While in the debate on Ukraine’s EU membership, there is a focus on the country’s compliance with core EU values, little attention is paid to the fact that by accepting Ukraine, the EU is about to open its doors to a country that has been supplying the bloc’s illegal markets, given that historically, Ukraine has been a gateway for illicit tobacco smuggled into the European Union.
According to experts, Ukraine has become the largest source of illicit tobacco in Europe, surpassing China in 2020. Despite the Russo-Ukrainian war, illicit tobacco products are still flowing from Ukraine-based factories to Europe, moreover, Ukrainian manufacturers are trying to boost the production inside Ukraine. In addition, a new form of illicit trade has appeared, under the guise of humanitarian aid.
Black market costs Ukraine more than one billion USD each year, studies say which means that losses from tax evasion in the tobacco sector alone amounted to billions, both in hrynyas and U.S. dollars.
Given Ukraine’s large-scale illicit tobacco production, all European citizens, regardless of whether they are smokers or not, have already seen counterfeit Ukrainian cigarettes. However, few people have any idea of the long and adventurous journey this luxury product takes from the manufacturers in Ukraine to European consumers.
In order to the illicit products could reach the consumption market in the EU, as a rule, there must be order within the black market in Ukraine. This internal order can only be secured if the respective Ukrainian regulatory bodies and law enforcement agencies are well bribed, while the oligarchs and politicians who control the tobacco market work closely together in order to secure the system’s trouble-free working.
According to studies, the size of Ukraine’s informal economy is estimated to be 44.2%. This figure suggests that there is a complex illicit ecosystem in Ukraine. The key actors in this illicit trade ecosystem include political elites, corrupt officials, law enforcement and local organized crime groups. There are several examples for the illicit tobacco production functioning under the protection of law enforcement officials as well as elected members of the Ukrainian Parliament. The revealed cases clearly show the embeddedness of Ukrainian-Russian trade networks, corruption, the informal economy, and money laundering infrastructure, all built around illicit tobacco production.
One of the illicit tobacco hubs is located in Lviv, western Ukraine. The Lviv Tobacco Factory, which is owned by Russian citizen Vladimir Kazakov, who also runs the Baltic Tobacco Factory (BTF), produces millions of packs of contraband cigarettes per week. The cigarettes from this smuggling empire are transported to EU countries by road, while huge shipments arrive, by sea routes, in the United Kingdom, even the United States, where they often end up in online shops. As for the BTF, a company located in Kaliningrad, Russia, this is the organization behind the entire black market.
Journalistic investigations suggest that the Lviv Tobacco Factory might be benefiting from political protection saying that the factory stands as a vivid illustration of the collusion between the private sector, political authorities, and the underworld. From these materials, the fact that director of the Lviv Tobacco Factory Hrihory Kozlovskiy (also the alleged head of the entire Ukrainian tobacco mafia), maintains close ties with Russian organized crime figures such as Viktor Panyushin (a.k.a. Pan) and Ukrainian criminals such as Yuriy Fedoriv (a.k.a. Musician) has been well known for a while.
To put it simply, this is the group of people who control the illegal tobacco trade in Western Ukraine, under the control of Kozlovskiy who, within this criminal scheme, can be called an intermediary, someone between criminals and political circles.
Kozlovsky is a co-owner of Vynnyky Tobacco Factory, which has been suspected of mass production of cigarettes for the black market, and investigated for tax evasion. He also owns resorts, hotels, construction companies, restaurants, and the football club Rukh. He also has investments in the Ukrainian healthcare sector. He portays himself as a ’Ukrainian businessman from Lviv and philanthropist’. Since the beginning of the war between Russia and Ukraine, he has been active in volunteer activities. In 2022 he founded the Charity Foundation Merciful Home, specialized in providing humanitarian assistance. His ’More Than Anything’ project’s goal is to provide treatment and rehabilitation for wounded Ukrainian soldiers and civilians. Over the past years, Kozlovskyy has received awards from the Ministry of Defense, the President of Ukraine, the Orthodox Church of Ukraine, for his assistance to the Armed Forces of Ukraine and the Ukrainian people.
In addition to criminal figures and Kozlovskiy as an intermediary, well-known oligarchs such as Ihor and Hrihory Surkis are also involved in the illegal tobacco trade. Their involvement in this business goes back to the years after the fall of the USSR. The Surkis brothers also own football clubs, including FC Dynamo Kyiv and other sports institutions, which they use for money laundering.
On the scheme’s next level, there are representatives of top political circles, such as David Arakhamiya, faction leader of the ruling Servant of the People party, who maintains contact with Hrihory Kozlovskiy, according to investigative journalists. The dirty money Arakhamiya receives from Kozlovskiy from illegal tobacco trading, allegedly is used to pay bribes to Ukrainian MPs in order to get certain bills passed.
According to Ukrainian media reports, Arakhamiya was lobbying for tax amendments that allows tobacco corporations to reduce excise taxes and cause serious damage to the Ukrainian state budget. As it was revealed some years ago, Arakhamiya intensified his attempts to pass tax benefits for manufacturers of sticks for electronic cigarettes through the Ukrainian parliament. His wife Victoria owns an offshore company, Global Bay Venture Limited, in the Seychelles.
Given that Arakhamiya as faction leader is one of President Zelenskyy’s closest political allies, not only his relationship with Kozlovskiy but also the true nature of that relationship can be no secret to the president. However, despite he is fully aware of how the tobacco mafia works, including its entire scheme and those involved, Zelenskyy has never done anything to combat it. On the contrary, with the adoption of certain laws, he has actively supported these criminal activities, in particular, with his contribution, the key figures involved in illicit tobacco trade such as Kozlovskiy are not included on the Ukrainian sanctions list.
President Zelenskyy’s turning a blind eye to the situation, as well as the lax rules in Ukraine (which is also due to Zelenskyy’s personal engagement in the scheme), have enabled enormous wealths to be accumulated from the illegal tobacco trade. According to the criminals’ tried and tested practice, those involved launder their illegal incomes through offshore companies – more than 100 offshore companies have been registered with the help of Ukrainian lawyer Natalia Haiduk –, convert them into cryptocurrencies, and then invest in real estate in countries such as the United Kingdom or Austria. In addition, large amounts of cash are being smuggled into the EU across the Ukrainian border.
Ukraine’s illegal trade in tobacco products not only causes significant revenue losses for the Ukrainian state budget but, it also should be added that annual EU losses from smuggling of Ukrainian cigarettes are also billions of euros, moreover, it is a source of financing of criminal structures in Ukraine. In light of the situation, the realistic chance to root out corruption within law enforcement, customs and government is quite small. With President Zelenskyy and friends directly engaged in criminal activities, the only common sense decision on behalf of the EU would be to revise Ukraine’s membership bid.
