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Announce withdrawal.
In February of this year, due to changes in the international political situation, Russia was subjected to a series of economic sanctions from major Western countries. The tobacco industry was not exempt from this. Starting in March, the four major tobacco companies announced their exit from the Russian market and each established a different exit plan.
British American Tobacco
Top brands: Kent, Rothmans, Lucky Strike, Vogue, Pall Mall, and "Ява".
It has been revealed to the media that the assets of this giant will be transferred to its distributor, SNA Group, a company that handles wholesale procurement of products. After the transfer of assets, the new owner will continue production and other business processes.
Empire Tobacco.
Major brands include Davidoff, Jade, P&S, West, and Maxim.
The executives reported on the transfer of business. The successors are four Russian senior managers who have experience working with companies related to this tobacco giant.
Philip Morris International
Major Brands: Marlboro, Parliament, L&M, Chesterfield, Bond Street.
The parent company is considering restructuring its operations in Russia, including possible asset transfers. (By the way, according to Forbes, Philip Morris has become the largest foreign company in terms of market share in Russia in 2020.)
Japan Tobacco International
Main Brands: Winston, Camel, LD, Sobranie, and Bolshoye
The company has suspended new investments in Russia and is continuing to evaluate various options for its business development, including the potential transfer of ownership.
Nanshe nanfen" translates to "difficult to part.
The tobacco market, a high-profit and stable consumer demand trade market, has always been an important component of Russia's federal fiscal tax revenue. The government's 2021 annual report shows that the tobacco industry's tax revenue budget in Russia is approximately 700 billion rubles, which is second only to oil and gas and ranks third in alcohol tax revenue.
For businesses, the decision to exit or stay in the fourth largest tobacco consumption market worldwide directly affects their financial plans for the next year or even several years. After all, the size of the tobacco consumption market changes steadily each year, and finding a new market with nearly 40 million smokers is an extremely difficult and challenging goal.
Tobacco is slowly leaving Russia, according to sources cited in a photograph from Екатерина МАРТИНОВИЧ at WWW.KP.RU.
According to a report from British American Tobacco, the company's net profits dropped by 1.7 times in the first half of 2022, to £1.938 billion ($2.3 billion). The estimated loss attributed to their departure from Russia is £957 million ($1.2 billion), which is linked to impairment of assets and liabilities.
According to the financial report from Imperial Tobacco, as of September, their revenue and profit decreased by 14.7% to £2.68 billion compared to the previous year. Leaving Russia led to a loss of nearly £400 million for the group, resulting in an 8.4% decrease in total tobacco sales in the second half of the year compared to the same period in 2021 and a 4.7% decrease for the year as a whole.
According to the financial report estimated by Firmo International in Q3 of 2022, its assets in Russia are worth $2.6 billion. The company plans to establish a self-sufficient independent organization in Russia and will temporarily postpone its exit from the Russian market.
Japan Tobacco's business structure in the Russian market is different, and the impact of its withdrawal is relatively small for the parent company. Its half-year financial report shows growth in all indicators for 2022, but the Russian market is proving to be challenging with declining sales and market share.
As they face significant financial losses, tobacco giants must grapple with the challenge of stabilizing the impact they have caused and returning to their business fundamentals.
As a result, the owners of the four major tobacco companies have been very cautious in seeking successors and considering transferring their business in Russia to former partners, with specific terms being kept confidential. From a legal standpoint, the transfer process is compliant, but in reality, it is likely just a trust management of the company. This allows them to re-enter the Russian market when the time is right or simply announce their exit on paper to respond to pressure from all sides while continuing to manage the company and share profits with the "new owner".
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The photo of a Russian tobacco production factory is sourced from Shutterstock.
Andrey Loskutov, the executive director of the Smoker Rights Movement and head of the Nicotine Alliance, stated that politics and economics do not always go hand in hand. He advised not to focus too much on political statements, citing the example of a friend who is the head of the Russian office of an international medical company. The friend shared that their international bosses called and told them to continue working despite having made a statement about suspending operations in Russia.
After the four major tobacco companies announced their withdrawal, data from the Russian Federal State Statistics Service showed a significant increase in tobacco orders in Kyrgyzstan and Kazakhstan, which share borders with Russia. All of these countries have offices of tobacco companies operating within them.
In November, Baysolt Khamzatov, Deputy Director of the State Function Science Center (ANO) to Combat Illegal Trafficking of Industrial Products, reported that according to the organization's latest research, the market share of illicitly traded tobacco products has increased significantly in some areas throughout Russia. In particular, the share has risen to 18.8% in St. Petersburg, 43.6% in Novgorod, and doubled in the Moscow region. The largest growth in illegal revenue has been in rural and border areas.
He also stated that smuggled tobacco confiscated in various regions is mainly comprised of products from Japan's JTI, British-American Tobacco, and Philip Morris USA. In Russia, factories of these brands provide up to 80% of the sales volume. Illegally imported cigarettes from Eurasian Economic Union (EAEU) member countries make the largest contribution to Russia's illegal market. Among them, 92% of the supplied goods come from Belarus. Producers from Kyrgyzstan and Armenia are also increasing.
It has been six months since the four major tobacco companies announced their exit from the Russian market. However, their products are still prevalent in the market and are being sold at a lower price in some areas due to the thriving illegal market.
Roman Troshkin, a manager working in partnership with Russian JTI authorities, has explained that the interest of consumers is easily understandable as they seek cheaper options. The EAEU (Eurasian Economic Union) has varying rates of consumption tax and different minimum prices for cigarettes, with Russia having the highest tax rate among all the member countries. For instance, in the Russian Federation, under the law, the minimum price for cigarettes is 112 rubles per pack; in Kyrgyzstan, it's 65 rubles, while in Kazakhstan, it is 71 rubles. As for Belarus and Armenia, there are no legally prescribed minimum costs, but these are respectively 30 and 57 rubles.
The price discrepancies of identical products are evident and, against the backdrop of decreasing incomes, illegal products have become highly appealing.
The active tobacco trade among neighboring countries of Russia has left the four major tobacco companies in a difficult position to pull out of the market. Tobacco, being a special fast-moving consumer good, is heavily relied on due to its addictive nature, resulting in a consistent demand for the product. Despite rumors that the four major tobacco companies have completely exited the Russian market, there is no clear evidence on the market level as their products continue to circulate and illegal sales are on the rise.
This state is expected to continue, and perhaps with a change in political situation, it will be revealed whether there will be an exit or not.
Article written by Liang Jiasen.
2FIRSTS will continue to bring you relevant information and reporting on the Russian electronic cigarette market and the new electronic cigarette labeling regulations in the Eurasian Economic Union (EAEU).
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