The share of Estonians buying alcohol in Latvia fell to 23 percent in 2020 - the lowest in four years, a study from the Estonian Institute of Economic Research (EKI) shows. However, there are now concerns rising fuel taxes may send drivers over the border.
In 2020 border trade was affected by both the reduction in excise duty rates the year before as well as the ongoing health crisis.
Revenue from excise duty on alcohol on purchases by foreign tourists on the northern border of Estonia decreased significantly, but at the same time income from purchases by local people on the domestic market increased as Estonians went to Latvia less to buy alcohol and bought more from Estonia, the Estonian Chamber of Commerce and Industry said.
Alcohol excise revenue totaled €211 million in Estonia was last year and €225 million in 2019. In Latvia, alcohol excise revenue in the respective years was €244 million and €249 million.
Last year, the share of alcohol buyers shows that border trade on the southern border of Estonia continues to decline. In 2019, the share of those who bought alcohol from Latvia was 33 percent, and in 2017 and 2018, when the border trade was at its peak, the share of those who bought alcohol from Latvia was 35 percent of the adult population.
"Purchasing from Latvia has decreased because the fall in excise duty in 2019 led to a fall in Estonian retail prices and the difference in alcohol prices between Estonia and Latvia is no longer so large that it is economically worthwhile to make a special longer trip. It must also be borne in mind that last year there were extreme restrictions that hindered cross-border trade," Marje Josing, director general of EKI, said.
The share of people who specifically go to Latvia to buy alcohol has decreased three times since 2017. Then, 18 percent of respondents went to Latvia specifically to buy alcohol. Last year, only 6 percent of respondents did so. In addition, the share of people who buy alcohol when traveling in or driving through Latvia has decreased to 18 percent compared to 2019, when 24 percent of those driving through who did so.
The residents of South Estonia accounted for the largest share of those who bought alcohol specifically from Latvia with 49 percent. At the same time, the residents of northern Estonia made up the largest share, 41 percent, of those who bought alcohol when passing through Latvia or traveling there, as in the summer of 2020, in the conditions of global travel restrictions, people drove around a lot in the so-called Baltic bubble and it was then easy to stop at border stores.
Alcohol is now bought mainly for personal consumption. Bringing alcohol as a gift has dropped from 31 percent to 23 percent over the year, bringing friends and acquaintances alcohol for money fell by 18 percentage points, or from 28 percent to 10 percent. The share of alcohol for resale has almost completely disappeared.
Josing said people who bought alcohol from Latvia also bought food and motor fuel, with 62 percent and 41 percent of people doing so. People who went to Latvia specifically to buy alcohol more often also bought tobacco products and construction goods, this was done by 23 percent and 21 percent of people, respectively.
"In addition to alcohol, food and motor fuels have been the most purchased in Latvia over the years," she said. The peak year of purchases was 2019, when approximately one-fifth or 24 percent of the Estonian adult population had purchased food products and 17 percent had purchased motor fuels from Latvia. "Purchasing from Latvia decreased significantly in 2020 due to the pandemic," Josing added.
Commenting on the survey, Mait Palts, director general of the Estonian Chamber of Commerce and Industry, said the impact of the health crisis has helped to reduce the effects of cross-border trade, but it would definitely also have happened under normal circumstances over time.
"After five years, we have managed to get alcohol-related cross-border trade back to normal, but it is now important that decision-makers do not make a similar mistake again. Already on May 1 of next year, it is planned to increase the excise duty rate on diesel fuel to the previous level, which, as one factor, once again motivates cross-border trade," he said.
Rising fuel taxes a concern
Palts said after the increase in excise duty, road transport companies would once again prefer to refuel in transit through Latvia, the amount of fuel to take home purchased by private individuals and small consumption by the border will also increase.
"Saving on fuel costs is more important for many households than saving money on alcohol or tobacco, for example, and the smaller price difference achieved on tobacco and alcohol, for example, is no longer so decisive, but while in Latvia, it is also beneficial to buy them and other goods from there," he said.
"Once again, there is a risk that we will motivate a large number of people, but also entrepreneurs, to spend in Latvia, which will again damage our tax revenues and put entrepreneurs in a worse competitive position than their neighbors," Palts said.
He added that it is an old truth that the broader context must always be seen when it comes to excise duties - what Estonia's neighboring countries are doing, how effective the fight against the black market is, what the general economic situation is and, when it comes to fuels, definitely what is happening on the global market and forecasts.
In January 2021, EKI conducted the fifth survey on border trade among Estonian residents. The survey was conducted by postal and online survey and was responded to by a total of 1,226 residents aged 18-74. The distribution of respondents in socio-demographic groups is representative and corresponds to the socio-demographic distribution of the Estonian population.
The survey is based, as sources of information, on an analysis of excise duty receipts in Estonia and Latvia, retail price surveys in Estonia and Latvia, expert interviews with manufacturers and retailers, a survey of residents and an analysis of data from the Tax and Customs Board.
Editor: Helen Wright