Challenges for China's E-Cigarette Export to Russia

Russia is currently China’s third largest export market for electronic cigarettes, according to the “2021 Electronic Cigarette Industry Blue Book” published by the Electronic Cigarette Industry Committee of the China Electronic Commerce Association and Juul Labs. The report reveals that in 2021, China’s electronic cigarette industry is projected to export about 138.3 billion yuan, up 180% from the previous year. The top four countries and regions for electronic cigarette exports are the United States, the European Union, Russia, and the United Kingdom, accounting for 53%, 15%, 9%, and 7% respectively.

With the ongoing conflict between Russia and Ukraine, China's export of electronic cigarettes to Russia is facing multiple challenges.

The impact of SWIFT sanctions on settlements is limited.

The ongoing conflict between Russia and Ukraine, as well as Russia's relationship with Western powers, is increasingly tense. On February 27th, the United States, European Union, and United Kingdom announced sanctions against the 10 largest financial institutions in Russia through the SWIFT system. The crisis has resulted in an atmosphere of great international tension.

Although some Russian banks may be excluded from SWIFT, the impact on the industry is not significant. Several e-cigarette foreign trade practitioners have stated that their company's export settlement has not been affected by SWIFT sanctions. They said that their company's clients usually open accounts in foreign banks in Russia, exchange rubles for dollars within Russia, and use dollars to complete payments. Currently, this business is continuing.

Ruble depreciation leads to order cancellations.

However, the devaluation of the ruble has had a more serious impact on the trade of electronic cigarettes between China and Russia. According to information obtained by "2FIRSTS", a vast majority of Chinese e-cigarette exporters have reported significant effects. Recently, there has been a great deal of volatility in Russia's financial markets. On February 24th, the Russian RTS index plummeted by over 50%, dropping to 611.95 points, while the MOEX index fell by more than 45%.

The Russian ruble experienced a significant depreciation, causing a surge in key energy commodities including oil and natural gas on February 28th. The off-shore exchange rate for the ruble against the US dollar also plummeted nearly 30%.

According to 2FIRSTS, Chinese exporters have stated that the devaluation of the ruble has caused immense pressure on Russian e-cigarette importers, with costs skyrocketing overnight. Faced with these huge cost pressures, a large proportion of importers have been forced to cancel their foreign trade orders for Chinese e-cigarettes. Importers are unlikely to engage in bulk order transactions until the ruble exchange rate improves.

This change has caught the market off guard. Prior to the recent conflict between Ukraine and Russia, the Chinese e-cigarette industry expected exports to Russia to increase by 50-100% this year. However, the unexpected event has had a significant impact. If the conflict persists, it is estimated that the Russian market will perform worse than last year, and the entire market will stagnate.

There could be ongoing disruptions to Grey's logistics.

Chinese e-cigarette exporters are facing significant difficulties in exporting to Russia due to challenging customs clearance procedures. Prior to the conflict between Russia and Ukraine, e-cigarettes from China would typically be cleared through a grey customs clearance process, meaning they would first arrive in Russian-speaking countries surrounding Russia, go through customs there, and then be transported into Russia. However, in the current geopolitical climate, logistics and border controls are much stricter, making grey customs channels between China and Russia less accessible.

Currently, the electronic cigarette market in Russia is not experiencing any shortage pressures, as distributors typically hold a three-month inventory. The impact of logistics disruptions has not yet been felt by consumers, and there have been no reports of significant price increases.

The dispute between Russia and Ukraine is unlikely to be resolved to everyone's satisfaction in the short term, and western sanctions against Russia will continue. This will present various inconveniences for the export of Chinese e-cigarettes to the Russian market. While the battlefield may be constantly changing, the fundamentals of supply and demand have not shifted. In the long term, the Chinese e-cigarette industry can still keep an eye on the Russian market and wait for trade to return to normal.