Dec. 25 (Bloomberg) -- It’s Christmas in frozen eastern Poland, and Pawel Mlynarski is blaming the government for taking away his livelihood: contraband cigarettes.

Until recently, Mlynarski, a 25-year-old unemployed builder, would cross the border into Ukraine as many as four times a night. Each time, he would return with at least one carton of 200 cigarettes, or 10 packs, to sell in the bars of his hometown of Przemysl, 15 kilometers (9 miles) from the European Union’s eastern frontier.

Then, on Dec. 1, Poland cut the import allowance to 40 smokes, or two packs. “This is an absolute tragedy,” says Mlynarski, who used to make as much as 20 zloty ($6.80) per carton selling packs of Prima. “Most people around here did the border. It was our only way of earning decent cash.”

The new limits are a result of the EU’s expansion a year ago of its passport-free movement of people, the so-called Schengen area, to include Poland. That forced the nation to bolster its -- and the EU’s -- eastern border. Now locals complain they are left with an unemployment rate above 17 percent, the highest in Poland, and the specter of more job losses as trade at the bars and cafes at border crossings collapses. Demonstrators threw stones and eggs at police to protest the new rules earlier this month.

“A gap has now opened up, and we have to fill it,” says Robert Choma, the mayor of Przemysl. “There are all these rules that come along to tighten the border, but nothing that balances out the work that’s lost.”

Discount Puffs

A pack of Prima in Ukraine costs the equivalent of about 1.20 zloty, about two-thirds less than in Poland, Mlynarski says. The profit a seller could pocket every month exceeded the national average wage and was tax-free, according to Artur Polakiewicz, a sociologist who is running a project to research illegal and semi-legal employment in the border region.

Before Poland joined Schengen, it was the Ukrainians who dominated the border trade, passing unhindered into the country bearing cigarettes, alcohol and even gasoline to sell to bargain-hungry Poles.

As Poland loosened controls for EU citizens and abandoned checks on its western border under Schengen, it tightened security for non-EU states to the east as part of its promise to clamp down on illegal immigrants. That made it harder for the Ukrainians to get in -- and opened up a gap in the contraband market that Poles themselves happily filled.

Doing Well

“The Poles in the border region did very well for themselves,” says Jan Pieklo, director of the Polish-Ukrainian Cooperation Foundation.

But the Polish government, along with fellow eastern EU members Hungary and Slovakia, adopted a version of an EU regulation that reduces the number of cigarettes individuals can bring into the bloc via land border points by 80 percent.

It was the only way to crack down on the illegal trade in the towns and villages along the border, says Witold Lisicki, spokesman for the Polish customs service.

The 200-cigarette allowance was supposed to be occasional, not daily, and for the purchaser’s own use. Almost all of the cartons ended up for sale in Poland or western Europe, he says.

“We couldn’t just put up with such a violation of the law,” says Lisicki. “But as long as prices in the east are lower, there will always be the temptation to smuggle.”

Polakiewicz says most tobacco traders register as unemployed to ensure their health care is covered by the state, although they have had little motivation to take on legal work because it is so badly paid. Salaries in and around Przemysl are often as low as 800 zloty a month before tax, according to the local labor office.

That leaves Mlynarski, the builder, considering the next steps in what he sees as a bleak future.

“There’s no industry around here, just a few shops -- and what with the economic crisis, they’ll probably be laying people off,” says Mlynarski. “I have no prospects.”

To contact the reporter on this story: Katya Andrusz in Warsaw at kandrusz@bloomberg.net

Last Updated: December 24, 2008 18:00 EST