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Russia Targets Alcohol Industry

October 7, 1998

MOSCOW (AP) _ Boris Smirnov’s family began making vodka more than a century ago, and has always had to satisfy two unquenchable thirsts: the Russian love of strong drink, and the government’s craving for taxes.

Russia’s czars got up to half their revenue from taxing vodka. The Communists went one better, nationalizing the entire industry, including the Smirnov firm. And now President Boris Yeltsin’s government seeks to fill its empty treasury by imposing greater control on Russia’s prolific alcohol producers.

``The government already takes almost everything we make,″ claimed Smirnov, a burly, bearded man who runs Smirnov vodka from a pastel yellow mansion just a few blocks from the Kremlin. ``If they ruin the alcohol business, then Russia won’t have any money or anything to drink.″

But with the Russian government broke, and the economy crumbling by the day, the alcohol industry is once again an irresistible target.

Yeltsin issued a decree Tuesday that calls for the government to take a controlling stake in all 184 distilleries that legally make pure alcohol.

In most instances, the government already has a controlling interest in the distilleries, but that hasn’t prevented a river of untaxed, illicit spirits from flowing onto the market.

The companies that purchase their pure alcohol from the distilleries and then make name brands, such as Stolichnaya and Smirnov vodka, will remain in private hands, but they fear the greater regulation will affect them as well.

According to the government, Russians consume a staggering 2.1 billion liters of vodka a year _ that’s 28 bottles for every man, woman and child.

But fewer than 1 billion liters come from government-licensed producers, which means that more than half of all vodka is eluding the tax man.

Some bootleg booze comes from the licensed distilleries that secretly produce extra alcohol. The remainder comes from the bootleggers.

Russia’s free-for-all capitalism has created a robust, if chaotic, market with dozens of domestic and foreign companies selling cheap, plentiful booze. Indeed, the alcohol business is one of the country’s few hardy industries.

Boris Smirnov has been able to re-establish the firm that the Communists commandeered. He’s also engaged in a protracted legal battle with the American-made brand, Smirnoff, which has been produced abroad since the 1930s, when a Smirnov family member who had left Russia sold the name.

Smirnov’s company now offers pepper vodka, as well as lemon, orange and cranberry. There’s even cowberry and whortleberry vodka.

Consumers are happy, but the government now gets no more than 4 percent of its revenues from alcohol taxes, down from roughly 25 percent during much of the Communist era.

Deputy Prime Minister Gennady Kulik said the government has no intention of nationalizing private firms, but it does want a better grip on the wholesale alcohol trade. The new plan could raise an additional $2 billion a year.

The scheme revives an age-old question about: Who is more addicted to the bottle, ordinary Russian citizens or their government?

The newspaper Trud traced the first Russian alcohol tax to the 10th century, uncovered reports of bootleggers in the 15th century, and said the first anti-alcohol campaign began _ and failed _ in 1652.

Soviet President Mikhail Gorbachev tried to persuade his countrymen to give up the bottle a decade ago. They didn’t, and he earned their eternal enmity.

Yeltsin, who’s been known to enjoy a drink, has portrayed legal consumption as a patriotic duty.

``When people spend their money on vodka, it should go to the treasury, not to swindlers,″ Yeltsin said in a radio address last year. ``We will give (the tax money) to pensioners, soldiers, doctors, and teachers. It will help build the economy.″

Yeltsin’s government last year banned vodka sales from street kiosks, where much bootleg vodka is sold. But enterprising kiosk owners built tiny add-on rooms so they could then pretend they were full-fledged stores, and thereby sell vodka.

The government also tried to raise the minimum price for vodka, but that just further stimulated the black market. Legal vodka costs $2 a bottle, and remains affordable even for poor Russians.

Smirnov said his company makes less than seven cents for each bottle of vodka it sells, and almost half of that goes to taxes.

``The government should do more to fight bootleggers,″ Smirnov said. ``It should implement all the old laws before it introduces new ones.″

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