The Illegal Online ENDS Market in Russia Will Exceed

RUB 23 Billion in 2021

According to the study, more than 46 million ENDS devices will be sold illegally on the

Russian-language Internet in 2021, with a total value of approximately RUB 23 billion. The

resulting loss to the federal budget is expected to exceed RUB 4.2 billion.*

Compared with 2020, illegal sales of ENDS have almost doubled.

Disposable vapes have become the most popular category in online sales. The disposable ENDS

market is expanding rapidly. It was estimated at 40 million devices in 2020 and exceeded 90

million devices in 2021.**

Due to insufficient regulation and the absence of effective deterrent measures, a significant

proportion of these products is sold illegally, without payment of taxes to the federal budget.

Gorodissky IP Security analysts forecast that, if the current trend continues and no new

regulatory measures are introduced, the illegal online ENDS market may grow to RUB 28.9

billion in the following year, while budget losses may exceed RUB 5.2 billion.

In total, the analysts identified more than 5,000 websites, social media groups and accounts

specialising in illegal ENDS sales, with a combined audience of more than 30 million users.

Distribution Channels

Sellers of illegal ENDS are actively moving online. Over the past year, Gorodissky IP Security

analysts recorded steady growth in the number of online offers.

Sellers are primarily focusing on disposable vapes, the fastest-growing product category.

The analysts identified more than 520 websites through which ENDS were sold illegally. Their

combined annual audience was approximately 18 million users.

Around 4,700 groups and accounts were identified on social media, with a combined audience of

approximately 12 million users.

The largest audiences were found on:

• VKontakte - 77.1%

• Instagram - 13.7%

• Telegram - 7.4%

Retail sales are particularly developed on VKontakte and Instagram. Easy registration, broad

accessibility to users of different ages and extensive coverage throughout Russia allow sellers to

distribute products quickly and arrange delivery within their region.

Online retail sales attract underage consumers because vapes can be purchased remotely from

such stores without identity or age verification.

Telegram accounts for only 7.4% of the total audience, but hosts a large number of wholesale

sellers. Products are generally purchased there for subsequent resale, and the largest

consignments of devices are distributed through the messaging platform.

Sellers frequently create networks and register resources across multiple platforms to reach a

wider audience.

They also create mirror resources that allow them to move quickly from one account or website

to another if a resource is blocked. One seller may operate an average of three to five such

mirrors.

The largest seller identified in the study operated more than 100 Telegram channels and more

than 100 associated websites.

Interestingly, these resources were connected with a wide variety of illegal activities, ranging

from counterfeit diplomas and assistance in obtaining driving licences to forged vaccination

certificates and remote alcohol sales.

This may indicate extensive involvement of organised crime in the illegal ENDS market.

How Much Do Illegal Sellers Earn?

• For the purposes of the study, illegal sales included:

• sales of counterfeit and fake products, referred to by sellers as "duplicates"

• sales of products imported unlawfully from other countries

remote sales of ENDS in circumvention of applicable legislation

The average price of an illegally sold ENDS device online was approximately RUB 500

Low wholesale purchase prices allow sellers to apply a significant mark-up to disposable vapes,

averaging approximately 150%.

Accordingly, the annual income earned by illegal sellers from disposable ENDS may exceed

RUB 13 billion.

Illegal payments are generally made through card-to-card transfers. The bank cards used may be

registered either in the names of nominees or in the names of the actual sellers.

The most popular illegally sold brand was HQD, accounting for 36% of all online sales.

The three leading brands were:

• HQD — 36%

• Puff Bar — 28%

• Maskking — 20%

Losses to the federal budget from illegal online sales in 2021 may exceed RUB 4.2 billion.* If

current trends continue, they may reach RUB 5.2 billion in the following year.*

It should be noted that disposable ENDS are not legally manufactured in Russia. All products are

imported, primarily from China.

According to the analysts' estimates, most ENDS devices enter Russia illegally.

The analysts identified the following factors contributing to the popularity of disposable ENDS

among illegal sellers:

• The price of disposable vapes is, in most cases, higher than the price of a pack of

cigarettes.

• High mark-ups allow sellers to earn more from smaller quantities of goods than from

cigarettes.

• Online channels are popular with the sellers' primary target audience, namely minors and

young people.

Illegal Online Advertising

In addition to the illegal sale of disposable ENDS, their advertising is widespread on social

media.

The experts identified more than 1.3 million social media posts advertising disposable ENDS.

Telegram was the most popular platform for illegal advertising. More than 700,000 posts were

published there during the previous year, with a potential audience of approximately 1.8 million

users.

• VKontakte and Instagram were also among the three leading platforms:

• VKontakte - 480,000 posts, with a combined audience of 2.3 million users

• Instagram - 235,000 posts, with a combined audience of 1.1 million users

Following amendments to Article 16 of Federal Law No. 15-FZ, "On Protecting Citizens' Health

from the Effects of Environmental Tobacco Smoke and the Consequences of Tobacco

Consumption", all identified advertising of disposable ENDS has been prohibited since 28

January 2021

It should also be noted that most of the advertising identified on social media was directed at

young people and minors, both in terms of its content and the groups and channels through

which it was distributed.

The study also identified official social media pages operated by the authorised distributor of

HQD, the most popular disposable ENDS brand.

A significant number of posts on those pages also violated the prohibition on advertising

disposable ENDS because they encouraged sales and consumption and demonstrated the process

of vaping.

Comment by Evgeny B. Alexandrov, Deputy Managing Partner of Gorodissky & Partners

"The market for disposable ENDS remains insufficiently regulated, with the result that a

significant proportion of it operates in the grey economy. The category is still not subject to

mandatory product marking, while products are imported through grey schemes under the guise

of other electronic devices, avoiding payment of excise duty.

A substantial black market has developed on the Russian-language Internet. Devices are sold

both at retail and wholesale for subsequent resale through offline stores.

Remote sales remain a highly promising channel, and we expect them to continue growing. At

the current rate, illegal sales of disposable ENDS may exceed 84 million devices, while the

income earned by offenders may surpass RUB 17 billion.**

Over a period of three years, the federal budget risks losing more than RUB 9 billion. This

amount may appear relatively modest when compared with the illegal market for traditional

cigarettes, but the rate of growth is alarming. In volume terms, the illegal segment is effectively

doubling every year.

Combating illegal online sales is a continuous pursuit. Offenders constantly move from one

account to another and create new channels. Identifying the individuals behind the sales is

extremely difficult because of the high level of anonymity offered by online platforms.

Social media platforms themselves do not have sufficient resources to identify and block all

prohibited content automatically.

The introduction of comprehensive regulation similar to that applicable to tobacco heating

systems may help bring the market into the legal economy. This could include inclusion in the

product marking and traceability system, the introduction of state technical regulation,

mandatory certification and declaration upon importation into the country."

Illegal Sellers' Revenue and Federal Budget Losses

Most Popular Brands on the Illegal Market

Distribution Channels for Illegal Products

Distribution of the Audience of Illegal Resources by Social Media Platform

For the purposes of the study, illegal online sales included:

• remote online sales of disposable ENDS in circumvention of applicable legislatio

• sales of counterfeit devices, known in illegal sellers' slang as "duplicates"

• sales of devices at prices substantially below official prices

sales of smuggled products unlawfully imported into Russia under the guise of other

devices and without payment of taxes to the Russian federal budget

* Calculations by Gorodissky IP Security analysts based on the results of their own study and

data from the presentation "Payment of Excise Duty upon the Importation and Sale of

Disposable Electronic Nicotine Delivery Systems", presented at the round table "Current Issues

in the Legal Regulation of Tobacco Product Circulation", organised by the Economic Policy

Committee of the Federation Council of the Federal Assembly of the Russian Federation on 18

November 2021

** Based on data from the presentation "Payment of Excise Duty upon the Importation and Sale

of Disposable Electronic Nicotine Delivery Systems", presented at the round table "Current

Issues in the Legal Regulation of Tobacco Product Circulation", organised by the Economic

Policy Committee of the Federation Council of the Federal Assembly of the Russian Federation

on 18 November 2021

30 December 2021

30 November 2021