CIGARETTE AFFORDABILITY IN THE RUSSIAN FEDERATION 2002 2017 CIGARETTE AFFORDABILITY IN THE RUSSIAN FEDERATION 2002-2017 Rong Zheng Patricio V. Marquez Polina Kuznetsova Xiao Hu Yang Wang I ACKNOWLEDGMENTS This report was prepared by a team led by Patricio V. Marquez, Lead Public Health Specialist, World Bank Group. Team members include: Rong Zheng, Principal Researcher and Writer; Xiao Hu and Yang Wang, WHO Collaborating Center for Tobacco and Economics, University of International Business and Economics, Beijing, China; and Polina Kuznetsova, Institute for Social Analysis and Forecasting at RANEPA (Moscow). The authors would like to thank the following peer reviewers for their insightful comments, inputs, and valuable suggestions that helped to improve earlier drafts of the report: Alan Fuchs, Senior Economist, Poverty and Equity Global Practice, World Bank Group; Paul Isenman, former Senior Manager with the OECD/DAC Secretariat, the World Bank Group, and USAID; Daria Khaltourina, Head of the Department of Health Economics and Resource Support of Federal Research Institute for Health Organization and Informatics of Ministry of Health of the Russian Federation; Sevil Kamalovna Salakhutdinova, Senior Health Specialist, World Bank Group Health, Nutrition and Global Practice. Angela Burton edited the report. Spaeth Hill designed the report. The preparation of the report was carried out under the World Bank Group Global Tobacco Control Program, coordinated by Patricio V. Marquez, with the support of the Bill & Melinda Gates Foundation and Bloomberg Philanthropies. Washington, DC September 2018 III CONTENTS Acknowledgments III Abbreviations IX Executive Summary XI Introduction 1 Smoking Prevalence in the Russian Federation: Health and Economic Consequences 1 Tobacco Tax Reform and Tobacco Tax Structure 4 Russia's Cigarette Market 6 Economic Fluctuation and Impact on Household Income 6 Measuring Affordability 11 Methodology 15 Defining Cigarette Affordability 15 Price Data 17 Income Data 17 Results 19 Affordability: Levels, Trends, Magnitude of Change and Growth Rate 19 Cigarette Affordability of Price Sub-Categories 2010-2017 23 Russia is the Most Affordable Country for Cigarettes since 2006 26 Main Findings 26 Discussion 31 The Specific Oriented Excise Structure is Faborable for Delivering Optimal Results 31 Macroeconomic Environment Helps Drive Cigarette Affordability in Russia 31 Big Achievements, but Challenges Remain 31 Cigarette Affordability in the Russian Federation 2002-2017 References 33 Appendix 1: Cigarette Price and Cigarette Affordability, 2002-2017 36 Appendix 2: Cigarette Affordability of Economy, Mid-Price and Premium Brands, 2010-2017 37 VI // Contents LIST OF TABLES Table 1: Ten countries with the largest cigarette consumption, 2016 2 Table 2 : Excise tax rates on filtered and non-filtered cigarettes, 2002–2017 5 Table 3: Global comparison of cigarette affordability rankings 27 VII Cigarette Affordability in the Russian Federation 2002-2017 LIST OF FIGURES Figure 1: Smoking prevalence among adults, RLMS versus GATS 2000–2016 1 Figure 2: Price, tax and tax incidence in average price of a pack of cigarettes, 2010–2017 7 Figure 3: Retail sales of cigarettes by brand type, 2002–2017 8 Figure 4: Nominal GDP growth rate 2002–2017 9 Figure 5: Cigarette affordability and consumption, 2002–2017 19 Figure 6: Price, excise and income growth and cigarette affordability 2002–2017 20 Figure 7: Annual and cumulative growth rate of cigarette affordability 2002–2017 (including a summary of negative growth 2008–2017) 21 Figure 8: Cigarette price, tax, affordability and income, 2002–2017 22 Figure 9: Nominal retail price per pack (20 sticks) by brand types and on average, 2010–2017 23 Figure 10: Cigarette affordability and market share by sub-category, 2010–2017 25 Figure 11: Annual and cumulative cigarette affordability growth rate by subcategory, 2010–2017 25 Figure 12: Cigarette consumption and affordability by subcategory, 2010–2017 26 VIII // Contents ABBREVIATIONS CAI: Cigarette Affordability Index COPD: Chronic Obstructive Pulmonary Disease CPI: Consumer Purchasing Price EU: European Union WHO FCTC: World Health Organization Framework Convention on Tobacco Control GATS: Global Adult Tobacco Survey GDP: Gross Domestic Product GYTS: Global Youth Tobacco Survey IPC: Income Purchasing Capacity LMICs: Low- and Middle-Income Countries OECD: Organization for Economic Co-operation and Development PPP: Purchasing Power Parity RIP: Relative Income Price RLMS: Russian Longitudinal Monitoring Survey UBS: Union Bank of Switzerland VAT: Value Added Tax WHO: World Health Organization IX EXECUTIVE SUMMARY The Russian Federation (Russia) is the world’s third largest cigarette consuming nation (after China and Indonesia) and has the highest per capita cigarette consumption in the world. Russia adopted the World Health Organization’s Framework Convention on Tobacco Control (WHO FCTC) in 2008, and since then has taken a comprehensive approach to combatting tobacco use by implementing a wide range of tobacco control interventions. Russia’s Law 15 FZ, which took full effect in 2014, has been recognized as one of the most comprehensive anti-tobacco laws in the world. Raising tobacco taxes and prices is recommended by WHO as the single most effective measure for reducing tobacco use, and therefore is a key component of Law 15 FZ. In the past two decades, the government has raised tobacco excise tax and prices annually, with Law 15 FZ accelerating the pace of these increases in recent years. Big achievements have been made so far: the average excise per pack of 20 sticks of cigarettes increased from 6 rubles to 48.7 rubles between 2010 and 2017, while the total tax (including VAT) increased from 10.4 rubles per pack to 67 rubles per pack, an increase of 544 percent in nominal terms and 283 percent in real terms. Also during this period, the average nominal price of a pack of 20 cigarettes increased by 313 percent, from 29.1 rubles per pack in 2010 to 120.1 rubles per pack in 2017, and the average real price increased by 145.5 percent, from 29.1 rubles per pack to 71.4 rubles per pack (2010 based). As a result of tax and price increases, along with other tobacco control interventions, tobacco sales fell by almost 30 percent and the number of smokers decreased 21 percent between 2009 and 2016 (World Health Organization 2017). People change their smoking behavior not because cigarettes are expensive or cheap, but because cigarettes are becoming more or less expensive. Tobacco taxes only reduce tobacco consumption if they increase prices and reduce cigarette affordability by adjusting the tax increases for inflation and any rise in per capita incomes. In most low- and middle-income countries (LMICs), income and purchasing power capacity of the population is rising due to favorable economic growth trends. Thus, cigarettes will become de facto more affordable for consumers, increasing consumption, unless tobacco taxes rise even faster. The goal of this study is to examine cigarette affordability in Russia between 2002 and 2017 in order to provide an understanding of the country’s current tobacco excise tax policy, and to identify opportunities and next steps. XI Cigarette Affordability in the Russian Federation 2002-2017 Main findings of this study include: • From 2002 to 2017, cigarette nominal average prices rose steadily by 917.9 percent, from 11.8 rubles to 120.1 rubles per pack. However, cigarette affordability presented two stages during this period: an ascending trend between 2002 and 2008, and a descending trend between 2008 and 2017. The most affordable year for Russian smokers was 2018, when cigarettes were 2.07 times more affordable than in 2002. By contrast, 2017 was the least affordable year, when cigarettes were 22 percent less affordable than in 2002 and 62 percent less affordable than the peak year of 2008. • In Russia, a positive correlation is perceived between cigarette affordability and cig- arette consumption: between 2002 and 2008, cigarette consumption increased by 17 percent, along with a 22 percent increase of cigarette affordability; by contrast, between 2008 and 2017 cigarette consumption decreased by 34 percent, accompa- nied by a 62 percent decrease in cigarette affordability. • For each year during the period 2010–2017, economy brands were the least afford- able category, while mid-price brands held the middle level and premium brands remained the most affordable for their corresponding smoking cohort. • All three price categories present descending affordability trends since 2010; afford- ability for the economy category reduced the most, by 62 percent, leading to a 53 percent consumption decrease, while the mid-price category fell by 51 percent, leading to a 16 percent consumption decrease; the premium category reduced the least, by 43 percent, leading to a 26 percent consumption decrease. The differences of affordability decrease among price categories restructured the market share: the market share of the economy brands was taken largely by the mid-price brands while the premium brands held a stable market share during the period 2010–2017. • From a global perspective, Russia has been the country with the most affordable cigarettes among the main tobacco use countries during the period 2006–2016. This indicates that despite striking progress achieved in reducing the affordability of cigarettes, Russia still has an ample room to do more. Given the still high smok- ing prevalence rates, and the huge preventable loss of life from smoking, big tax increases with recurrent hikes over time to keep cigarette prices climbing more steeply than per capita real income growth should be given high priority as a key part of Russia’s overall tobacco control effort. XII // Executive Summary This paper is organized as follows: the introduction provides background, including smoking prevalence, cigarette tax and prices, cigarette market and macroeconomic background in Russia. The Measuring Affordability section summarizes the existing literature on the best ways to measure cigarette affordability. The Methodology section summarizes data sources and explains the methods used to measure cigarette affordability. The Results and Discussion sections present the main findings and provide future policy implications. XIII THE RUSSIAN FEDERATION (RU HAS ONE OF THE HIGHEST SMOKIN PREVALENCE RAT IN THE WORLD, PARTICULARLY AMONG MEN. ACCORDING TO THE GLOBAL ADU INTRODUCTION Smoking Prevalence in the Russian Federation: Health and Economic Consequences The Russian Federation (Russia) has one of the highest smoking prevalence rates in the world, particularly among men. According to the Global Adult Tobacco Survey 2016, 30.5 percent of adults in Russia (36.4 million people – 49.8 percent male and 14.5 percent female) currently use tobacco. Overall, 29.9 percent of adults in Russia (35.8 million) were current cigarette smokers (48.8 percent among men and 14.2 percent among women) (World Health Organization 2017). In addition to GATS, annual data on the prevalence of smoking are assessed using the nationally representative Russian Longitudinal Monitoring Survey (RLMS). This survey is not designed to accurately assess smoking habits, but rather involves interviewing all household members about factors such as work status, incomes, expenditures and health. Some respondents may wish not to disclose in front of other family members the fact that they smoke, which can lead to lower estimates than those provided by GATS. Nevertheless, the use of RLMS allows the dynamics of Russian smoking prevalence to be tracked over years (figure 1). GATS and RLMS are roughly consistent in their assessment of the decline in male smoking prevalence between 2009 and 2016. By contrast, GATS shows a substantial Figure 1: Smoking prevalence among adults, RLMS versus GATS 2000–2016 70% 60% 62 60 61 60 59 59 59 59 58 57 56 50% 54 50 52 52 51 49 46 45 40% 39 35 36 35 35 35 35 30% 34 34 34 34 33 32 30 31 31 30 28 28 20% 21 14 10% 14 14 14 15 14 15 15 15 15 15 15 15 14 14 14 14 12 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Males, RLMS Males, GATS Females, RLMS Females, GATS Total, RLMS Total, GATS Source: GATS and RLMS. Data at http://www.who.int/tobacco/surveillance/survey/gats/rus/en/ RLMS; and https://www.hse.ru/en/rlms/. Note: Adults are those ages 15 and older. 1 Cigarette Affordability in the Russian Federation 2002-2017 decline among females from 21 percent to 14 percent during those years, with RLMS showing a lesser decline, from 15 percent to 14 percent. Traditionally, smoking was not widespread among women, but from 1992 to 2002 – within a decade of the collapse of the Soviet Union – the prevalence of smoking among women had more than doubled (Perlman et al. 2007). Much of the available literature attributes this rapid growth to an aggressive campaign by transnational companies to conquer the Russian tobacco market (Lillard and Dorofeeva 2015), as well as to changes in cultural and social norms around female smoking that had already begun in the late Soviet period (Quirmbach and Gerry 2016). In 2016 Russia was the world’s third largest cigarette-consuming nation, behind China and Indonesia. However, Russia has by far the highest per capita consumption (table 1). Table 1: Ten countries with the largest cigarette consumption, 2016 RETAIL VOLUME, 2016 PER CAPITA CONSUMPTION, 2016 COUNTRY (BILLION STICKS) (STICKS PER PERSON) China 2,350.5 1,705 Indonesia* 316.1 1,211 Russia 278.4 1,929 USA 263.4 814 Japan 173.9 1,369 Turkey 105.5 1,327 Egypt 90.0 941 Bangladesh 86.1 528 India 84.9 64 Philippines 79.1 766 *Excluding hand-rolled kreteks. Sources: Retail volume data are sourced from Euromonitor International, 2017; Population data are sourced from World Bank; Per capita consumption data are calculated by the authors. Harm from Secondhand Smoke According to GATS 2016, an estimated 21.8 percent of adults are exposed to secondhand smoke in enclosed workplace areas, 23 percent of adults are exposed to secondhand smoke at home; 20 percent of adults are exposed in restaurants, and 10.5 percent on public transportation (World Health Organization 2017). Among youth, 36 percent (ages 13–15) are exposed to secondhand smoke in public places and at home (Sakharova et al. 2017). 2 // Introduction Harm to Health Tobacco use is deadly. National evidence reveals that tobacco-related diseases are among the most significant contributors to Russia’s premature mortality burden, independently doubling the Russian population’s mortality risk and shortening life expectancy by 6.7 years for men and 5.3 years for women (Gerasimenko and Demin 2001). International research paints an even deadlier picture, estimating an average loss of a decade of life – and up to two decades of life – for the approximately half of smokers who die of tobacco- related diseases (Jha and Peto 2014). Around 282,000 Russians died from smoking-attributable diseases in 2016, and nearly a quarter of all male deaths and 4 percent of all female deaths were smoking-related – about 14 percent of deaths overall. Approximately 80 percent of tracheal, bronchus and lung cancer mortality, 59 percent of chronic obstructive pulmonary disease (COPD) mortality, and 15 percent of hypertensive heart disease deaths are related to smoking (IHME 2018). Other studies produce similar estimates: for example, in 2009 smoking caused the death of 278,000 people (or 14 percent of total mortality), of which 63 percent were the result of cardiovascular diseases (Maslennikova and Oganov 2011). Harm to Development and Household Economy In 2005 the Russian population spent 83.4 billion rubles (US$2.9 billion) or 0.4 percent of the gross domestic product (GDP) on cigarettes, an amount that represents the short-term financial opportunity cost of smoking (i.e. money that could be spent on other goods) (Ross et al. 2008). In 2009, money spent on tobacco products amounted to almost 0.9 percent of the nation’s GDP (World Health Organization 2010). A smoker with average per capita income in Russia would have to spend 3.2 percent of their income to purchase 10 pieces of the most popular cigarettes to smoke daily each year (Drope et al. 2018). Harm to the Environment Cigarette butts are the most commonly discarded pieces of waste worldwide. It is estimated that 130,882 tons of butts and packs end up as toxic waste in the Russia each year (Drope et al. 2018). Damage to the National Economy Tobacco use generates significant healthcare costs as a result of tobacco-related illnesses. The treatment of cardiovascular and respiratory diseases primarily associated with tobacco consumption represent about 34 percent of all healthcare expenditures in Russia (Gerasimenko et al. 2007). Lunze and Migliorini (2013) estimate that cardiovascular 3 Cigarette Affordability in the Russian Federation 2002-2017 and respiratory diseases alone have cost Russia’s health system 125 billion rubles (US$4.2 billion). Smoking causes substantial ill health, thus reducing the quality of life and productivity. One study calculated the productivity loss to tobacco use in 1999 as US$4.44 billion (Ross et al. 2008). Using a different methodology, another study estimated the smoking-attributable productivity loss to be US$364 million in 2000 (Maslennikova et al. 2004). In 2005, the costs of productivity losses due to tobacco-related premature deaths were estimated to be US$24.7 billion annually, more than 3 percent of Russia’s GDP (Ross et al. 2008). According to the Tobacco Atlas, the economic cost of smoking in Russia amounts to US$41.4 billion. This includes direct costs related to healthcare expenditures and indirect costs related to lost productivity due to early mortality and morbidity (Drope et al. 2018). In sum, although different methodologies produce different results, the economic costs of smoking are very high, whether in absolute terms or as a share of Russia’s GDP. Tobacco Tax Reform and Tobacco Tax Structure Cigarette taxation in Russia has had many revisions since the collapse of the Soviet Union. At the beginning of the 2000s, tobacco excise taxes were extremely low, and in 2003 a mixed excise duty was introduced, with both a specific and an ad valorem component. As a result of the 2003 tax reform, cigarette excise taxes increased by about 230 percent for high-priced premium cigarette brands (such as Marlboro) and by about 146 percent for mid-priced cigarette brands (based on Economist Intelligence Unit prices). The excise tax system redesigned in 2007 resulted in an excise tax system with a maximum retail price and a minimum federal-level excise tax (table 2). It had, until 2010, two tiers, with taxes on filtered cigarettes far higher than those on unfiltered cigarettes, so providing an incentive for downward substitution. Russia adopted the World Health Organization’s Framework Convention on Tobacco Control (WHO FCTC) in 2008, and tobacco control policies have been prioritized ever since. In 2010, the Russian government introduced the “National strategy on creation of a public policy to combat tobacco consumption for the period of 2010–2015.” This was followed by the adoption of national tobacco control legislation in 2013. Federal Law No.15 “On protecting the health of citizens from the effects of second-hand tobacco smoke and the consequences of tobacco consumption” became one of the most comprehensive laws globally. Among other crucial measures, the law underlined price and tax measures aimed at reducing demand for tobacco by increasing tobacco taxes. In line with WHO FCTC Article 6, Russia has raised tobacco taxes regularly since 2010, annually increasing the average excise burden by at least 30 percent. In 2011 it equalized the specific excise tax and minimum total tax per stick between filtered and non-filtered cigarettes. The continued increase in taxes, alongside other tobacco control measures 4 // Introduction from the country’s comprehensive tobacco control law, greatly reduced tobacco sales in the country, boosted tobacco excise revenue and resulted in a number of other significant benefits (table 2, figure 2). Nominal prices increased by 313 percent, from 29.1 rubles per pack in 2010 to 120.1 rubles per pack in 2017. Real prices, deflated by the Consumer Purchasing Price (CPI), increased by 145.5 percent, from 29.1 rubles per pack to 71.4 rubles per pack (based on 2010 prices) during this period. In 2011, the specific excise tax rate rose significantly, tripling for unfiltered cigarettes and equalizing between filtered and unfiltered cigarettes. It then increased from 175 rubles per 1,000 cigarettes in 2010 to 1,562 rubles in 2017 (an increase of 431 percent in real terms) (table 2). Table 2 : Excise tax rates on filtered and non-filtered cigarettes, 2002–2017 FILTERED CIGARETTES (PER 1,000 PIECES) NON-FILTERED CIGARETTES (PER 1,000 PIECES) 2002 39.2 rubles 11.2 rubles 2003 50 rubles + 5% wholesale price 19 rubles + 5% wholesale price 2004 60 rubles + 5% wholesale price w/o excise & VAT 23 rubles + 5% wholesale price w/o excise & VAT 2005 65 rubles + 8% wholesale price w/o excise & VAT 28 rubles + 8% wholesale price w/o excise & VAT 2006 78 rubles + 8% wholesale price w/o excise & VAT 35 rubles + 8% wholesale price w/o excise & VAT 2007 100 rubles + 5% max retail price (not <115 rubles) 45 rubles + 5% max retail price (not <60 rubles) 2008 120 rubles + 5.5% max retail price (not <142 rubles) 55 rubles + 5.5% max retail price (not <72 rubles) 2009 145 rubles + 6% max retail price (not <172 rubles) 70 rubles + 6% max retail price (not <90 rubles) 2010 175 rubles + 6.5% max retail price (not <210 rubles) 90 rubles + 6.5% max retail price (not <115 rubles) 2011 280 rubles + 7% max retail price (not <360 rubles) 280 rubles + 7% max retail price (not <360 rubles) 2012 360 rubles + 7.5% max retail price (not <460 rubles) 360 rubles + 7.5% max retail price (not <460 rubles) 2013 550 rubles + 8% max retail price (not <730 rubles) 550 rubles + 8% max retail price (not <730 rubles) 800 rubles + 8.5% max retail price (not <1,040 2014 800 rubles + 8.5% max retail price (not <1,040 rubles) rubles) 960 rubles + 11 % max retail price (not <1,250 2015 960 rubles + 11 % max retail price (not <1,250 rubles) rubles) 1,250 rubles + 12% max retail price (not <1,680 2016 1,250 rubles + 12% max retail price (not <1,680 rubles) rubles) 1,562 rubles + 14.5% max retail price (not <2,123 2017 1,562 rubles + 14.5% max retail price (not <2,123 rubles) rubles) Sources: Summarized by authors based on excise tax code of the Russian Federation. Note: Values at the beginning of the year. The tax was increased twice in 2012. 5 Cigarette Affordability in the Russian Federation 2002-2017 The unified ad valorem excise tax on both filtered and unfiltered cigarettes increased from 6.5 percent to 14.5 percent of the maximum retail price from 2010–2017 (table 2), as a result of which the average excise per pack of 20 cigarettes increased from 6 rubles to 48.7 rubles (figure 2). Total tax (including VAT) increased from 10.4 rubles per pack to 67 rubles per pack, an increase of 544 percent in nominal terms and 283 percent in real terms. Taking account of the increase in tax as a percentage of retail price, total taxes on filtered cigarettes increased by 20 percentage points, from 35.7 percent of the average retail price in 2010 to 55.8 percent in 2017, which is still far below the WHO recommendation of 75 percent. The share of excise tax in the retail price has grown significantly since 2010, by 2017 reaching 40.5 percent. This is still substantially below the WHO-recommended level of 70 percent for excise taxes,1 which suggests that excise tax in Russia remains low, with substantial room for further increases despite significant tightening undertaken in recent decades (figure 2). Russia’s Cigarette Market Tobacco has been popular in Russia for more than 300 years. Today, international tobacco companies dominate Russia’s cigarette market, and hold about 90 percent of market share. In 2016, Japan Tobacco Incorporated held 33.5 percent of the market share by volume, followed by Philip Morris International (27 percent), British American Tobacco (21 percent) and Imperial Tobacco Group (8 percent). More than 278 billion cigarettes were sold in Russia in 2016 (Euromonitor International 2017). Total cigarette sales saw a steady rise between 2002 and 2008, and a downward trend from 2008 to 2017 (figure 3), decreasing by almost 19.6 percent between 2013 and 2016. This corresponded with a decrease in smoking prevalence from 31 percent to 28 percent. Economic Fluctuation and Impact on Household Income Russia has experienced dramatic economic fluctuation in the past two decades, from the prosperity of the 2000s to the onset of recession in 2009 (figure 4). Particular aspects of this fluctuation have increased the uncertainty of household income and influenced the affordability of cigarettes overall and also on different income groups, including: • the country’s high level of social inequality. Russia’s middle-class accounts for 40 percent of the population and spends less than half of its income on necessities, 1 See http://www.who.int/tobacco/economics/taxation/en/index1.html. 6 // Introduction Figure 2: Price, tax and tax incidence in average price of a pack of cigarettes, 2010–2017 160.0 70% Rubles per pack 140.0 60% 120.0 50% 100.0 40% 80.0 30% 60.0 20% 40.0 20.0 10% 0.0 0% 2010 2011 2012 2013 2014 2015 2016 2017 Excise Nominal average price Total tax Real average price (2010 based) Excise growth rate (%) Excise as % of nominal average price Tax as % of nominal average price 2010 2011 2012 2013 2014 2015 2016 2017 Excise 6.0 8.0 10.4 15.0 21.8 28.3 37.6 48.7 Total tax 10.4 13.2 17.0 22.6 32.2 40.9 53.6 67.0 Nominal average price 29.1 33.9 43.1 49.9 68.2 82.8 104.7 120.1 Real average price (2010 29.1 31.3 37.8 41.0 52.0 54.6 64.6 71.4 based) Excise growth rate (%) 33.3% 30.0% 44.2% 45.3% 29.8% 32.9% 29.5% Excise as a % of nominal 20.6% 23.6% 24.1% 30.1% 32.0% 34.2% 35.9% 40.5% average price Tax as a % of nominal 35.7% 38.9% 39.4% 45.3% 47.2% 49.4% 51.2% 55.8% average price Source: Excise and total tax were calculated by the authors according to the tax rate listed in table 2. Price data is listed in Appendix 1. Growth rate and tax as a percentage of retail price were calculated by the authors. 7 Cigarette Affordability in the Russian Federation 2002-2017 Figure 3: Retail sales of cigarettes by brand type, 2002–2017 19,675 19,498 20,000 19,02118,649 19,156 18,753 Million packs 18,522 18,538 18,000 17,271 17,315 16,77016,820 15,808 16,000 14,623 13,947 14,000 12,946 12,000 10,000 8,000 6,000 4,000 2,000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Economy brands Mid-price brands Premium brands Total Source: Euromonitor International (2017). is able to accumulate savings, and can make consumer choices, including private education, healthcare, cultural activities and private pension services. The remaining 60 percent of households are essentially deprived of these choices (Akindinova et al. 2016); • the high level of inflation and the devaluation of the Russian ruble that have eroded savings and hindered investments; • the drop in oil prices and sanctions imposed by the West after 2009 that have put the nation into an economic tailspin. 8 // Introduction Figure 4: Nominal GDP growth rate 2002–2017 10.0% 8.2% 8.5% 8.0% 7.3% 7.2% 6.0% 5.3% 6.4% 5.2% 4.5% 4.0% 4.7% 3.7% 2.0% 1.5% 1.8% 0.7% -0.2% 0.0% -2.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 -4.0% -2.8% -6.0% -8.0% -7.8% -10.0% Source: World Bank, https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=RU&view=chart. 9 AFFORDABILITY REFERS TO AN INDIVIDUAL’S PURCHASING PO WITH REGARD TO A PARTICULAR PRODUCT. VARIO METHODOLOGIE HAVE BEEN DEVELOPED IN MEASURING AFFORDABILITY Affordability refers to an individual’s purchasing power with regard to a particular product. Various methodologies have been developed in recent decades to define cigarette affordability as a function of cigarette price and individuals’ income levels, with reference to the quantity or share of resources required to buy a pack of cigarettes. Existing literature suggest two measures of affordability using narrow and broad income measures. A broad measure of income is per capita GDP, which takes into consideration the values of non-money income such as the provision of public goods and services (Blecher 2010). Based on the broad measure of income, Blecher and van Walbeek (2004) developed the Relative Income Price (RIP) as the measurement indicator of cigarette affordability. RIP calculates the percentage of per capita GDP required to buy 100 packs of cigarettes. In this study, Russia was ranked as having the second highest level of cigarette affordability of 18 lower-middle-income countries studied during the period 1999 to 2001. Since then, Blecher’s RIP method has been widely used to measure cigarette affordability. Blecher and van Walbeek (2008) investigated the RIP for each year in the period 1990–2006 for countries with available data. The results in this study show that cigarettes have become three times more affordable during this period in Russia. More recently, Blecher et al (2013) analysed trends in the affordability of cigarettes in Europe between 2004 and 2010, and of the 37 European countries studied, Russia has experienced the largest increase in cigarette affordability. Based on the narrow measure of income, such as money income or wages, Guindon et al. (2002) used the earnings of 12 occupations, assessed via a survey of earnings by the Union Bank of Switzerland (UBS), to calculate the average number of working minutes required to purchase a pack of local brand or Marlboro (or equivalent) cigarettes. As one of the observed cities in the study, smokers in Moscow in 2000 needed to work for 71.3 minutes to buy a pack of Marlboro, or 42.8 minutes to buy a pack of local brand cigarettes. Using the UBS earnings data, and considering seven (out of 14) occupations with the lowest earnings, Kan (2007) investigated cigarette affordability by measuring cigarette prices as a proportion of daily income in 60 cities in 2006. Moscow was listed as the 15th highest affordable city among the 60 cities studied (most of the cities ranked above Russia were in high-income countries such as the United States, Switzerland and Spain). All the above cross-country studies defined the price as the retail price of a specific brand such as the most-sold local brand. Kostova et al (2014) points out that a comparison of the retail price of a single brand fails to account for the variability of cigarette prices within a number of countries. Kostova’s study derived the average price smokers paid per 20 cigarettes from 11 Cigarette Affordability in the Russian Federation 2002-2017 the GATS, using the RIP method. The results of this study showed that Russia was the only country (out of 15) where RIP was below 1 percent according to GATS data available in 2009, which means Russia was the country that had the most affordable cigarettes. All these studies included Russia as one of the nations observed in cross-country analyses of cigarette affordability, and all study results concluded that: • cigarettes in Russia became more and more affordable during the 1990s; and 2000s; • Russia has highly affordable cigarettes by international comparison. So far there are few studies exclusively focusing on cigarette affordability within Russia, particularly looking at the period immediately before and after Russia adopted the WHO FCTC. This study examines cigarette affordability in Russia during the period 2002–2017, focusing on overall average cigarette affordability. It also looks at the different price categories consumed by different income groups, and analyses the factors driving affordability. These factors are helpful in understanding the successes and shortfalls of tobacco control policies in Russia, in particular the tobacco taxation policy applied after Russia adopted the WHO FCTC in 2008. 12 // Measuring Affordability 13 IN TERMS OF LOO INTO CIGARETTE AFFORDABILITY I RUSSIA AND ACR DIFFERENT INCO GROUPS, THIS RE ADOPTS PER CAP DISPOSABLE INC (I.E. PER CAPITA INCOME AFTER METHODOLOGY Defining Cigarette Affordability Among all methods applied in previous studies, the RIP method (which defines cigarette affordability as the percentage of per capita GDP required to buy 100 packs of cigarettes) has been widely used. Its advantages over other methods include: • Per capita GDP is a good indicator of living standard and income. • GDP data are commonly available, which makes it easier to calculate cigarette affordability (Blecher and van Walbeek 2004). Every country calculates per capita GDP annually using a consistent methodology, thus enabling global comparison of tobacco affordability at country level. • WHO has adopted the RIP method, calculating cigarette affordability for all countries with available data. This makes it possible for our study to identify current cigarette affordability in Russia compared to other countries. In terms of looking into cigarette affordability in Russia and across different income groups, this report adopts per capita disposable income (i.e. per capita income after taxes) as the measure of income instead of the traditional per capita GDP. In Russia, the average household net-adjusted disposable per capita income is estimated at US$16,657 per year, lower than the OECD average of US$30,563 per year. There is a considerable gap between the richest and poorest – the top 20 percent of the population earn almost eight times as much as the bottom 20 percent.2 The Gini coefficient of disposable household income is 0.376 in Russia, higher than the OECD average, which reached 0.318 in 2014.3 The large disparities in income distribution in Russia mean that the use of average income as an indicator may fail to identify the affordability distribution across different income groups. In addition, the smoking behavior of various income groups varies – smoking prevalence is usually higher among lower income groups than among higher income groups. Therefore, we further investigate the cigarette affordability across high-, middle- and low-income groups respectively in order to examine the differential impact of cigarette tax increases on different price categories consumed by different income groups. 2 See http://www.oecdbetterlifeindex.org/countries/russian-federation/. 3 See http://www.oecd.org/social/income-distribution-database.htm. 15 measure of income instead of the traditional per capita GDP. In Russia, the average household net-adjusted disposable per capita income is estimated at US$16,657 per year, lower than the OECD average of US$30,563 per year. There is a considerable gap between the richest and poorest – the top 20 percent of the population earn almost eight times as much as the bottom 20 percent.2 The Gini coefficient of Cigarette Affordability in the Russian Federation 2002-2017 disposable household income is 0.376 in Russia, higher than the OECD average, which reached 0.318 in 2014.3 The large disparities in income distribution in Russia mean that the use of average income as an indicator may fail to identify the affordability distribution across different income groups. In addition, the smoking behavior of various income groups varies – smoking prevalence is usually higher among lower income groups than among higher income groups. Therefore, we further investigate the cigarette affordability across high-, middle- and low-income groups respectively in order to examine the differential impact of cigarette tax increases on RIP Equation different price categories consumed by different income groups. RIP Equation The RIP method defines cigarette affordability as the percentage of per capita disposable The RIP method defines cigarette affordability as the percentage of per capita disposable income4 to income4 required buy 100 required packs to buy of cigarettes. Equation of cigarettes. 100 packs Equation (1)(1) demonstrates demonstrates the RIP the RIP rationale. rationale. 100 × P RIP = (1) Disposable Income567 895:;9 where RIP represents the relative income price of cigarettes, P is the retail price of a pack of cigarettes with 20 individual pieces. The RIP measures the level of cigarette affordability – where RIP represents the relative income price of cigarettes, P is the retail price of the higher the RIP, the less affordable cigarettes are, and vice versa. a pack of cigarettes with 20 individual pieces. The RIP measures the level of cigarette affordability – This report also makes use of the income purchasing capacity (IPC) developed by Zheng et al the RIP, the higher (2017), the which less affordable measures cigarettes how many packs are, could of cigarettes and bevice versa.with the per purchased capita disposable income in a given setting. Unlike the RIP, the higher the IPC the more affordable cigarettes are, and vice versa. Equation (2) demonstrates the IPC rationale and This report also makes use of the income purchasing capacity (IPC) developed by Zheng which measures how many packs of cigarettes could be purchased with the et al (2017), per capita disposable income in a given setting. Unlike the RIP, the higher the IPC the See http://www.oecdbetterlifeindex.org/countries/russian-federation/. 2 See http://www.oecd.org/social/income-distribution-database.htm. more affordable cigarettes are, and vice versa. Equation (2) demonstrates the IPC rationale 3 4 In this report the traditional per capita GDP method is used only in the global ranking comparison. and shows that the IPC is essentially the inverse of the RIP (but not multiplied by 100 – a shows that the IPC is essentially the inverse of the RIP (but not multiplied by 100 – a constant that in any event drops out when comparing years or countries): constant that in any event drops out when comparing years or countries): Disposable Income567 895:;9 IPC = (2) P shows where that the IPC is essentially IPC represents the income the inverse of purchasing the RIP for capacity (but not multiplied cigarettes, and Pby is 100 – a price the retail where IPC a pack that constant represents of in anyincome the event of cigarettes withdrops out when purchasing 20 individual comparing capacity pieces. years foror countries): cigarettes, and P is the retail shows that Disposable Income the IPC is essentially the inverse affordability of the RIP (but not multiplied by 100 price of a pack For of cigarettes better evaluating with the IPC = 20 trend of individual cigarette pieces. 567 895:;9 across a long period, (2) we – a the adopt constant that in any event drops out whenP comparing years or countries): Cigarette Affordability Index (CAI) method which measures the changing magnitude of where IPC cigarette For better evaluating represents affordability the trendthe income compared purchasing with capacity the base of cigarette year. for cigarettes, affordability Disposable Income 567 895:;9 acrossand P is the a long retail price period, we adopt the IPC = of a pack of cigarettes with 20 individual P pieces. (2) Equation (3) demonstrates Cigarette Affordability Index (CAI) rationale ofwhich the method CAI method: measures the changing magnitude of where For IPC evaluating better the trend represents the incomeof purchasing capacity for cigarette affordability cigarettes, across a longand P is the we retail period, adoptprice the RIPABBA cigarette affordability of a pack of Cigarette compared cigarettes CAI; =with Affordability Index20with the individual , method (CAI) base = year. pieces. which where t measures 2002, the 2003 …changing magnitude of 2017 (3) RIP; cigarette affordability compared with the base year. For better evaluating the trend of cigarette affordability across a long period, we adopt the Equation Equation (3) (4) demonstrates demonstrates the the CAI rationale rationale of of the CAI IPC method. In other words, the CAI is an method: Cigarette Affordability Equation (3) Index demonstrates (CAI) the method rationale ofwhich measures the changing magnitude of CAI method: index of the IPC, with the base year set at 2002: cigarette affordability compared with the base year. RIPABBA CAI; = IPC; , where t = 2002, 2003 … 2017 (3) CAI; = RIP Equation (3) demonstrates the , where t ; rationale 2002,2003 … 2017 (4) = method: of CAI IPC ABBA Equation (4) demonstrates the RIPABBA CAI rationale of the IPC method. In other words, the CAI is an Price Data CAI; = , where t = 2002, 2003 … 2017 (3) Equation (4) demonstrates index of the IPC, with the CAI the RIP base ; rationale year set at of 2002: the IPC method. In other words, the CAI is Two sets of (4)cigarette data price IPC were adopted for IPCreport. this One words, average set is overall an index ofEquationthe IPC, with the demonstrates CAI; = basethe;year CAI set atof rationale , where t 2002: the method. = 2002,2003 In other 2017 (4) … of the CAI is an retail price 2002–2017 (estimated IPC index of the IPC, with the base based on Euromonitor year set at 2002: data retail sales in rubles, per ABBA million sticks). The other set is retail prices by price category 2010–2017: specifically, the Price averageDataprice of Kent IPC; to represent the premium category,5 while the market CAI;is= selected , where t = 2002,2003 … 2017 (4) IPC retail price of Winston Blue is selected to represent the mid-price category.6 The average ABBA Two sets of cigarette price data were adopted for this report. One set is overall average price of a domestic brand sourced from Rosstat is used to represent the economy-price Data2002–2017 (estimated based on Euromonitor data of retail sales in rubles, per Price price retail category.7 million sticks). The other set is retail prices by price category 2010–2017: specifically, the Two sets of cigarette price data were adopted for this report. One set is overall average average price of Kent is selected to represent the premium category,5 while the market retail price 2002–2017 (estimated based on Euromonitor data of retail sales in rubles, per retail price of Winston Blue is selected to represent the mid-price category.6 The average million sticks). The other set is retail prices by price category 2010–2017: specifically, the price of a domestic brand sourced from Rosstat is used to represent the economy-price average price of Kent is selected to represent the premium category,5 while the market category.7 retail Income price of Winston Blue is selected to represent the mid-price category.6 The average Data price of a domestic brand sourced from Rosstat is used to represent the economy-price 4 Analysing In this report the traditional category. 7cigarette affordability per capita GDP method iniseach usedprice category only in requires the global rankingestimating comparison. average income in high-, middle- and low-income groups respectively. High- and low-income groups were   Income Data 16 // Data and Methods 5 See https://service.nalog.ru/tabak.do. Analysing 6 cigarette affordability See https://service.nalog.ru/tabak.do. in each price category requires estimating average income inSee Income 7 http://www.gks.ru/dbscripts/cbsd/dbinet.cgi. high-, Data and low-income groups respectively. High- and low-income groups were middle-  Analysing cigarette affordability  in each price category requires estimating average income   in high-, middle- and low-income groups respectively. High- and low-income groups were Price Data Two sets of cigarette price data were adopted for this report. One set is overall average retail price 2002–2017 (estimated based on Euromonitor data of retail sales in rubles, per million sticks). The other set is retail prices by price category 2010–2017: specifically, the average price of Kent is selected to represent the premium category,5 while the market retail price of Winston Blue is selected to represent the mid-price category.6 The average price of a domestic brand sourced from Rosstat is used to represent the economy-price category.7 Income Data Analysing cigarette affordability in each price category requires estimating average income in high-, middle- and low-income groups respectively. High- and low-income groups were defined as the first and the fifth quintiles of income distribution, while the middle-income group includes the second, third and fourth quintiles. To estimate average income of these groups, Rosstat data on average disposable income were used, alongside available income distribution data.8 5 See https://service.nalog.ru/tabak.do. 6 See https://service.nalog.ru/tabak.do. 7 See http://www.gks.ru/dbscripts/cbsd/dbinet.cgi. 8 See https://fedstat.ru/indicator/31399; http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/ru/statistics/population/level/# 17 IN TERMS OF LOO INTO CIGARETTE AFFORDABILITY I RUSSIA AND ACR DIFFERENT INCO GROUPS, THIS REPORT ADOPTS PER CAPITA DISPOSABLE INCOME (I.E. PER RESULTS Affordability: Levels, Trends, Magnitude of Change and Growth Rate Using disposable per capita income and average retail prices, cigarette affordability indexes for 2002–2017 were derived by measuring RIP, CAI and IPC with the following aims: (a) to estimate the levels of cigarette affordability in each year; (b) to present trends in cigarette affordability during the period; (c) to calculate the magnitude of cigarette affordability change; and (d) to examine annual growth rates, as well as the fixed-base growth rates of cigarette affordability over the period. Figure 5 presents cigarette affordability as measured by the CAI for the period 2002–2017. Average cigarette affordability showed two trends during the study period: it rose from 2002 to 2008, and fell between 2009 and 2017. The lowest cigarette affordability level was 2017, when cigarettes were 0.38 times less affordable than 2008 – the peak of cigarette affordability during the whole period studied. Figure 5: Cigarette affordability and consumption, 2002–2017 20,000 2.50 Million packs 19,675 19,498 19,156 19,021 18,753 18,000 18,538 18,649 18,522 17,315 17,271 16,820 16,770 16,000 2.00 2.07 2.03 15,808 1.95 14,000 1.88 14,623 1.83 13,947 1.72 12,000 1.50 12,946 1.59 1.61 1.55 10,000 1.38 1.21 1.22 8,000 1.10 1.00 1.00 6,000 0.88 0.78 4,000 0.50 2,000 0 0.0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Cigarette consumption CAI Average Source: Cigarette sales volume data is sourced from Euromonitor International; CAI average is calculated by the authors. Relating Affordability and Consumption Cigarette affordability has a positive correlation with cigarette consumption in Russia. As shown in figure 5, cigarette affordability more than doubled between 2002 and 2008, 19 Cigarette Affordability in the Russian Federation 2002-2017 and cigarette consumption also rose (except for a brief fall in 2007). Falling cigarette affordability in the period 2009–2017 is associated with declining consumption. Over the whole observed period 2002–2017, cigarette affordability decreased by 21.66 percent along with the decrease of cigarette consumption by 22.81 percent from 16,770 million packs in 2002 to 12,946 million packs in 2017. However, comparing peak affordability in 2008 and lowest affordability in 2017 shows a 62.24 percent drop, with consumption correspondingly decreasing by 34.20 percent. In per capita terms, the decline in consumption – made up of decreases both in prevalence and packs per adult (ages 15 and older) – is even sharper, falling by 21.75 percent between 2002 and 2017 (32.70 percent between 2008 and 2017). Impact of Changes in Price and Income Cigarette affordability depends on two dynamic factors – price and income. Cigarettes become more affordable when prices rise less than income, and become less affordable when price rises outstrip rises in income. Figure 6-A compares affordability trends between 2001 and 2017 by examining annual rises in income and prices. It shows that the average cigarette price rose during the whole period – with a gentle rise up to 2008 and a more rapid rise after 2008 due to the accelerated excise increase after Russia adopted the WHO FCTC. Figure 6-B also shows how cigarette affordability rose when the annual growth rate of income outpaced the annual growth rate of price (the case during 2002–2008), and fell during the period 2008–2017. Figure 6: Price, excise and income growth and cigarette affordability 2002-2017 6 A. CIGARETTE AFFORDABILITY 6 B. RISE IN INCOME AND PRICES 140.0 2.50 40.0% Average price/excise (rubles/pack) CAI average 120.0 35.0% 2.00 100.0 30.0% 1.50 25.0% 80.0 20.0% 60.0 1.00 15.0% 40.0 10.0% 0.50 20.0 5.0% 0.00 0.00 0.0% 2002 2004 2006 2008 2010 2012 2014 2016 2002-2003 2003-2004 2004-2005 2005-2006 2007-2008 2008-2009 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 2006-2007 2009-2010 Nominal average retail price Average excise per pack CAI Average Annual growth rate of income Annual growth rate of average price Source: Excise was calculated by the authors according to the tax rate listed in table 2. Price data is listed in Appendix 1. CAI average and growth rate were calculated by the authors. 20 // Results Relating Affordability and Economic Growth As demonstrated in figure 7, cigarette affordability was 21.66 percent lower in 2017 than it was in 2002. Between those two dates affordability rose and fell – increasing most sharply in 2003 (by 21.01 percent) and decreasing most sharply (by 21.56 percent) in 2014. Figure 7: Annual and cumulative growth rate of cigarette affordability 2002–2017 (including a summary of negative growth 2008–2017) 2002-2003 21.01% 2008-2009 -1.96 2003-2004 14.41% 2009-2010 -4.21% 2004-2005 14.64% 2005-2006 8.14% 2010-2011 -6.00% 2006-2007 9.69% 2007-2008 10.20% 2011-2012 -12.06% 2008-2009 -1.96% 2012-2013 -3.58% 2009-2010 -4.21% 2010-2011 -6.00% 2013-2014 21.56% 2011-2012 -12.06% -3.58% 2014-2015 -9.68% 2012-2013 2013-2014 -21.56% 2015-2016 -20.23 2014-2015 -9.68% 2015-2016 -20.23% 2016-2017 -10.73% 2016-2017 -10.73% -62.24% 2008-2017 2002-2017 -21.66% -70.00% -20.00% 30.00% -70.00% -20.00% 30.00% Cumulative growth rate Annual growth rate Source: Calculated by the authors. Growing cigarette affordability in the period 2002–2008 was mainly the result of the country’s strong economic performance, which led nominal disposable income to outstrip the excise-tax driven increase of average cigarette prices. As a result, cigarette affordability climbed steadily during this period (see figure 6 and figure 8). After a decade of high growth, the Russian economy eventually slowed in the wake of the global financial crisis in 2008. Since 2009, with the deepened global recession, Russia has experienced larger-than-expected losses in output and employment, and a sharp rise in poverty. Russia’s nominal GDP in 2009 contracted by about 7.8 percent (The World Bank in the Russian Federation 2009a) . Although nominal disposable income did not contract as much as GDP, its growth rate for the first time fell behind that of nominal cigarette prices (see figure 6). 21 Cigarette Affordability in the Russian Federation 2002-2017 The Russian economy, helped by higher oil prices and stronger global demand, began to grow slowly in 2010, but downside risks associated with weak domestic demand and remaining structural constraints remained (World Bank in the Russian Federation 2009b). Russia’s economy has not returned to its pre-recession size, meaning that the rise in nominal disposable income has fallen behind the tax-induced nominal cigarette price rises. As a result, cigarette affordability has steadily fallen during the period 2008–2017, making 2008 the peak and turning point for cigarette affordability during the period 2002–2017 (figure 8). Figure 8: Cigarette price, tax, affordability and income, 2002–2017 30,000 Rubles Billion rubles 180,000 25,882 26,127 24,051 25,000 160,000 26,013 22,980 21,804 23,810 23,678 140,000 20,036 20,000 19,582 17,940 120,000 17,281 110,667 99,489 104,390 97,177 100,000 15,215 92,059 109,918 15,000 13,509 105,807 98,411 93,724 98,429 80,000 11,620 88,628 10,819 78,234 10,000 60,000 68,338 60,924 40,000 47,366 54,555 5,000 20,000 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Real disposable income per capita (2002 Based) Real GDP (2002 Based) CAI 140 2.50 Average price/excise (rubles/pack) 120.12 120 104.74 2.00 100 82.79 80 1.50 68.15 60 1.00 49.92 43.10 40 29.09 33.92 19.91 21.42 24.83 0.50 20 11.80 12.77 13.82 15.24 17.69 0 0.00 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Nominal average retail price Nominal average excise CAI Average Source: Both GDP and population data are sourced from World Bank. Real disposable income per capita calculated by the authors. Data at https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=RU&view=chart. 22 // Results Cigarette Affordability of Price Sub-Categories 2010–2017 In general, the prevalence of tobacco use is higher among low-income groups than middle- and high-income groups (IARC 2011). Previous studies have demonstrated that different income groups respond differently to price-related measures. Usually, lower- income groups are more price responsive than higher-income groups – a trend seen in high-income countries such as the United States (Hersch 2000) and lower-middle-income countries such as Indonesia (Adioetomo et al. 2005). When the smoking prevalence rate is declining, smoking is typically observed more in the lower socioeconomic sector of the population (Graham 1996; Lopez et al. 1994; Pierce et al. 1989). In Russia, tax hikes on tobacco since 2010 have made cigarette prices increase significantly for all price categories. Specifically, from 2010 to 2017 the retail price of economy cigarettes increased the most, by 4.5 times; premium category cigarettes increased the least, by 2.9 times; and mid-price category cigarettes increased by 3.4 times. The overall average price of all brands increased by 4.1 times during this period (figure 9). However, the impact of tax and price increases on the affordability of different price categories – and therefore on consumption within each category – remains unknown. Figure 9: Nominal retail price per pack (20 sticks) by brand types and on average, 2010–2017 140 135 Rubles per pack 125 120 120.1 120 105 104.7 100 100 100 92 85 82.8 80 75 76 70 72 68.1 67 63 60 54 54 47 49.9 41 43.1 39 40 35 35 38 33.9 29 29.1 22 20 0 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 Economy category Mid-price category Premium category All cigarette brands Source: Based on Appendix 1 and Appendix 2. The analysis of the affordability of price sub-categories is based on a few assumptions: • Economy, mid-price and premium brands are consumed to a very large extent by low, middle- and high-income groups respectively, measured by per capita dispos- able income. 23 Cigarette Affordability in the Russian Federation 2002-2017 • The low-income group accounts for the lowest quintile of per capita disposable income, the high-income group accounts for the highest quintile of per capita disposable income, and the middle-income group accounts for the three middle quintiles of per capita disposable income. • The economy brands consumed by low-income groups accounted for 28–40 per- cent of consumption during the period 2010–2017 as a result of the higher smok- ing prevalence of low-income groups. Cigarette affordability by cigarette subcategory and by corresponding sub-groups (2010– 2017) is presented in figure 10, and Appendix 2. The main findings include: • Cigarette affordability of all three categories has declined since 2010. • Economy brands are the least affordable category; mid-price brands hold the middle level of affordability; and premium brands maintain the most affordable position in each year during the whole period. For example, in 2017, low-income smokers spent 9.81 percent of their per capita disposable income to buy 100 packs of economy cigarettes, while high-income smokers spent only 1.53 percent of their per capita disposable incomes for 100 packs of premium brands. Meanwhile, mid- dle-income smokers spent 3.99 percent of their per capita disposable income for 100 packs of mid-priced cigarettes. • From 2010 to 2017, affordability of economy cigarettes fell the most (62 percent), while the affordability of mid-price cigarettes fell by 51 percent, and premium ciga- rettes fell (the least) by 43 percent (figure 11). • The differing levels of falling affordability among the three sub-categories reshaped the market share. As figure 10 shows, the market share of economy brands shrank dramatically, from 40 percent in 2010 to 28 percent in 2017; mid-price brands and premium brands, whose affordability also reduced but to lesser degrees, expanded their market share by 10 percent and 1 percent respectively. • Utilizing tax and price policy to combat tobacco use is based on price elasticity theory and income elasticity theory: affordability, therefore, reflects the dynamic equilibrium of price elasticity and income elasticity. As shown in figure 12, the more affordability fell, the more consumption also fell. During the period 2010–2017, falling affordability in the economy category led to consumption decreasing by 53 percent (the most among all categories); while consumption in the mid-price and premium categories declined by 16 percent and 26 percent respectively. 24 // Results Figure 10: Cigarette affordability and market share by sub-category, 2010–2017 10 A. CIGARETTE AFFORDABILITY 10 B. MARKET SHARE SUBCATEGORY 10% 100% 16% 16% 16% 17% 17% 17% 17% 17% 90% 8% 80% 70% 45% 48% 6% 48% 48% 60% 49% 51% 55% 55% 50% 4% 40% 30% 2% 20% 40% 36% 36% 35% 34% 33% 28% 28% 10% 0% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 RIP Economy Economy brands RIP Average Mid-price brands RIP Middle Premium brands RIP Premium Source: Market share was sourced from Euromonitor International 2017. RIP for sub-categories was calculated by the authors. Figure 11: Annual and cumulative cigarette affordability growth rate by subcategory, 2010–2017 -16.85% -7.41% 0.21% Economy -22.66% -13.73% -5.82% -21.76% -67.02% 1.60% 3.13% -15.22% Mid-price -13.32% -2.86% -23.31% -14.32% -50.85% -18.74% -1.81% -5.42% Premium -1.47% -4.47% -15.23% -5.80% -43.29% -65% -45% -25% -5% 15% 35% 55% 2010-2011 2014-2015 2011-2012 2015-2016 2012-2013 2016-2017 2013-2014 2010-2017 Source: Market share was sourced from Euromonitor International 2017. RIP for sub-categories was calculated by the authors. 25 Cigarette Affordability in the Russian Federation 2002-2017 Figure 12: Cigarette consumption and affordability by subcategory, 2010–2017 12 A. CIGARETTE CONSUMPTION 12 B. CIGARETTE AFFORDABILITY BY SUBCAGEGORY 10,000 14,000 Million packs Million packs 8,964 9,000 8,563 8,328 8,806 12,000 11,544 8,000 7,586 7,428 7,146 7,000 6,600 7,746 7,629 10,000 9,211 8,712 8,584 6,000 6,751 9,381 8,200 8,000 5,000 6,026 4,825 6,951 5,391 6,000 4,000 3,947 6,547 5,103 5,184 5,347 4,533 3,000 3,008 3,133 4,000 3,929 3,816 3,038 2,672 2,371 3,573 2,927 2,000 2,961 2,689 2,236 2,508 2,369 2,227 2,000 2,074 1,000 1,384 1,020 0 2,070 1,604 0 1,304 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 Premium brands IPC Premium Mid-price brands IPC Middle Economy brands IPC Economy Source: Consumption data was sourced from Euromonitor International 2017. IPC for subcategories was calculated by the authors. Russia is the Most Affordable Country for Cigarettes since 2006 Previous studies (Blecher and van Walbeek 2008; Kostova et al. 2014) have compared the level of cigarette affordability of a number of countries (low- and middle-income countries with high smoking prevalence) including Russia, and concluded that cigarettes were most affordable in Russia in 2006 and 2009. To understand whether Russia’s regular tax and price increases since 2010 have altered the country’s top position for cigarette affordability, this report ranks the level of cigarette affordability of the 14 countries observed in previous studies for the years 2008 and 2016. Table 3 presents the global ranking of cigarette affordability in 2006, 2008, 2009 and 2016, and reveals that Russia has been the most affordable country for cigarettes during each of the four years. In other words, Russia has maintained the highest level of cigarette affordability of all 15 countries studied since 2006. Main Findings 1. From 2002 to 2017, cigarette nominal average prices followed a rising trend, increasing by 917.9 percent, from 11.8 rubles to 120.1 rubles per pack. However, cigarette affordability presents two stages during this period: an ascending trend between 2002 and 2008, and a descending trend between 2008 and 2017. The most affordable year for Russian smokers was 2008, when cigarettes were 2.07 times more affordable than in 2002. By contrast, 2017 was the least affordable year, when cigarettes were 22 percent less affordable than in 2002 and 62 percent less afford- able than 2008. 26 // Results Table 3: Global comparison of cigarette affordability rankings COUNTRY COUNTRY COUNTRY COUNTRY AFFORDABILITY AFFORDABILITY AFFORDABILITY AFFORDABILITY RANKING FROM RANKING FROM RANKING FROM RANKING FROM BLECHER AND VAN AUTHORSb KOSTOVA ET ALc AUTHORSb WALBEEKa 2006 2008 2009 2016 MOST AFFORDABLE (LOWEST RIP) Russia Russia Russia Russia Mexico Ukraine Brazil China Poland Philippines China Brazil Romania Brazil Philippines Uruguay Brazil Poland Ukraine Ukraine Uruguay China Turkey Philippines Philippines Turkey Egypt Mexico Thailand Egypt Poland Poland Turkey Uruguay Vietnam Egypt Indonesia Mexico Mexico Indonesia China Romania Uruguay Vietnam Vietnam Thailand Romania Thailand Egypt Indonesia Thailand Turkey India Bangladesh Indonesia Romania Bangladesh Vietnam Bangladesh Bangladesh India India India LEAST AFFORDABLE (HIGHEST RIP) Notes: a Ranking based on RIP which is the retail price of 100 packs of the most-sold brand as a percentage of GDP per capita for year 2006, as reported in Blecher and van Walbeek (2008). b Ranking based on RIP as the retail price of 100 packs of the most-sold brand as a percentage of GDP per capita for year 2008 and 2016 respectively. The RIP of Russia was calculated by the authors, and the RIP of other countries was sourced from the appendix of WHO (2017).10 c Ranking based on RIP calculated as the Global Adult Tobacco Survey-derived median price paid for 2,000 cigarettes, relative to per capita GDP in PPP-adjusted constant dollars, as reported in Kostova et al (2014). The RIP for China in 2006, 2008, 2009 and 2016 was sourced from the study of cigarette affordability in China conducted by Zheng et al (2017). The RIP for Indonesia in 2006, 2008, 2009 and 2016 was sourced from the study of cigarette affordability in Indonesia conducted by Zheng et al (2018). 10 Available at http://www.who.int/tobacco/global_report/2017/appendix-ix/en/. 27 Cigarette Affordability in the Russian Federation 2002-2017 2. A positive correlation is perceived between cigarette affordability and cigarette con- sumption in Russia. From 2002 to 2008, cigarette consumption increased by 17 per- cent along with 107 percent of affordability increase; from 2008 to 2017, cigarette consumption decreased by 34 percent, with a 62 percent of affordability decrease. 3. From 2010 to 2017, economy cigarettes were the least affordable category, while mid-price cigarettes held the middle level of affordability, and premium cigarettes remained the most affordable category of cigarette in each year during this period. All three categories present descending affordability trends since 2010: affordability for economy cigarettes fell the most (by 62 percent), leading to a 53 percent con- sumption decrease; mid-price cigarette affordability fell by 51 percent, leading to a 17 percent decrease of consumption; and premium cigarette affordability fell the least (by 43 percent), leading to a 26 percent consumption decrease. As a result, the economy cigarettes’ market share shrank dramatically, while mid-price brands and premium brands expanded their market shares. 4. From the perspective of global comparison, Russia has been ranked as the most affordable country among counterpart countries during the period 2006–2016. This indicates that despite striking progress since 2010 in reducing the affordability of cigarettes, Russia still has ample room to do more. Given the country’s still-high smoking prevalence rates, and the huge preventable loss of life from smoking, raising tobacco taxes to substantially reduce cigarette affordability should be given high priority as a key part of Russia’s overall tobacco control effort. 28 // Results 29 IN TERMS OF LOO INTO CIGARETTE AFFORDABILITY I RUSSIA AND ACR DIFFERENT INCO GROUPS, THIS RE ADOPTS PER CAP DISPOSABLE INC (I.E. PER CAPITA INCOME AFTER T DISCUSSION The Specific Oriented Excise Structure is Favorable for Delivering Optimal Results Russia applies a mixed cigarette excise tax structure with high reliance on specific tax (for example, in 2017, specific tax accounts for 65 percent of total excise), a minimal retail price setting, and a uniform specific tax applied for both filter and non-filter cigarettes. All these features are favorable to delivering optimal results. The specific-oriented excise tax structure benefits for reducing the price gap between higher- and lower-priced products. In Russia for instance, the economy brand category had a lower affordability level than the middle and premium brand categories during each of the observation years between 2010 and 2017 because the lower-income group is far poorer than the middle and higher income groups. The affordability of the economy category also declined the most, by 62 percent, which led to consumption also decreasing the most among all brand categories (by 53 percent). This is, to a substantial extent, the result of the effect on sales prices of the highly desirable structural shift in tobacco taxes from ad valorem to uniform specific excises. This shift maximizes health benefits for three reasons: lower-income groups tend to smoke more and be more price responsive; importantly, young people, still with relatively low disposable incomes and not yet firmly addicted to tobacco, also are more price responsive; and uniform specific excises encourage higher- and middle-income smokers to stop or cut back rather than to swap to lower-price brands. Macroeconomic Environment Helps Drive Cigarette Affordability in Russia The Russian government raised excise tax on cigarettes annually during the observation period of 2002–2017, which led not only to average price rises but also sub-category price rises. With the consistent ascending price trend during the period 2002–2017, the affordability, however, presented two stages with opposite trends, which to a large extent were due to the difference in income growth during 2002–2008 and 2008–2017. In other words, the macroeconomic environment plays an important role in cigarette affordability trends in Russia. This is because: • The Russian economy heavily relies on its energy sector exports. After the debt crisis in 1998, the devaluation of the Russian ruble, together with the uninterrupted upward trend that oil prices experienced in the period from 1999 to 2008, propelled 31 Cigarette Affordability in the Russian Federation 2002-2017 the Russian economy to grow at an annual average rate of 7 percent.11 Tax increases did not provide a sufficient rise in retail prices, so rapid increases in nominal per capita disposable incomes resulted in an increase of cigarette affordability of 107.5 percent between 2002 and 2008. • Russia was among the economies hardest-hit by the 2008-2009 global economic crisis: the economy plunged 7.8 percent in 2009 as oil prices plummeted and foreign credit dried up. The economic contraction was the sharpest since 1994, which directly resulted in the decreasing in cigarette affordability in 2009. Although no long-term damage was caused due to the government’s proactive and timely response to ring-fence key sectors of the economy from the effects of the crisis, Rus- sia’s economy did not return to its pre-recession size. That, together with increases in tobacco taxes that accelerated from 2010, caused cigarette affordability after 2008 to follow a continuous descending trend. Big Achievements, but Challenges Remain Russia has accelerated implementing tobacco control measures, including raising tax and prices after adopting the WHO FCTC in 2008. From 2010 to 2017 the average excise tax increase in Russia was seven-fold. This increase helped to deliver the following results • Real cigarette prices increased by 145 percent from 2010 to 2017, while real dispos- able per capita income increased by only 12 percent, making cigarettes much less affordable. • Sales decreased from 383 billion cigarettes in 2010 to 259 billion cigarettes in 2017 – a decrease of 124 billion cigarettes, or 32 percent, and by 31 percent per capita. • According to the Global Adult Tobacco Survey, tobacco use prevalence significantly decreased among Russian adults, falling from 39.1 percent in 2009 to 30.5 percent in 2016 (from 60.2 percent to 49.8 percent among males; from 21.7 percent to 14.5 percent among females). This represents a 22 percent relative decline in tobacco use prevalence for the period under review. However, big challenges remain despite the achievements made. Smoking prevalence still is among the highest in the world and the average cigarette price is still very cheap – in 2017, the average price of a pack of 20 sticks was 120 rubles (US$1.8). Total tax, including VAT, amounts to only 55.8 percent of retail price, far below the 75 percent recommended by the WHO. Even after the recent tax increases, cigarette affordability remains at the highest level among the largest tobacco-using countries, as it has since 2006. The combination of very high prevalence and very high affordability, both in comparison with 10 See https://www.focus-economics.com/countries/russia. 32 // Conclusion other countries, suggests the importance of continuing rapid tobacco tax reform. This means continued and accelerated significant increases in specific tobacco excise taxes and tobacco prices at a rate well above current rises in disposable income. 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Washington, DC: World Bank. 35 Cigarette Affordability in the Russian Federation 2002-2017 APPENDIX 1: CIGARETTE PRICE AND CIGARETTE AFFORDABILITY, 2002-2017 DISPOSABLE NOMINAL REAL AVERAGE INCOME RELATIVE INCOME AVERAGE PRICE (RUBLES PURCHASING CIGARETTE INCOME YEAR PER CAPITA PRICE PER PACK, CAPACITY AFFORDABILITY PRICE NATIONWIDE (RUBLES BASE YEAR AVERAGE INDEX AVERAGE (%) (RUBLES) PER PACK) 2002) (PACKS) 2002 47,366 11.80 11.80 2.49 4,014 1.00 2003 62,009 12.77 11.23 2.06 4,857 1.21 2004 76,788 13.82 10.96 1.80 5,557 1.38 2005 97,060 15.24 10.73 1.57 6,371 1.59 2006 121,858 17.69 11.36 1.45 6,889 1.72 2007 150,482 19.91 11.73 1.32 7,556 1.88 2008 178,363 21.42 11.06 1.20 8,327 2.07 2009 202,740 24.83 11.48 1.22 8,164 2.03 2010 227,501 29.09 12.59 1.28 7,820 1.95 2011 249,360 33.92 13.53 1.36 7,351 1.83 2012 278,653 43.10 16.37 1.55 6,465 1.61 2013 311,138 49.92 17.75 1.60 6,233 1.55 2014 333,199 68.15 22.48 2.05 4,889 1.22 2015 365,599 82.79 23.64 2.26 4416 1.10 2016 368,933 104.74 27.94 2.84 3,523 0.88 2017 377,724 120.1 30.90 3.18 3,144 0.78 Sources: Disposable income per capita nationwide is sourced from Federal Statistics. Data at https://www.fedstat.ru/indicator/30992; http://www.gks.ru/free_doc/new_site/population/urov/urov_14g.xls. The nominal average price is calculated by the authors, based on Euromonitor’s data retail sales value and sales volume; the real average price is calculated from the nominal average price and CPI sourced from the World Bank. Data at https://data.worldbank.org/indicator/FP.CPI.TOTL?locations=RU. The RIP average, IPC average, and CAI average are calculated by the authors. 36 // Appendix APPENDIX 2: CIGARETTE AFFORDABILITY OF ECONOMY, MID-PRICE AND PREMIUM BRANDS, 2010-2017 DISPOSAL INCOME PER PRICE (RUBLES PER PACK) RIP (%) CAPITA (RUBLES PER PACK) YEAR MID- MID- HIGH- MIDDLE- LOW- PREMIUM ECONOMY PREMIUM ECONOMY PRICE PRICE INCOME INCOME INCOME BRANDS BRANDS BRANDS BRANDS BRANDS BRANDS 2010 54,2589 178,588 59,150 47 35 22 0.87 1.96 3.72 2011 59,0983 196,994 64,834 63 38 29 1.07 1.93 4.47 2012 66,3195 219,207 72,450 72 41 35 1.09 1.87 4.83 2013 74,0509 244,762 80,896 85 54 39 1.15 2.21 4.82 2014 78,9682 263,227 86,632 92 67 54 1.17 2.55 6.23 2015 860,986 290,042 96,884 105 76 70 1.22 2.62 7.23 2016 868,837 292,687 97,767 125 100 75 1.44 3.42 7.67 2017 883,884 300,924 101,988 135 120 100 1.53 3.99 9.81 37