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Russian consumers are largely not effected by recent changes that effected multinational tobacco companies operating in the country. Photo credit: George Hodan, Pixabay.
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Prior to February 24, 2022, the Russian tobacco market enjoyed an annual 15% growth rate, one of the world’s highest. Photo credit: Oleg Dubyna, CC 3.0
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Marlboro-maker PMI recently confirmed its plans to continue its business in Russia. Photo credit: Nima Ashkbari, Pexels.
Global tobacco multinational players have taken different steps in regards to their Russian business amid ever-tightening sanctions and Russia’s growing isolation in the international arena.
Prior to February 24, 2022, Russia’s tobacco market was one of the most promising for global tobacco manufacturers in terms of development prospects, as its annual growth rate of up to 15% was among the world’s highest. However, after the beginning of the Ukraine-Russia military conflict, all the companies, which historically controlled 99% of the Russian tobacco market, faced a tough decision over further operations in Russia.
One such producer, British American Tobacco (BAT), finally left Russia and Belarus in November 2023 as the company officially sold its local assets to a consortium which is headed by the former management of BAT’s Russian subsidiary.
The newly-established and renamed company is registered in Abu Dhabi. According to Russian analysts, one of the reasons for the Abu Dhabi registration could be related to its favorable tax and legal system, which is provided to Russian businesses at present, the provision also a way to access the international banking system.
The amount of the BAT deal has not been disclosed. BAT had planned its departure from Russia since 2022. That spring, it suspended investments in the country but continued the production and sale of cigarettes. In 2022, the company was able to increase its revenue by 2%, compared to 2021. As of October 2023, Russia and Belarus accounted for approximately 2.7% of the group’s revenue.
At present, the former BAT businesses in Russia and Belarus operate as the ITMS group, while their portfolio include Dunhill, Kent, Vogue, Rothmans, Lucky Strike, and Java cigarettes, as well as glo tobacco heating systems and Vuse disposable vaporizers.
In recent months, ITMS has been able to re-build its business processes in Russia, producing almost the entirety of its Russian range within the country and exporting some of its finished products to some neighboring states (former Soviet countries). At the same time, the range of imported products in BAT’s line in Russia after February 24, 2022 has significantly declined due to logistics, sanctions, and other issues.
Last summer, BAT estimated its losses from leaving the Russian market at US$1.2 billion. As the official amount of the deal was not disclosed, some Russian analysts estimate it in the range of US$200-300 million, which is significantly lower than the real market value of BAT’s business in Russia. BAT operated in Russia for more than 30 years. The company launched local production in 1994 and operated a factory in St. Petersburg. According to 2022 data, the Russian division employed 2,500 people.
According to Nielsen, in 2022 the company was the third largest cigarette manufacturer in Russia. It occupied 23% of the market. Its competitors were Japan Tobacco International (JTI) and Philip Morris International (PMI), which had 35.6% and 31.1% market share, respectively.
For PMI, the company previously announced the possible transfer of its Russian assets. According to earlier statements by PMI’s c.e.o. Jacek Olczak, the company was experiencing serious difficulties trying to leave Russia. Olczak said that negotiations were underway to sell the business with three buyers, however they seem to be without any result.
According to some estimates, the value of PMI’s Russian assets could be around US$2.5 billion. Olczak had said that potential Russian buyers were ready to purchase the assets at a low price. Still, according to the position of the Ministry of Finance of the Russian Federation, western companies leaving Russia should sell their local enterprises with a discount of at least 50%. Due to this, as Olczak said, PMI would “rather continue” its business in Russia than sell it on unfavorable terms. For JTI, its Russian division recently said that after the introduction of sanctions by the US, EU, and Japan on some materials for cigarettes as dual-use products, tobacco companies are looking for new suppliers in China, India, and other countries.
The company, however, recently confirmed its plans to continue its business in Russia.
Sergey Glushkov, director of corporate relations and communications at JTI Russia, said, “After February 24, 2022, our company decided to continue its business in Russia in order not to deprive consumers of the product to which they are accustomed. We also reserve the right to make any decision and naturally comply with all regulatory rules both in the Russian market and international rules.”
At the same time, he added, the company will not introduce next generation tobacco heating devices in Russia. At present there are four JTI factories in Russia and the JTI Russia division em-ploys about 4,000 employees, including production and management. In the Russian Federation, the corporation sells such cigarette brands as Winston, Camel, LD, Sobranie, Mevius, and Russian Style. On March 10, 2022, JTI announced that it suspended new investments and additional marketing activities in Russia.
Another large tobacco company, Imperial Brands, left the Russian Federation as it transferred its business to Russian investors associated with Megapolis (the largest distributor of cigarettes in the Russian Federation). The new owners changed the names of the companies owned by Imperial Brands to International Tobacco Group and International Tobacco Group Volga (production site).
Russian analysts in the field of tobacco business believe BAT and Imperial Brands’ decision to leave Russia will not have a major negative impact on the local market in general.
As Maxim Korolev, head of the Russian Tabak analyst paper, said in an interview with Russian Kommersant business newspaper, there most likely will be no problems with the assortment or prices after the departure of BAT from the market. According to him, in recent years the company produced most of its products within Russia, and the supply of raw materials has been smoothly adjusted over the last 1.5 years.
Korolev and other interviewed analysts also believe there will not be any problems or interruptions in production at the former BAT factory in Russia, as it will be managed by the same management team. All the global majors first expanded into the Russian market shortly after the collapse of the USSR. BAT was operating in Russia since 1991, PMI since 1992, JTI since 1999.