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UCM’s marketing director Dmitriy Rastegin (left) and Sergey Khartsiy posing with some of their cigarette brands at the recent WT Middle East show in Dubai. Photo credit: Thomas Schmid
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Sergey Khartsiy, director of manufacturing for Russian cigarette company UCM, was the only person who spoke to us on the record. All other sources quoted in this article requested strict anonymity, attesting to the sensitivity of the topic. Photo credit: Thomas Schmid
Many Asian companies are benefitting from the EU’s economic sanctions on Russia.
A long line of economic and geopolitical analysts have noted on multiple occasions that the sanctions slapped on Russia by the European Union (EU) actually harm EU companies more than they do Russian businesses. In other words, the sanctions are backfiring, and not wholly unexpectedly so. Entire business sectors in the EU have taken a hit, including tobacco industry suppliers, for whom Russia had constituted a lucrative market. The other side of the coin is, of course, that many companies outside the EU, but especially in Asia, have experienced more or less pronounced increases in Russian orders, as they are not bound by EU policy. The most obvious benefactor here is China, but other countries are cashing in as well… though they may have to resort to sometimes rather creative ways when it comes to facilitating shipping and receiving payments.
Sergey Khartsiy, director of manufacturing for Russian company United Cigarette Manufactory (UCM) told Tobacco Asia during a recent interview that supply difficulties concerned certain types of raw materials, including paper products. But, he insisted that this was not the biggest issue, because numerous markets, especially China, could be tapped. “The main problem for us is [machinery] spare parts.” Due to the sanctions, there are severe limitations for original equipment manufacturers in the US and the EU to ship spare parts to the Russian Federation. “That’s why we are looking at all options to find other suppliers, including those for consumables but also mechanical and electronic parts.” An original supplier in the EU shipping spare parts through a third country is effectively impossible because serial numbers are tracked to their final destination. It could lead to trouble for the respective supplier if it is discovered that the parts end up in Russia. Instead, Khartsiy explained, the common method is to source non-original but compatible spare parts from alternative manufacturers, mostly from China.
Since Russia also has been cut off from the SWIFT international banking system, payment transactions initially had created headaches, too. But Khartsiy insisted that these difficulties had been largely solved in the meantime, especially where bank transfers to China are concerned. “And as per others… there’s always is a solution,” he said. Although UCM’s factory is not operating at full capacity “for the time being,” Khartsiy said that raw tobacco can be obtained from countries like India and Pakistan. The main problem here was not access but the still persisting general global tobacco shortage.
A Chinese supplier of packaging materials, tow, and blanks, requesting strict anonymity, confirmed to Tobacco Asia that the sanctions are indeed “benefitting a lot of Chinese companies”. Our source divulged that Russian orders for the packaging company as well as its sister firm, a machinery supplier, had more than doubled since the sanctions were imposed. “It also has something to do with the close relationship between Russia and China, which enables easy payments for Russian customers,” the source said. Though, getting orders to the customers is a little more cumbersome, the source admitted. “But we have agents who know how to do it,” the source said, hinting that “Turkey benefits from this, too.”
A Turkish firm, previously specializing in shisha tobacco machinery only, disclosed to Tobacco Asia that the sanctions had prompted it to expand its portfolio to primary processing machinery, which it is “now selling a lot to Russia.” Consignments are typically shipped through third countries, “such as Dubai and others.” And as bank transfers won’t work for collecting payments, the company in question literally flies an employee into Russia to pick up cash. Our source echoed what UCM’s Sergey Khartsiy had already told us: “There is always a way, a solution.”
Meanwhile, a large South Asian tobacco merchant said while it has been receiving “more inquiries” from Russian companies, the overall number had increased only slightly. However, orders are more often than not placed by buyers from countries such as Azerbaijan or Tajikistan, who “might be” acting as intermediaries. Merchandise is generally shipped to the Turkish port of Mersin. As Russia’s Black Sea ports are more or less inaccessible due to the ongoing war, our source said it is “conceivable” that the stock is subsequently transported into Russia by trucks. Payment is handled through the intermediary, whereas 50% must be settled when placing the order, the remaining 50% being due “once the freighter is nearing Mersin.” “Full payment must have been made by the time the vessel docks in Mersin, otherwise we won’t release the shipping documents,” the source said. “We can’t take any risks.”
Not everybody is partaking in the “Russian sales bonanza,” though. There also are Asian companies that voluntarily forego Russian business for the time being; not because they want to avoid potential problems but because “it’s just all too complicated.” Unlike raw tobacco, filter tow and paper products currently are not included in the list of sanctioned goods, which means they can be shipped to Russia from anywhere. While a paper supplier based in Asia-Pacific confirmed to Tobacco Asia that it is receiving “more inquiries from Russia than before the war,” a top executive at the firm interviewed that the company has nonetheless “consistently declined these orders.” Though the supplier’s home country is of course not part of the EU, its central bank is blocking incoming payments from Russia, supposedly as a measure against “money laundering” – though it may well be a concession to not upset the EU, a crucially important trade partner of the country in question. While the top executive acknowledged that payments could be routed through third countries, he said that “in the end we won’t do it, because it’s just too risky for us.”
While Russian manufacturers may be desperate for machinery and parts, raw tobacco, tow, and papers, there also are product types that have not experienced rising demand. Flavors would be an example for that. A flavor company situated in the Near East told Tobacco Asia off the record that it hasn’t seen any noteworthy increase in Russian business due to the sanctions. But a source at the company also noted that “Russia has never been a key market for us, as our main clients al-ways have come from around the Middle East and Asia.” The source added that “this is not to say that some [customers] are not using our flavors in their own merchandise, which they subsequently may supply to Russia. It’s hard to tell.”
For flavor houses in the EU the situation is very different, of course. A supplier based there confirmed that its “Eastern Europe business has all but dried up because of the sanctions.” However, the company didn’t bother deploying “other channels” to outwit the sanctions. “It would create more headaches with shipping and collecting payments than it’s worth.” Instead, the firm in question claimed to have “compensated by finding new markets, for instance in Asia.” However, while our interviewed source pointed out that the company hoped to re-enter Eastern Europe once the sanctions have ended, this could potentially prove difficult. “Once things have returned to normal, many of our old [Eastern European] customers will have established new supply lines and it will be hard convincing them to come back to us. But we’ll see.”
Just like paper products, foils, films, and tapes presently are also excluded from the list of prohibited goods and could be legally shipped to Russia even from the EU. But a supplier in the EU nonetheless admitted that its Russia business has “virtually completely disappeared, although in theory we can still deal with them [without violating the sanctions].” The two main stumbling blocks are transportation and banking. “We don’t really find any transport companies that are prepared to go into Russia, or even into Belarus,” the source elaborated. “While we could legally sell our products, it doesn’t really help if we can’t deliver them to the customers over there, right?” Then there is the payment problem. “We need proper bank transactions and don’t accept cash, so together with the impossible logistics that takes [Russia and Belarus] completely off the map for us.”