How to Bring Ukraine’s Tobacco Market Out of the Shadows: Analytics, Recommendations, and the Role of the State in Wartime
During wartime, when every hryvnia counts, the issue of losses from shadow markets becomes especially acute. The tobacco sector is one of those areas where the scale of illegal circulation has long become a systemic problem, and there is still a lack of effective tools to combat it.
Despite this, the legal part of the business continues to demonstrate stability and remains one of the key donors to the budget. But even this positive fact does not overshadow the main issue: the state loses tens of billions of hryvnias each year due to illegal production within the country.
Despite damage to production facilities as a result of attacks and overall economic instability, major international manufacturers maintain production volumes and pay record taxes. In some cases, tax revenues have tripled compared to the pre-war period, which confirms the ability of transparent business to operate even under crisis conditions. This fact is important not only for the industry but for the economy as a whole: large legal companies create jobs, invest in production, pay taxes in advance, and provide financial support to the state. But alongside this, a parallel segment of the market functions, undermining economic balance.
The situation on the tobacco market in Ukraine is unique. In most European countries, illegal products are created mainly through smuggling. In Ukraine, however, the main source of shadow activity is illegal production within the country. Moreover, these are often not “garage” workshops, but formally legal enterprises with licenses and excise stamps that declare minimal production volumes but actually produce ten times as much. This creates the illusion of legality, while the budget loses over 25 billion UAH every year. There were periods when the share of the shadow market reached 26%, one of the highest rates in Europe. Short-term actions by law enforcement in 2024 achieved results reducing the share to around 12%, but the lack of systematic control quickly returned the situation to previous levels.
Why Existing Mechanisms Don’t Work
Formally, the tools exist:
- The tax service has the right to revoke the licenses of manufacturers who violate the law.
- Production inspections are possible to match declared volumes with excise stamps.
- There are available criminal liability mechanisms, which can be strengthened.
- The eExcise system could in the future provide full product traceability.
In practice, however, only a small part of these tools are used. The reason is simple: regulation is often applied to legal businesses, while illegal ones do not feel real pressure. New requirements such as video surveillance at factories are fulfilled by large manufacturers at their own expense, while illegal enterprises continue to operate with impunity. As a result, transparent business becomes the object of increased scrutiny, while shadow producers effectively avoid responsibility.
eExcise: A Step Forward, But Needs Realistic Implementation
European practice of product traceability using data matrix codes is an effective tool against counterfeiting. Ukraine also plans to transition to the eExcise system, which should ensure control from production to the retail shelf. However, the Ukrainian model is much more complex, since it also includes a mechanism for paying tax according to new rules. The initial launch plan for 2026 proved unrealistic testing, legislative amendments, and time for manufacturers to adapt are needed. For a successful, loss-free launch, it is critical that new rules do not lead to production shutdowns, as this could cost the budget billions.
How to Bring the Market Out of the Shadows: A Strategic Approach
Analytics show: bringing the market out of the shadows is possible without extra costs to taxpayers if the state acts systematically. The most important steps:
1. Strict Licensing and Control over Production Volumes
Revoking a license is the simplest and most effective tool. If an enterprise declares one thing but produces another the license must be immediately revoked.
2. Strengthening Liability for Illegal Production
Draft law No. 9364 is key. It provides for increased liability and introduces real sanctions.
3. Clear Policy Without “Tax Experiments”
Business needs predictability, not new rules every six months.
Stability is the basic requirement for investment in complex economic conditions.
4. Consultations with the Industry Before Making Decisions
EU countries have long applied the “regulate together” principle: decisions are made after discussion with market representatives. This is not lobbying it is risk reduction.
5. Gradual and Realistic Launch of eExcise
It is necessary to create technical conditions, not force manufacturers to risk production stoppages.
During wartime, the tax base must not be wider, but more stable. The goal should not be to increase pressure on legal business, but to stop losses where they are greatest in the shadow segment.
This does not require new taxes. It does not require increased pressure on business. It does not require additional budget expenditures. It only requires enforcement of the laws that already exist. The problem of the shadow tobacco market is not about cigarettes. It is about economic discipline, about equal rules of the game, about the state’s ability to enforce its decisions.
In a situation where legal companies pay record taxes and the illegal segment continues to operate with impunity, the state loses not only money it loses trust. Bringing the sector out of the shadows could give the budget over 20 billion UAH annually, which during wartime is equal to funding critical sectors: defense, healthcare, social programs. Today, the most rational way is not to pressure legal business, but to close loopholes for the shadow segment, establish control over production, and give regulations real force.
This will allow the creation of a fair market, reduce the burden on conscientious taxpayers, and ensure a stable increase in budget revenues without additional tax pressure. And most importantly this is a solution that can be implemented right now. Without risks. Without fantasies.
Only through effective control, stable rules, and political will.
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