The Ukrainian tobacco shadow economy has been growing steadily since 2018. Back then, it accounted for 4.7% of the market. This trend accelerated after the start of the full-scale war. By the end of 2023, experts from Kantar Ukraine estimated that one in four cigarettes in Ukraine was produced illegally.

However, by March 2024, the overall level of illegal tobacco trade in Ukraine had decreased to 19.1% from 25.7% in October of the previous year. This decline is attributed to efforts to counteract illegal distribution schemes.

Media reports identify the major counterfeit producers in Ukraine, detailing locations and naming individuals who profit from these activities.

They can be conditionally divided into "gray" companies that hide behind legal production and openly illegal "black" companies.

LIGA.net has compiled data on the beneficiaries of this shadow market in Ukraine.

Kings of the "gray" zone

Counterfeit and illegal cigarettes in Ukraine are either smuggled in or produced domestically. 

The situation is like a swinging pendulum in terms of domestic production and countermeasures. Reports of successes, raids and seizures of illegal cigarettes and equipment appear periodically, but later, usually through the courts, all of this is returned to the owners, and the cycle repeats itself.

An example of a "gray" production site is the Lviv Tobacco Factory in Vynnyky. According to Kantar, in 2022, 64% of illegal cigarette production in the country was attributed to this company. 

At that time, the company was owned by Lviv businessman Hryhoriy Kozlovskyy, according to YouControl. However, he later left the list of founders.

The production facilities at the Lviv Tobacco Factory host several companies previously associated with Kozlovskyy and his business partners. Currently, according to YouControl, he is no longer listed as a founder of any tobacco-related companies. On March 29, 2023, the Commercial Court of Lviv Oblast approved a settlement agreement between Bytskyi and Svishchov, and on April 27, 2023, another settlement agreement between Bytskyi and Kozlovskyy was approved.

Local media reports state that the factory premises belong to Kozlovskyy's daughter, Sofiya Maksymets, while the cigarette brands Marvel, Strong, and Lifa, produced there, are owned by Oleksandr Svishchov's daughter, Viktoria Svishchova.

Lviv Tobacco Factory in Vynnyky and Marvel International Tobacco Group distribute their products through Trading House Marvel, owned by Oleksiy Riznyk.

Media reports have revealed tax evasion schemes involving so-called "duty-free schemes." Under this scheme, cigarettes are ostensibly produced under contracts with duty-free shops operating at borders and airports. According to the documents, the cigarettes are sold in these duty-free shops, but in large quantities per individual buyer. In reality, distribution takes place through retailers, markets, train stations and online.

How is counterfeit tobacco sold?
Illegal tobacco products are sold in Ukraine through online platforms, Telegram channels, and postal operators. Telegram groups post product prices and photos of cigarette packs, most of which lack excise stamps. Sales often require a minimum purchase of three or five blocks. These channels are interconnected, and cigarettes are shipped via mail services, which cannot inspect every parcel.

In early March 2023, detectives from the Economic Security Bureau of Ukraine conducted a search at the Lviv Tobacco Factory and found 1.6 million packs of cigarettes without excise stamps, resulting in a tax loss of 85 million UAH ($2.3 million). However, by September 27, 2023, the Shevchenkivskyi District Court of Kyiv lifted the seizure on the factory's property.

A special law was enacted on October 1, 2023, to counter the duty-free scheme, limiting sales volumes.

Also, in the context of the production of "gray" counterfeit goods on the basis of legal enterprises, the media mention another company: United Tobacco and an enterprise located in the city of Zhovti Vody in the Dnipropetrovsk Oblast. It is associated with the former MP of the ruling party at the time, Mykola Martynenko.

In August 2022, the company was deprived of its license and production was halted. This required the intervention of President Volodymyr Zelenskyy.

Before that, the factory was searched by the State Fiscal Service, the National Police, and the Security Service of Ukraine in 2018-2021.

Despite being shut down in August 2022, the factory allegedly resumed operations in Ternopil Oblast.

Another "gray" production site mentioned in the media is Ukrainian Tobacco Production in Hoshcha, Rivne Oblast, linked to the former owner of Donetsk's Hamadei Tobacco Factory, Vladyslav Helzin. This factory is said to produce counterfeit versions of well-known brands for export to the EU.

Exporting counterfeit: hidden in fuel tanks, transported by homemade drones
The scale of counterfeit production in Ukraine is such that attempts are being made to smuggle them into EU countries, where they fetch higher prices. According to the Economic Security Bureau of Ukraine, in 2023, in the Chernivtsi Oblast, cigarettes were hidden in fuel tanks, with trucks passing through customs as empty and returning with fuel. In the Volyn Oblast, locals used homemade drones with parachutes to smuggle cigarettes into Poland. In Zakarpattia, smuggling was also carried out with homemade UAVs, and packages of cigarettes were glued with reflectors to make them easier to find after they were dropped.

"Black king" of the Odesa catacombs

Regarding "black schemes," in 2023, it became known about the seizure of underground equipment used for the industrial production of tobacco products in the Odesa catacombs. Along with it, 1.3 million packs of cigarettes with counterfeit excise stamps and nearly 20 tons of tobacco raw materials were confiscated.

According to LIGA.net, law enforcement authorities estimate that this equipment, capable of producing up to 100,000 packs of cigarettes per day, may be worth $150-200 million.

The seized production and packaging lines were initially arrested after the raids. However, in March 2024, the Shevchenkivskyi District Court of Kyiv lifted the arrest, citing that the property was leased and the ultimate owner was a controlled enterprise.

Law enforcement officials have stated that "the mentioned company is affiliated with a well-known sanctioned Odesa smuggler."

In this context, it is noteworthy that after the court decided to lift the arrest on the Odesa "catacomb" line in late March, the President of Ukraine published a decree on April 4 based on a decision by the National Security and Defense Council.

According to this decree, Vadym Alperin, whose name is frequently mentioned in the media in the context of corruption at the Odesa customs and even referred to as the "King of Contraband," was subjected to personal sanctions. These include a temporary prohibition on using and disposing of assets he owns, as well as assets he may be directly or indirectly associated with through other individuals or entities.

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