In the shadow of the war and budget holes, the illegal tobacco market in Ukraine has once again returned to the growth trajectory. Schemes of production, smuggling and trade, which worked undercover for years, not only survived, but also took advantage of new conditions: the rise of excise taxes, the fall of the population’s income, the overloading of the law enforcement system by the war. According to experts, state budget losses due to non-payment of taxes in the tobacco sector amount to more than 24 billion hryvnias — an amount that, in the military economy, is commensurate with the purchase of 400,000 FPV drones. The return of illegal tobacco to such large-scale positions in the conditions of war creates not only fiscal losses, but also demonstrates the stability of corruption schemes that continue to ensure the unhindered work of shadow manufacturers and smugglers even under extraordinary conditions. The problem is a stable parallel economy that works as efficiently during the war as it did before it.
Illegal tobacco during the war: how Ukraine loses billions
During the war, tax discipline has a direct connection with the state’s defense capacity, so political leaders have spoken harshly about it at different times. During the Second World War, US President Franklin Roosevelt emphasized that tax evasion in armed conflict is not just a crime, but a direct harm to the state’s defense capability. US President Harry Truman, who succeeded Roosevelt, declared that non-payment of taxes during wartime was treason.
In turn, the Prime Minister of Great Britain, Winston Churchill, noted that a person who avoids paying taxes in wartime is shooting his soldiers in the back. He also emphasized that victory in war is ensured by sweat, blood and taxes. General Dwight Eisenhower emphasized that every cent that was not included in the budget reduced the number of ammunition at the front. During the armed conflict in Vietnam, US Treasury Secretary William Simon pointed out that war requires not only bravery on the front, but also financial responsibility behind the scenes. After the start of a full-scale war between Russia and Ukraine in 2022, Polish President Andrzej Duda noted that the honesty of the taxpayer during the war is a matter of the survival of the state.
In Ukraine in 2025, these words sound like a sentence. The war is now in its fourth year, and the shadow tobacco market is once again showing defiant growth, undermining an already strained budget. Each illegal pack of cigarettes is not only a lost excise duty, but also a broken contract for drones and other weapons, underfunded salaries of the military, unbuilt fortifications, and under-received funds for the treatment and rehabilitation of our defenders.
In 2025, the illegal tobacco market in Ukraine went up again after a short-term decline. According to Kantar Ukraine, already in February 2025, the volume of illegal tobacco products in the country increased to 14.1% of the total market. This is the first increase after a steady decline through 2024. According to their estimate, the total volume of illegal cigarettes in 2025 may amount to about 5 billion pieces. At the same time, the amount of unpaid taxes to the budget of Ukraine will exceed 24.2 billion hryvnias. It is not abstract, because for this amount Ukraine could buy at least 120 combat drones of the “Bayraktar” type or more than 400 thousand FPV drones, which have already become one of the main elements of success on the front. Also, with this money, it would be possible to maintain more than 50 thousand soldiers for almost a year, paying them salaries of 40-45 thousand hryvnias. This is funding for 12,000 apartments for those who lost their homes due to the war. These are three new military hospitals or the strengthening of Ukrainian air defense, which today saves hundreds of lives every day.
The situation is much more serious than a single figure for the current year. The dynamics of recent years show that losses from shadow tobacco are estimated at tens of billions every year. Thus, in 2023, the share of the illegal cigarette market reached a record 25.7% in October, and the average annual figure was 21.8%. The volume of shadow goods then reached 353 million 115 thousand packs. According to the calculations of the “Ukrtyutyun” association, the budgets of all levels then received a shortfall of 23.5 billion hryvnias only due to non-payment of excise tax, VAT and retail excise duty. That is, every fifth cigarette was sold in violation of the law.
In 2024, the state managed to partially roll back the growth of the illegal market. After the peak year of 2023, the share of shadow cigarettes began to decline. The average annual share of illegal production fell to 16.1% — this was the lowest figure since the beginning of the Great War. During the year, the dynamics remained unstable: in July 2024, the share was 14.6%, in October it decreased even more to 12.6%. However, this progress was short-lived. Already from the beginning of 2025, the trend turned again in the opposite direction: the illegal segment began to increase volumes.
Even against the background of these fluctuations, the amount of losses for the state budget remains critical. The International Monetary Fund notes in its reports that Ukraine loses from 17 to 31 billion hryvnias in excise taxes from illegal tobacco every year. These are official figures that are included in the monitoring of IMF missions during the review of Ukraine’s financial stability. In other words, the scale of losses from the shadow tobacco market is included in the list of key risks for the macro-financial stability of the state in conditions of war.
If we take into account non-payment of excise duties, VAT and retail tax, direct budget losses exceeded 70 billion hryvnias in the last three years of the war alone. According to various estimates and taking into account the fluctuations of shares in different months, the total amount of shortfalls for 2023, 2024 and the beginning of 2025 is close to 75-80 billion hryvnias. This amount is comparable to the annual expenditures of the Ministry of Health. This is more than the state spends on all state support for education. This is twice as much as the funds that Ukraine was able to allocate in 2023 for arming the army from internal budgetary sources, excluding Western aid.
However, tax losses are only part of the problem. The illegal tobacco business creates a much wider zone of toxic pressure: it is shadow employment, illegal cash circulation, corruption schemes in law enforcement and control bodies, reputational risks when receiving international financial support. The state is forced to justify to donors every time why the existing obligations to combat smuggling remain declarative.
So, the words of prominent politicians of different years in Ukraine in 2025 took on a literal meaning. Tax evasion during the war ceased to be an economic problem, but turned into another form of attack on the state, which holds the front every day.
What does the mechanism of this looting look like and who benefits
After the government’s crackdown on the shadow tobacco market in the first years of the full-scale war, the mechanisms of illegal business did not disappear. They changed their tactics, but did not stop bringing billions in losses to the budget of Ukraine even at a time when the state is waging a heavy war. And those behind these schemes have not only preserved their business, but multiplied it, continuing to profit from every pack of counterfeit or duty-free cigarettes.
The basis of the illegal market remains domestic underground production, which is located mainly in the central, northern and southern regions of Ukraine. They operate under the guise of fictitious enterprises registered as front persons or offshore companies, often masquerading as legal production with permits and certificates. According to analysts, most of these illegal factories continue to function thanks to formal loopholes in the permitting procedures. When law enforcement agencies search and seize products, these factories actually move the equipment to another location and resume operations in a short time.
After the start of a full-scale war, the authorities tried to strike at these chains: in two years, more than 500 searches were conducted, thousands of boxes of counterfeit cigarettes were seized, and part of the transport channels were liquidated. But, as the reports of the tax service show, the participants of the schemes quickly adapted. The transportation of large consignments was replaced by small retail transit with intermediate transfer bases. Part of the goods are processed as humanitarian goods. It is the humanitarian sphere that has become one of the most vulnerable areas, where illegal goods move easily through the country without sufficient checks.
A separate area of abuse is the so-called pseudo-export. Until 2023, there was a rule in Ukraine that allowed the production of cigarettes for export at a zero excise rate. Formally, the goods were exported from Ukraine, but a significant part of them returned to the domestic market, bypassing excise duties and VAT. According to experts’ estimates, the budget lost up to 10 billion hryvnias annually due to this scheme. In 2024, some of the loopholes were closed, but a significant amount of illegal products continues to enter Ukraine. At the same time, the main sources of the illegal market are underground factories on the territory of Ukraine, smuggling from the countries of the European Union, transit from Belarus, re-export schemes from Moldova and the countries of the Caucasus. Illegal productions are located mainly in the central, northern and southern regions of Ukraine, often covered by legal enterprises with fictitious reporting.
Counterfeit excise stamps remain an important component of the shadow market, some of which are printed outside of Ukraine — primarily in Transnistria. According to official data of the State Customs Service, in 2023, the number of detected counterfeit stamps doubled. Already in 2025, according to Kantar Ukraine, a third of illegal cigarettes (33%) in Ukraine had fake excise stamps, 67% were fakes of international brands.
It should be noted that Kantar analysts name Marshall Finest Tobacco, United Tobacco, VK Tobacco FZE as the key players in the counterfeit products market in 2025, which together account for 25% of counterfeit cigarettes without excise stamps, as well as Ukrainian Tobacco Production, which accounts for another 8%. At the same time, the share of contraband deliveries decreased: from 2.7% in 2021 to 0.6% in February 2025, although surges up to 2.2% in April and 2.6% in October were recorded during 2024. The average level of smuggling in 2024 was 1.9%.
One of the most common schemes is the illegal sale of products manufactured allegedly for Duty Free or export. These products enter the retail trade tax-free, which allows them to be sold much cheaper than legal cigarettes. In February 2025, the share of illegal Duty Free products was 6.4%, the average annual indicator in 2024 was 5.9%. The share of counterfeit products in February 2025 reached 7%, while the average annual indicator for 2024 was 8.3%. According to Kantar Ukraine, more than half of illegal Duty Free products (55%) are produced at the Vynnykivka tobacco factory (Lviv region). The main brands are Compliment (50%) and Lifa (5%). The rest are Marshall (25%), Urta (9%), Brut (6%) and unknown producers.
Marshall Finest Tobacco Ukraine, operating in the village of Ostryv, Ternopil region, appeared in seizures after searches in 2024 due to suspicions of the production of illegal cigarettes. “Ukrainian tobacco production” in Gosh, Rivne region appears in a number of criminal cases for tax evasion, counterfeiting and smuggling. According to the court register, in 2023-2024, this company produced cigarettes of its own brands and counterfeits of international brands, selling them with fake excise stamps inside the country and through smuggling channels to the EU. In November 2024, the company lost its license.
The Vynnykivka tobacco factory has repeatedly found itself in the epicenter investigations. In March 2023, the Bureau of Economic Security found 1.6 million packs of illegal cigarettes in its warehouses, which caused a loss of 85 million hryvnias to the budget. The factory was accused of using schemes with cheaper excise stamps intended for cigars, which significantly reduced the excise burden. Violations of production certification procedures were also recorded, which gave grounds for suspending its license.
After the production of Duty Free cigarettes was banned in Ukraine, the shadow business moved to new pseudo-export schemes. During the customs clearance of containers, mainly in the port of Odessa, fictitious contracts are used with packing companies from Syria, Iraq, Turkey, and Thailand. The labeling of such products does not meet the standards of any of these countries, contains minimal information about the dangers of smoking, or does not contain such warnings at all. After customs clearance, the containers either remain in Ukraine, being sold at reduced prices without taxes, or are illegally exported to Europe, forming a black market for counterfeit goods in EU countries. At the same time, in customs declarations, the owners of such products are often indicated by the same players — Marshall Finest Tobacco Ukraine and Vinnykiv Tobacco Factory.
Despite dozens of searches, seizures, temporary production stops, these enterprises continue to work. No criminal case against major market participants has yet resulted in actual convictions, and the production and sale of illegal cigarettes continues, causing billions in losses to the state.
At the same time, illegal cigarettes are sold openly. According to Kantar Ukraine, in 2025 the main channels are kiosks (39% of illegal circulation), shops (29%), street vendors (14%) and markets (11%). That is, they are not sold underground. Moreover, the largest volumes of trade in illegal tobacco products were recorded in Dnipropetrovsk (28%), Odesa (16%), Lviv (9%), Kharkiv (8%), Kyiv (7%) and Khmelnytskyi (5%) regions. In these regions, illegal goods are sold virtually unhindered.
Responsibility for the existence of this criminal scheme is not limited to underground manufacturers or smugglers. Behind every illegal package is an entire infrastructure of retail sales, logistics, trade and the tacit consent of part of the law enforcement system. Without legal outlets that sell illegal products, this market would not exist on such a large scale. In fact, illegal cigarettes have become part of the legal market circulation.
It should be understood that the responsibility for the scheme, due to which the budget and the army do not receive significant sums, is borne not only by those who organize the production of counterfeit and duty-free products, but also by those who ensure their sale, buy these products, as well as those who have to fight this phenomenon. One can partially understand people who have lost their jobs, housing, stable income and are forced to save on everything, including cigarettes. However, this does not explain the fact that, due to this vulnerability of citizens, retail outlets operate quietly, the owners of which deliberately choose to sell illegal products, receiving a stable profit from this.
The state is actively fighting the shadow market. Law enforcement officers demonstrate searches, seizures, initiated proceedings. But behind every high-profile operation there is the same final picture: not a single high-profile case against the key producers of counterfeit goods during all the years of the war ended in a guilty verdict and a real punishment. Those who provide illegal production, sales and cover-up continue to work. Schemes change logistics, legal addresses, controlled companies, but remain active.
Among public activists, analysts, and some people’s deputies, there have long been accusations against law enforcement agencies and regulatory agencies that do not demonstrate real effectiveness in investigating these schemes. Their actions are often reduced to situational raids without a strategic result. This “blindness” and reluctance to bring cases to court is one of the key reasons for the preservation and further growth of the criminal shadow.
The situation is complicated by the fact that individual schemes are built on gaps in the legislation. For example, as early as 2023, there was a loophole in Ukraine – the production of cigarettes for export at a zero excise rate. Formally, the goods were exported from Ukraine, but then a significant part of them was illegally returned to the domestic market, bypassing excise and VAT. According to various estimates, the budget lost up to 10 billion hryvnias every year due to this scheme. In 2024, the state eliminated part of these regulations, but a lot of gray imports continue to enter the country through neighboring territories.
Another problem is that some of the illegal products are officially marked with fake excise stamps, which are manufactured outside of Ukraine, primarily in Transnistria. According to the State Customs Service, in 2023 the number of detected counterfeit stamps will double compared to the previous year.
Is there a chance to change the situation?
Breaking the system of illegal tobacco business in Ukraine is possible only with the simultaneous launch of a set of real, not declarative, measures. The first and key issue remains the effective work of law enforcement agencies. Without an effective investigation, which would not stop at loud searches and seizures, but would bring cases to specific guilty verdicts, it is impossible to destroy organized production schemes. Today, the vast majority of cases hang at the level of pre-trial criminal proceedings, individual sentences are selective, and the big players of the shadow market remain untouched. As long as there is a system of crushing at various levels — from individual law enforcement officers to high-ranking officials in central authorities — kiosks, factories, and logistics schemes operate without systemic failures.
Strict control over logistics channels should become the second element. The transportation of illegal cigarettes today takes place in small batches, along complex routes, through numerous intermediate points. Here, the internal transportation monitoring system and the control of the movement of goods not only when crossing borders, but also within the country — especially at warehouses, transshipment bases, and transport hubs — are critically important.
No less important is the complete closure of loopholes for pseudo-exports and gray Duty Free. As long as there are regulations that allow products to be formally declared as intended for export, manufacturers will take advantage of these loopholes. Containers with forged contracts issued to fictitious recipients in Syria, Iraq, Thailand or the Caucasus remain a source of illegal goods being returned to Ukraine or brought to the European black market. The prohibition of such schemes should be accompanied by the control of each export batch with a real check of the final buyer, the delivery route and documentary confirmation of the legality of the transactions.
A separate critical direction is the introduction of modern digital systems for tracking the production, circulation and sale of tobacco products. In the European Union, the Track&Trace system works, which allows you to trace the path of each package from the factory to the point of sale. In Slovakia, Poland and Lithuania, after the introduction of such systems, the volume of the illegal market decreased to the level of 3–5%. In Ukraine, attempts to launch such electronic systems have been blocked for years precisely by those for whom the shadow market has become a source of stable income.
Another necessary component is international cooperation. Part of the flows go through neighboring states, using their territory as a transit point or a source of counterfeit stamps. Joint investigative teams, data exchange between customs offices, coordination of criminal liability at the interstate level can complicate the work of cross-border chains.
However, none of the technical tools alone will ensure the result, if the main thing is not there – a clear political and executive will of the state authorities to completely dismantle the illegal model of tobacco products circulation built over the years. It is not about regular statements, high-profile press releases, isolated searches or one-off operations. The issue is the purposeful and systematic disruption of all links of the scheme at the same time: from production facilities where the counterfeit is manufactured, from warehouses where it is stored before distribution, from wholesale chains that organize sales, to retail outlets where illegal products are openly sold, and to those who provide administrative cover for these processes in control and law enforcement structures.
As you can see, as of today, such work is almost not carried out. Illegal factories continue to operate, containers with pseudo-export products pass customs clearance, retail outlets freely sell cigarettes without excise duty, and the budget loses funds that could finance the purchase of drones, weapons, equipment and everything that is critically needed for the army today. The full-scale war is now in its fourth year, but the internal economic schemes that rob the state during hostilities remain intact. So, while our military defends the country at the front, in the rear, the budget continues to lose billions because of those who shoot them in the back.
