, even though they were partially unprofitable, voluntarily hand over all distribution to a monopolist, losing money and surely aware of price manipulation and manual restrictions on shipment volumes? Are tobacco companies really interested in the existence of such a market regulator, and if so, what issues does TEDIS address for tobacco companies that value their international reputation?
We will try to find the answer to this question in the company’s history and among its shareholders.
The History of a Monopolist
It's no coincidence that Tedis-Megapolis appeared in Ukraine. It's a subsidiary of Russia's tobacco monopoly, Megapolis, which, according to Forbes, is among the top 10 private companies in the Russian Federation, with annual revenues of $12 billion in 2015, for example.
The main shareholders of the Russian Megapolis are Kremlin oligarchs Igor Kesaev and Sergey Katsiev, who, in addition to the Megapolis Group, are co-owners of many assets, including the V.A. Degtyarev Arms Plant.
An interesting fact that may have contributed to Megapolis's strengthening position in Ukraine is that in 2013, Japan Tobacco Inc. (JTI) and Philip Morris International (PMI), two of the "Big Four" tobacco companies, became shareholders of Megapolis Group. They each purchased 20% of Megapolis' shares for $1.5 billion, thus entering the Russian distribution business.
Incidentally, it was on this date in 2013 that the Antimonopoly Committee of Ukraine (AMCU) established the beginning of Megapolis's monopoly and control of 99,43% of the Ukrainian cigarette market. Whether these tobacco shareholders exert influence over the Ukrainian Megapolis-Tedis, and if so, what influence, remains to be seen. All tobacco market participants ignored my requests for interviews.
But let's return to Ukraine.
Having monopolized the cigarette sales market in Russia, Megapolis entered the Ukrainian market in 2010. This coincided with the beginning of Viktor Yanukovych's presidency.
The initial acquisition by Messrs. Kesayev and Katsiev was the company "Podillya Tyutyun," which at the time held approximately 20% of the cigarette distribution share in Ukraine. Its co-owners at the time, Andriy Yarema and Serhiy Lavrenyuk, became shareholders of Megapolis-Ukraine.
After purchasing the "core" of the future monopolist, following a well-established Russian scenario, Megapolis bought up the main tobacco distributors, thus forming a monopoly on cigarette distribution in Ukraine.
From Yanukovych's "family" (without whose personal approval such an enterprise could not have been established in principle), Odessa businessman Boris Kaufman and, according to some information published on the Internet, Kaufman's business partner, businessman Alexander Granovsky, became shareholders of Megapolis-Ukraine.
Boris Kaufman - Alexander Granovsky
It is believed that the close relationship between Boris Kaufman and former head of the Presidential Administration Boris Lozhkin (former head of the Presidential Administration Lozhkin once sold Focus magazine to Kaufman) ensured the stability of Megapolis's work after the Maidan.
Businessman Boris Kaufman was even spotted by Radio Liberty journalists making nightly visits to the Presidential Administration to resolve his issues—who knows what kind?
The only thing that dealt a blow to the company's reputation was the wave of anti-Russian blockade.
As a representative of a Russian business whose shareholders are involved in the Russian military-industrial complex, Megapolis' warehouses and offices across Ukraine were blocked by activists. However, Megapolis emerged from this predicament with minimal losses. The monopolis publicly disavowed the Russians, stating that Megapolis-Ukraine has no connection whatsoever with the Russian Megapolis Group.
On this matter, the head of Megapolis-Ukraine, Ivan Bey, even gave an extensive interview to liga.net.
Here's an excerpt: "Our position regarding the ownership structure has already been stated in official press releases. The company's ultimate controlling beneficiaries are citizens of Ukraine, Ireland, and the United Kingdom.
— So, there is nothing in common between the Russian Megapolis and the Megapolis-Ukraine today?
- Нет.
— When did the Russian capital exit? After all, everyone knows that Megapolis-Ukraine was created by Russians.
"According to the information I have, all structural changes were completed in 2015, but they began back in 2013. The structuring process took quite a while."
To close the deal, Megapolis Ukraine was even restructured into TEDIS Ukraine in May 2016. But a document that came into my possession appears to undermine Mr. Bey's entire theory and casts doubt on the Russian capital's exit from Megapolis Ukraine.
I cannot judge the veracity of this document, but based on what is written, in 2015, it was not the Russian shareholders who left the Ukrainian Megapolis, but rather the Ukrainians Sergey Lavrenyuk and Vitaliy Yarema who apparently sold their stake in the Cypriot offshore Megapolis Holdings (Overseas) Limited to the remaining shareholders, Messrs. Katsiev, Kesaev, Kaufman, and Granovsky.
The deal price is impressive: $105 million.
According to the written information, the payment for this agreement has been ongoing since 2015 and will only be completed by 2018. Therefore, it appears the shareholder composition has not changed since Megapolis's formation. Incidentally, the companies mentioned in this agreement, MEGAPOLIS HOLDINGS (OVERSIZ) LIMITED and MEGAPOLIS UKRAINE INVESTMENT LIMITED, are now the official founders of TEDIS Ukraine.
Interestingly, in September 2016, the Russian company Megapolis was added to the National Security and Defense Council's updated sanctions list. Number 113, an unfortunate number for tobacco companies, turned out to be the one.
This may have been due to the involvement of Megapolis Group shareholders Igor Kesayev and Sergey Katsiev in supplying the Russian army and possibly supplying their products to the "Donbas miners." After all, in addition to the tobacco monopoly, as I mentioned above, they are co-owners of the V.A. Degtyarev Arms Plant, which was planned to become the first private military-industrial concern in Russia, Degtyarev.
It's not yet clear whether the sanctions imposed on Russia's Megapolis will in any way affect Ukraine's Megapolis-Tedis.
It's an interesting coincidence that all of TEDIS's problems with the authorities began immediately after the resignation of Boris Lozhkin, head of the Presidential Administration and close associate of Boris Kaufman.
So, a month after Lozhkin's resignation, in September 2016, the State Fiscal Service raided Tedis's offices and warehouses across Ukraine, accusing the monopolist of tax evasion.
As the Ukrainian Retail Association stated: "It's possible that the searches and seizure of documents at TEDIS-Ukraine are related to the State Fiscal Service's investigation into possible tax evasion by tobacco manufacturers. Specifically, in May of this year, the tax service reported claims against Philip Morris Ukraine totaling approximately 4 billion hryvnias." Journalists from the GOLOS.UA portal even included this event in the top 5 tax scandals of 2016.
Incidentally, according to the State Fiscal Service, Tedis Ukraine's tax debt as of January 1, 2017, was a whopping 483,364,250.00 UAH. However, the head of the State Fiscal Service, Roman Nasirov, who is currently tearing both TEDIS and tobacco companies apart, was less attentive to the lawlessness in the tobacco industry last year.
As reported online on the eve of the 2016 budget, Roman Nasirov, along with TEDIS co-owner Boris Kaufman, actively participated in tobacco lobbying, helping to push through parliament favorable changes to the tax code and block unfavorable ones for tobacco companies.
Excise War
Tobacco is a legal drug, the state justifies its availability on the open market with one argument: the budget makes a lot of money from it, collecting excise taxes on every pack of cigarettes, and it is quite obvious that it strives to collect more by raising the excise tax rate annually.
Thus, in 2016, after raising the specific excise tax rate by 40% and the ad valorem rate by 20%, 30,4 billion were collected in the first 11 months, 10,7 billion more than in the 11 months of 2015.
But for tobacco companies, raising excise taxes means a drop in sales and, consequently, profits, since higher excise taxes lead to higher prices, and the more expensive a product, the less it is consumed. Incidentally, raising excise taxes is also the most effective tool in the fight against smoking.
In our country, primarily due to the increase in excise taxes, cigarette sales fell from 125 billion in 2008 to 75 billion in 2015. Therefore, tobacco manufacturers are doing everything they can to stop the increase in excise taxes.
Judging from the online correspondence published, one of the main roles in tobacco lobbying appears to be played by one of the shareholders of Tedis-Megapolis, Boris Kaufman.
In the conversation that surfaced, a certain Kaufman and a certain Nasirov discussed parliament's adoption of tax code amendments favorable to tobacco companies. According to ANTIKOR, they helped organize the vote on tax code amendments favorable to tobacco companies:
a certain Lutsenko (a person with this surname headed the BPP faction in Parliament in December 2015),
a certain Yuzhanina (a person with this surname is listed as the head of the tax committee of the Verkhovna Rada)
a certain Maksim Kuryachy (a person with this name and surname is a deputy from the BPP and is listed as a member of the tax committee of the Verkhovna Rada)
Judging by the dates of the correspondence, the dialogue takes place on the eve of and during the process of adopting the 2016 budget.
While preparing materials on the tobacco topic, I asked for confirmation or denial of such conversations by sending inquiries to the namesakes involved, Megapolis-Tedis shareholder Boris Kaufman, and the head of the State Fiscal Service, Roman Nasirov.
Boris Kaufman ignored the request, but Roman Nasirov stated that he was unaware of the existence of such correspondence and that he had never had such conversations with Kaufman, although he did confirm his long-standing acquaintance with Boris Rafailovich.
Another person with the same last name as the person involved in the correspondence, the head of the tax committee, Nina Yuzhanina, also denied the facts of these events, telling us that she has no idea who Boris Kaufman is or what he does.
It's possible that such a dialogue never actually took place, but given that all the tax changes adopted by parliament in December 2015 are chronologically consistent with the processes described in the correspondence, were largely in favor of the tobacco industry, and also contradict the position of the Ministry of Finance, we believe it's reasonable to doubt the sincerity of the respondents' responses.
To resolve any questions regarding this correspondence, I sent a journalistic request to NABU asking them to verify its authenticity, but I have not yet received a response. However, I did receive the position of the Ministry of Finance, the initiator of the tax changes, on the adopted amendments to the tax code, which, as it turns out, directly contradict Ukraine's commitments to the EU.
Law of Ukraine dated December 24, 2015 No. 909 “On introducing changes to the Subsidiary Code of Ukraine and other legislative acts of Ukraine to ensure the balance of budgetary expenditures in 2016” The order is required to re-establish Minimum prices for Tyutun's products.
Nowadays, the introduction of minimum prices for Tyutun’s products will meet the international demands of Ukraine. Ukraine, it is expected that the EU Directive 2011/64/EC dated 21.06.2011 will be implemented before November 1, 2016. The Directive stipulates the right of manufacturers to independently set prices for their products
Oddly enough, the decisions put to a vote by the Parliament's Tax Committee contradict not only the position of the Ministry of Finance but also the country's European orientation. However, they are entirely in line with the wishes of the tobacco companies.
Selfless tobacco lobbying
After this, I'm unlikely to surprise you with the fact that the children of some Ukrainian officials involved in the tobacco industry's excise tax turmoil work both for the tobacco companies themselves and for the tobacco monopoly Tedis-Ukraine. For example, the son of the current Prosecutor General, Yuriy Lutsenko, whose namesake only yesterday allegedly was canvassing for votes to introduce a minimum price on cigarettes at the behest of a certain Kaufman, works for Tedis-Ukraine.
The daughter of Mikhail Kobtsev, head of the excise subcommittee of the Verkhovna Rada Tax Committee, which participates in determining and discussing tobacco excise tax rates, works for the tobacco company Philip Morris.
Ekaterina Ivanova, the daughter of longtime tax committee secretary Sergei Sholomitsky, worked first in the Ukrainian office of tobacco giant JTI, and now in the Swiss office. This was reported by the publication "Chetverta Vlada" (Fourth of Power).
So, it's hard to understand how and under whose quota Pavlo Baloha, a representative of the Transcarpathian "Balogh clan" and repeatedly suspected by the media of organizing cigarette smuggling into the EU, got onto the tax committee. After all, raising the excise tax rate directly impacts the reduction of the "smuggling margin."
Perhaps all these conflicts of interest lead to the Tax Committee of the Verkhovna Rada of Ukraine being more concerned with the interests of the tobacco industry than with the interests of the state, its revenues, and the health of the nation?
So, since May 2015, the Tax Committee has been slowing down the introduction of draft law No. 2820 into the Parliament “On introducing changes to the current laws of Ukraine to protect the health of the population from the unprofitable influx of money.”
In short, its main essence is as follows:
— prohibit tobacco companies from using flavorings and additives in cigarettes that are designed to attract young people.
— oblige manufacturers to report annually on the composition of cigarettes
— change the design of the pack with a warning label located at 65% and an off-putting image on both sides.
It would seem that this is a perfectly normal and necessary law for the country, protecting future generations from cigarettes. But tobacco lobbyists have their own vision of our children's future.
Budget 2017
During the nighttime adoption of the 2017 budget, tobacco industry initiatives once again prevailed over the Ministry of Finance regarding changes to excise tax rates, managing to defeat the Tax Committee's proposal to raise the ad valorem excise tax rate on expensive cigarettes to 15%.
With great difficulty, the new Ministry of Finance, headed by Danylyuk, in December 2016, fought just as hard as the Ministry of Finance under Yaresko to raise the specific excise tax rate by 40%, which, as part of the Association Agreement with the EU, we must raise sixfold. At this rate and with the current parliamentary aides, it will take us about eight years.
So it should come as no surprise that Lithuanian President Dalia Grybauskaitė, at the close of the third post-Maidan year, declared that corruption in the highest echelons of power is harming Ukraine more than the war in the east of the country.
On the topic: Kaufman-Granovsky and their business interests: airports, vodka, cigarettes, banks, hotels
Roman Nasirov. The Business Past of Ukraine's Chief Tax Official
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