Economy 3 December 2024, 12:15pm

Cigarette smugglers win big on Hungarian real wage decrease

Portfolio

Illicit tobacco trade has increased significantly in Hungary in recent years, driven largely by the fact that while the living standards of Hungarians have fallen due to high inflation, prices on the black market have not increased. The illicit tobacco market is supported by the fact that it is now very easy to order online, said Krisztina Patócs, Lieutenant Colonel at the National Tax and Customs Administration (NAV), at a press conference on Tuesday.

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The illicit tobacco market in Hungary in 2023 was 7.9%, up from 7.2% a year earlier and 4.2% before that. These rates have increased significantly since the coronavirus pandemic.

Krisztina Patócs told Portfolio that while the proportion of drone smuggling has increased in recent years, it has subsided in recent months because it requires serious organisation on the part of the smugglers and they can only smuggle a very small amount of goods across the border.

There are now an increasing number of illegal tobacco factories operating in the country, including some operating in trucks, constantly on the move.

The growing trend of the illicit market is confirmed by the empty cigarette pack research, which focuses not on the entire tobacco market, but only on cigarettes and not only on counterfeit cigarettes, but on all products for which the tax has not been paid, said Márk Szabó, Head of Communications at JTI Hungary.

In the Hungarian cigarette market, this would be 17% in the first half of 2024, compared to 6% in 2021.

Based on a total market size of 5.5 billion units, this means a loss of HUF 76 billion in tax revenue for the budget.

The survey also revealed that the consumption of illegal cigarettes is no longer limited to the north and east of the country, but affects practically the whole country, with the exception of Tolna, Somogy and Fejér counties.

It is estimated that the illegal market for fine-cut tobacco accounts for 30% of the total.

Krisztina Patócs said that

while black market prices have not increased in Hungary, legal tobacco prices have, while people's purchasing power has decreased.

Within the NAV, a working group was set up years ago to combat the illegal tobacco market. So far, the focus has been mainly on offenders, but communication campaigns are now being launched to reach consumers. The aim is to reduce demand.

Seizures

Since 2022, the amount of contraband cigarettes seized per case has fallen dramatically. This is the result of the fact that while the number of seizures has fluctuated between 3,000 and 6,000 from quarter to quarter, the total quantity has delcined.

In 2021, there were still plenty of quarters when the average seizure volume was between 10,000 and 20,000 cigarettes, i.e. the amount of cigarettes smugglers were busted with, but in the last two years this has dropped to between 1,000 and 2,000.

However, in the first nine months of 2024, the 16,000 successful seizures resulted in nearly 99 million cigarettes being seized by the NAV, which helped push the average down to under 6,200 cigarettes from over 10,000 in Q1.

There were 6,940 busts in the third quarter alone, with over 30.1 million cigarettes seized, up from 4,746 seizures of 24.5 million cigarettes in Q2.

The graph below shows the average amount of cigarettes seized, but to smooth out the fluctuations we have calculated a rolling average for each quarter.

When asked about the sharp increase in Q1, the NAV said it was not the sign of a turnaround, and that the amount of cigarettes seized in criminal proceedings was extremely high, which significantly boosted the average. The authority pointed to a specific case in which financial investigators managed to seize 35 million cigarettes. During the coordinated operation, HUF 4 billion worth of Ukrainian cigarettes and large amounts of euros were seized.

At that time, it was thought that a single bust distorted the statistics, accounting for a significant part of the total quarterly captures, but the latest data suggest otherwise.

In addition to cigarettes, the NAV also provides data on "other smoking tobacco" and "fine-cut tobacco". These are found in far fewer cases by smugglers: 218 cases recorded in the first quarter and only 62 in Q2. However, there was growth in both categories in Q2 (276 and 72 seizures, respectively) and Q3 (380 and 78 seizures respectively.)

The quantity per case has jumped (about 20x q/q) for other tobacco in Q2, but dropped back sharply in Q3, and it grew dramatically (about 50x q/q) for fine-cut tobacco and even further (+63% q/q) in July-September.