The factory is closing after nearly a century of cigarette production. Photo by Nathan Greenhalgh.

RIGA — British American Tobacco (BAT) Latvia will shut down its production plant in Riga this week and lay off 223 employees. The company says this is because of excise tax hikes in the last two years that has led to a flourishing of the black market.

“Comparing the first six months this year with the same period last year the production volumes have decreased by 64 percent. Today the factory uses less than 20 percent of its capacity,” the company said in a press release, adding that black market sales on duty-unpaid cigarettes constitute more than 36 percent of entire the tobacco market in Latvia.

“Today’s reality is that unfortunately we have to make a painful decision — we are proposing to restructure the company, to close down the factory and to decrease the number of employees in the commercial unit…Every excise tax increase leads to the danger of further development of organized crime and reduction of the number of legal workplaces,” Peter Halacz, chairman of the management board of BAT Latvia said in the press release.

Excise tax increases during recent years resulted in significant cigarette price rises causing illicit trade to grow rapidly. Within the past two years the legal cigarette market has shrunk by 40 percent, affecting the low price segment in particular.

“The overall economic situation in the country has just intensified the negative effect. In this situation many consumers, especially with low income, tend to look for cheaper alternatives choosing duty-unpaid cigarettes instead of legal products,” the release said.

The loss of the factory will be a bitter pill to swallow for the government, which has until now done little to control the import of illegal cigarettes. BAT Latvia is one of Latvia’s major taxpayers, paying 40 million lats (€57 million) in 2008.

Marita Jansone, press spokesperson for BAT Latvia told Baltic Reports however that the government is moving in the right direction with its recent clampdown on cigarettes crossing the border between Russia and Belarus.

“The Latvian government is aware of the problem. The recent changes in the legislation decreasing the number of legally imported cigarettes from the third countries — instead of 200 cigarettes only 40 allowed — is the first step towards the direction to change the situation,” she said.

Despite BAT’s assertion that duty-unpaid cigarettes are to blame for the closure, the factory was traditionally made for export.

About 60 percent of all production in Riga factory is for export, both inside and outside the EU, the company said. Brands manufactured in the Riga factory are Kent and Vogue.

Jansone told Baltic Reports that Production from the Riga plant would be moved to other plants in Western Europe.

The cigarette factory, located at 58 Miera, has been there since 1912. It had previously been called Rīgas Tabakas Fabrika and before that Maikapars Tabakas Fabrika.

BAT has 49 cigarette factories in 41 countries, producing some 715 billion cigarettes in 2008.