The Big 4 Tobacco in Russia: Not a Real Exit

Jason Liang

Withdrawal Announcement

As the international political situation changed in February this year, major Western countries imposed economic sanctions against Russia, which involved the tobacco sector.

Since March, the four largest tobacco companies, (British American Tobacco, Imperial Tobacco, Philip Morris International, and Japan Tobacco International) have announced their withdrawal from the Russian market, and developed different exit plans.

1.    British American Tobacco (BAT) (Kent, Rothmans, Lucky Strike, Vogue, Pall Mall, Java (Ява)):

l  The company has revealed to the press that it is transferring its assets in Russia to its distributor SNS Group of Companies, which handles wholesale purchasing of products. After taking over the assets, the new owner will continue to operate production and other business processes.

2.    Imperial Tobacco (IT) (Davidoff, Jade, P&S, West, Maxim):

l  Its executives reported on the transfer of operations. The successors were four senior Russian managers who worked for companies associated with the tobacco giant.

3.    Philip Morris International (PMI) (Marlboro, Parliament, L&M, Chesterfield, Bond Street):

l  The head office is considering restructuring its operations in Russia, including a possible transfer of assets. (Incidentally, Forbes reported the company became the foreign company with the largest tobacco market share in Russia in 2020)

4.    Japan Tobacco International (JTI)(Winston, Camel, LD, Sobranie, Больше):

l  The company has suspended new investments in Russia and continues to "evaluate various options for the development of its business, including potential transfers of ownership".

Hard Exit

The tobacco market, a highly profitable trade market with stable consumer demand, has long been an important source of Russia's fiscal revenue. Russia's 2021 annual government reports show that the Russian tobacco industry has a tax budget of approximately RUB 700 billion, second only to oil and gas, with alcohol tax revenues in third place.

For enterprises, exiting the Russian market, the world's fourth largest tobacco consumption market containing stable profits, is directly related to their financial plan for the next year or even years. Considering the steadily changing scale of the tobacco consumption market every year, it is tough and challenging to find a new consumer market of nearly 40 million smokers.

Tobacco manufacturers are leaving Russia 

Source: Екатерина МАРТИНОВИЧ WWW.KP.RU

According to the financial report from BAT, its net profit decreased to GBP 1.938 billion (USD 2.3 billion) in the first half of 2022, a 1.7-fold decrease. It is estimated that due to the impairment of assets and liabilities generated by existing Russia, the loss will be GBP 957 million (about USD 1.2 billion).

Its financial report released revenue and profit figures by September falling by 14.7% to GBP 2.68 billion compared to last year. While exiting Russia, the group lost nearly GBP 400 million in earnings, with a drop in total tobacco sales of 8.4% in the second half of 2022 compared to a year ago, with a reduction of 4.7% for the whole year.

According to PMI Q3 2022 financial statements, its assets in Russia are estimated to be USD 2.6 billion. Establishing a self-sufficient independent organization in Russia, PMI is planning to delay its withdrawal from the Russian market.

Because of the unique business structure of JTI in the Russian market, exiting from Russia will have a relatively small impact on its headquarters. Its H1 financial statements see growth in all indicators in 2022 except the business in Russia where sales and market share are declining.

As business enterprises, tobacco giants face the challenge of minimizing such impact considering the huge economic losses.

As a result, the owners of the four largest tobacco companies have been very cautious in finding successors. They are taking into account turning over their business in Russia to their former partners, with confidential terms. They are doing this in a compliant way in terms of legislation, but those companies might just be put into trust management in essence. By doing so, they can return to the Russian market when it is time. It is also possible that they simply announce their exit without actual actions to respond to pressure from all parties, while in fact, they continue to manage those companies and share the profits with the new owners.

Exiting Russia with Continued Business

Tobacco Factory In Russia 

Source: Shutterstock

According to Andrey Loskutov, Executive Director of the All-Russia Movement for the Rights of Smokers and Chairman of the Nicotine Alliance, political and economic activities do not always run in accordance, and there is no need to put too much focus on political statements. He added an example of his friend, the Head of the Russian Division of an international medical company. On the phone, the foreign boss told his friend that although a statement was announced to pause business in Russia, their work shouldn't be influenced.

Since Big Tobacco declared to exit Russia, Kyrgyzstan and Kazakhstan, Russia's two neighbouring countries, where no tobacco company set up an office, have seen a remarkable increase in the order volumes of tobacco than before.

In November, illegal tobacco product distribution showed an outstanding increase in market shares in some areas in Russia according to the latest research, said Baysolt Khamzatov, Deputy Director of the National Scientific Competence Center in the Field of Combating Illegal Circulation of Industrial Products, with the figure rising to 18.8% in St. Petersburg, 43.6% in Novgorod, and two times in Moscow. Rural and border areas took the most growth of illegal sales.

He added that smuggled tobacco seized in these regions mainly consists of JTI, BAT, and PMI products, and their factories provide up to 80% of sales in Russia. The cigarette illegally imported from members of the Eurasian Economic Union (EAEU) is the biggest contributor to the illegal tobacco market in Russia. Belarus supplies 92% of the illegally imported cigarettes, while the manufacturers in Kyrgyzstan and Armenia continue to grow.

It has been half a year since Big Tobacco exited the Russian market, but there has been no decrease in products from those companies on the market. On the contrary, tobacco products can be purchased at a relatively low price in some areas due to the active illegal markets.

Roman Troshkin who manages the cooperation between JTI Russia and Russian authorities said that it is easy to get consumers' interest (good commodities with low prices). EAEU sets up different excise tax rates and minimum cigarette prices, and Russia enjoys the highest excise taxes. For instance, in Russia, the minimum price of cigarettes is set at RUB 112 per package according to laws. It is set at RUB 65 under a similar scheme in Kyrgyzstan and RUB 71 in Kazakhstan. In Belarus and Armenia where laws do not restrict the minimum fees, the prices are RUB 30 and RUB 57, respectively.

Illegal products are more attractive in the area of decreased revenue because they are cheaper than the same but legal ones.

The prosperous tobacco trade in bordering countries around Russia makes the four major tobacco enterprises continue their business while announcing exiting Russia. As a fast-moving consumer good, tobacco keeps stable demands on the market all year round due to its dependence. With stable and continuous profits, Big Tobacco has not shown the tendency to fully exit the Russian market. It still has active product circulation and the sales of tobacco products on illegal markets continue to increase.

Such a situation is expected to continue. As the political environment changes, it might be clearer whether Big Tobacco will exit the Russian market completely.

2FIRSTS will continue to bring you updates of relevant information.

References:

National Media Group

Russian Tobacco

Federal State Statistics Service (Russia)