Kosovo Hikes Tobacco Excise

United Nations administrators have acted to reduce the huge volume of cigarettes smuggled out of the country – but the move is unlikely to stop the illicit trade, especially across the porous border to Serbia.

On October 1, the UN Interim Administration Mission in Kosovo, UNMIK, raised excise taxes by two-thirds as part of measures designed to combat cigarette smuggling in the Balkans.

Importers will now pay 10 euro for every 1,000 cigarettes they bring into the protectorate. This is the second and final stage of an excise reform which saw excise rates raised from two to six euro on July 1.

When UNMIK first arrived in Kosovo in June 1999, after NATO strikes and the withdrawal of Serbian troops, there was no customs regime. The province has continued to be a centre of smuggling. As UNMIK's former chief, Michael Steiner told a regional conference in May 2002, "In the Balkans, cigarette smuggling is the life-blood of organised crime... Kosovo has earned an unfortunate reputation as a hub of this illicit trade."

The conference led to the Pristina Declaration, under which regional states pledged to work towards harmonising tax rates. But this has not happened yet, and differing excise rates charged on tobacco continue to make smuggling extremely profitable.

For example, until October someone smuggling just one armload of 1,000 cigarettes from Kosovo to sell in Serbia earned 11 euro in unpaid excise alone, because they were avoiding Serbian excise of just over 17 euro. With the new rate imposed by UNMIK, the profit will be seven euro. That is assuming the consignment was legally imported and taxed in Kosovo in the first place.

Although the new tax rate will hit the smugglers’ income, the profits will remain substantial since the trade involves millions rather than thousands of cigarettes.

It is hard to estimate how big the flow of cigarettes out of Kosovo is, but various surveys conclude that some 350 tons of cigarettes are smoked in the province every month. That leaves 40 per cent of the 580 tons legally entering Kosovo unaccounted for. And that is not counting illegal imports.

Most of the excess is smuggled into Serbia, and the authorities in Belgrade have been protesting loudly at the loss of tax revenue. Finance minister Bozidar Djelic said in July that "a significant proportion of cigarettes smuggled into Serbia originate in Kosovo".

The province’s unresolved status means that for the past four years it has been separated from Serbia only by an “administrative boundary line” rather than a national border, so there is no Serbian customs post to check imports. IWPR staff have crossed the frontier many times, and have seen that checks by Serbian financial police are perfunctory at best. "You could smuggle an H-bomb across that line," one traveller told IWPR.

Vladan Begovic, who heads Serbia's tobacco commission and is a former director of the customs service, told IWPR, "Smuggled cigarettes, mainly from Kosovo, will cost the budget approximately 50 million euro in revenue loss this year alone."

John Robertson, director for enforcement at UNMIK’s customs office, acknowledges that there is a problem with the scale of officially-sanctioned imports into the province. "Delivery to Kosovo exceeds domestic demand," he told IWPR.

But he says it is up to Serbia to clamp down on illegal imports since UNMIK has already reduced the incentive to smuggle with the excise hike. "One has to remember that the vast majority of cigarettes smuggled into Serbia from Kosovo are legal here. UNMIK taxes have been paid,” he said. “The onus is therefore on Serbian customs to stop the product when it enters territory under its control."

Begovic thinks the increase is not enough, and wants the remaining disparity in the rates to be ironed out, "Although UNMIK has increased taxes, it won't stop the illegal movement as the taxes are still much smaller than Serbia's. This means that smuggling continues to be highly profitable.”

"Harmonisation of taxes is the only way to reduce smuggling," he insisted.

Robertson agrees that harmonisation is the way forward, but argues that Serbia's level is unrealistic for Kosovo, "If we hike our rate to theirs, cigarette smuggling into Kosovo would increase from Macedonia and Albania, where tax rates per 1,000 are between seven and eight euros."

Instead, he points to other measures which UNMIK believes will reduce smuggling from Kosovo into neighbouring territories. For example, an excise stamp is being introduced to identify cigarette packs intended for sale within Kosovo. The stamps, termed banderols, will be attached to all cigarettes ordered by the 12 importers licensed by UNMIK. The stamps are attached by the manufacturer before the cigarettes are dispatched to Kosovo. Counterfeiting will be limited, says Robertson.

"With the banderols, Serbian law enforcement can now conduct spot checks and immediately identify product meant for the Kosovo market,” he said. “As in Kosovo, police in Serbia will now be able to track smuggling more effectively. We believe this will make a major difference."

Robertson believes that the excise regime can be effective, pointing to UNMIK’s own estimate that 95 per cent of all cigarettes sold in Kosovo are now taxed compared with none in June 1999.

The smugglers don’t seem to be too worried by the changes. "UNMIK is just trying to frighten us, nothing real will happen,” IWPR was told by a man who is one of the biggest smugglers in Mitrovica, northern Kosovo. “We will need two or three days to make fake banderols, and if you don't think we have our own people in UNMIK, you are wrong."

Another innovation is that health warnings on cigarettes intended for Kosovo will be in both Albanian and Serbian, which Robertson says will make them “a far less attractive product for Serbian consumers". However, IWPR has seen packs marked in Albanian being sold openly in the Serbian town of Kursumlija, with little negative consumer reaction.

"Dual health warnings will hardly stop cigarette smuggling into Serbia," said Nebojsa Medojevic, economic director at Montenegro's Centre for Transition, "Foreigners would be naive to think that one can stop smuggling with the introduction of a marketing act.

"Cigarette smugglers are very well connected across the region's de facto borders. They have almost reached EU standards in terms of free flow of goods and people in this region. Governments are lacking this level of cooperation."

Medojevic echoes a growing consensus amongst independent experts that the only solution to smuggling is an economic treaty resembling a customs union between Balkans states.

"Cigarette smuggling will remain big business until there is a regional tax harmonisation agreement from Ljubljana down to Tirana," he said.

Tatjana Matic is IWPR project coordinator in Kosovo, Hugh Griffiths is an IWPR investigations coordinator.