Tobacco companies leaving Russia slowly and sadly: What will happen to cigarettes and their prices

18.05.2022
#industry news
WE'RE LEAVING, BUT WE'RE STAYING

Foreign companies are leaving, supplies from abroad are disrupted, economic ties are collapsing… But it seems that there is an island of stability in our market - this is the tobacco industry, which in Russia is almost entirely owned by four of the world's largest corporations. If cigarettes get more expensive, then it is tolerable compared to other goods. In January, the annual growth was 18%, in March - already 16%. There is no shortage on the shelves.
Other Western companies are waving sanctions and tobacconists are quietly smoking on some distance away. Have they really become russified to such an extent?
In fact, representatives of the tobacco industry have announced their departure with varying degrees of directness (See "SPECIFIALLY"). They just do it quietly, without haste and specific deadlines, so that production does not stop and the flow of profit does not quit.


Tobacconists are leaving Russia slowly and sadly. And there is an explanation for this. The Russian tobacco market is the fourth in the world in terms of production volumes. Leading corporations occupied it back in the early 90s, after the memorable tobacco riots, when the smokes disappeared from the shelves. Cigarettes have been returned, production has been raised, and now average salaries in the tobacco industry are among the highest among industries.
- Tobacconists have something to lose, - told KP Maxim Korolev, chief editing officer of the Russian Tobacco industry news agency. - Investments have been made over these 30 years - for $5 billion: factories have been built, equipment has been purchased. But the rate of increase in excise taxes is such that tobacconists are kept on a tight leash all the time. All over the world, this production is highly profitable, but we do not — all go to excise taxes. Everyone was waiting: tomorrow we will start earning, tomorrow we will start earning again. But in the end, only investments turned out, and there was no high incomes.


The owners of tobacco concerns have been very carefully looking for successors to whom they will be able to transfer their business in Russia - only among partners. The conditions are under lock and key. It looks very much like this is only legally a sale, but in fact it is a transfer to trust management. So that when the time comes, you can easily return to your previous positions. Or even, staying on the sidelines according to the documents, in fact continue to run the business, sharing profits with nominal new owners.

- No one is going to leave - everything is quiet in our tobacco Baghdad. It is not necessary to pay attention to political statements," Andrey Loskutov, executive director of the Movement for the Rights of Smokers, head of the Nicotine Alliance, told KP. - Politics and economics don't always go side by side. For example: my friend, the head of the Russian representative office of an international medical company, told me how his international boss called him and said that he had made a statement about the suspension of work in Russia, but you were working, and you are working. That is, we spoke to the West, they say, we are like everyone else, but for Russia we are working further.
Our market is very valuable for tobacco producers - according to various estimates, it is 33-35 million smokers, the expert says. On the other hand, if during the changes in the tobacco industry cigarettes disappear from the shelves or prices for them soar, people may react very nervously. The leadership of the United States and the European Union are just waiting for this. But business has its own interests.
Our market is very valuable for tobacco producers - according to various estimates, it is 33-35 million smokers, the expert says. On the other hand, if during the changes in the tobacco industry cigarettes disappear from the shelves or prices for them soar, people may react very nervously. The leadership of the United States and the European Union are just waiting for this. But business has its own interests.

TINY (SMALL) BUT IN BULK    
But the industry does have a problem — it's delivery. Tobacco comes to Russia from Brazil, India and African countries. They take it by the sea in 40-foot containers — first to Rotterdam, where the largest tobacco exchange in Europe is located, then they transfer it to other ships — and to St. Petersburg. Or directly to St. Pete.


- The countries that grow tobacco have not joined the sanctions, they are ready to sell us, but the largest container carriers refuse to deliver tobacco to Russia, - says Maxim Korolev.
According to him, the available reserves will last for a maximum of six months. During this time, the problem with delivery should be solved.
- Now there is no delivery from Brazil to Europe or directly to St. Petersburg, - Pavel Gulyakin, general director of the transport and logistics company VTN Agency, told KP. - But you can deliver tobacco to Houston or Philadelphia and from there the line still operates directly to St. Petersburg. Containers can be delivered from South America and through Mexico. Such transportation with intermediate transshipment will be more expensive and the delivery time will be longer. And if before the journey from Brazil took 35-45 days, then according to the new version it can stretch for 2.5-3 months. Another possible problem is the lack of containers. All this will increase the cost of delivery by about 1.5 times.
According to the interlocutor, there is no direct delivery from India. The option is via China to Vladivostok, and then through Russia - by rail. There is also a fairly new option - the delivery of tobacco from India to Russia by rail directly, without the maritime element. Another characteristic sign of the time is that many small carriers have entered the market, which somehow cooperate with each other. Of course, this is not as convenient as if the entire delivery was concentrated in one hand.


KENT FROM TASHKENT
The golden time is coming for the illegal market, - confirms Korolev. - Cigarettes from neighboring countries that are not under sanctions will be imported to Russia.

And our fans of bad habits will light up not the domestic Kent, but, for example, the Tashkent one. They will also bring their own stamps from the southern republics to us. All this exotic stuff is cheaper than our smokes. Firstly, the cost price is lower (cheaper labor), and secondly, excise taxes are not so high.

- Now the share of counterfeit, according to expert estimates, has increased from the recent 15% to 20%, - says Korolev, - It's hard to say what will happen next. For example, 12 years ago, when excise taxes were sharply increased in the UK, and a pack of cigarettes began to cost 8 pounds (almost 10 euros) against 3 euros in Europe, the share of smuggling in the island state reached 30-40%.

For a smoker, "fake"??? is an earthly paradise. Even now, cigarettes that officially cost 100-150 rubles are sold for 50-100 rubles at kiosks selling contraband. And if there is more illegality, then according to the laws of the market it will become even cheaper.

However, the state will stay out of pocket.
- The tobacco industry gives about 700 billion rubles of excise duties to the budget, - said Andrey Loskutov. - This is the second place after oil and gas, alcohol is on the third. We are already losing 100 billion rubles on the "illegal" - a colossal figure. In well-fed times, it was possible to turn a blind eye. But now, when every ruble has to be counted, neither international tobacco corporations, which also suffer losses due to smuggling, nor the authorities will give illegal immigrants a single sniff. There would be a will. The same plan was passed down to the police to issue fines for smoking in the wrong places — here you can give the same plan to close outlets with counterfeit. I saw a kiosk with the left product — the wilderness. Otherwise, they cannot be defeated.


WILL CIGARETTES GET MORE EXPENSIVE? NOT A FACT
But such a scenario is also possible: not only ready-made blocks and packs will be imported from neighboring countries, but also everything that is needed for it`s own production - tobacco, cigarette paper, filters. What prevents, for example, Kyrgyzstan or Kazakhstan from ordering a little more tobacco than usual — based on the Russian share? Nothing prevents. Our factories will receive raw materials, tobacco companies will receive Russian money and smokers will receive the cherished potion. Perhaps this process will be organized by the tobacco giants themselves, who have announced the termination of business in Russia. They also have representative offices in neighboring countries.
However, due to the presence of intermediaries in this chain, the final price of a pack may increase. However, not a fact.
- The costs of production and transportation do not have a big impact on the final cost, - Vadim Zhelnin, long-term director of the Association of Tobacco Manufacturers Tabakprom, explained to Komsomolka. - The main thing in the price is the excise tax. And if it happens that the cost of a pack turns out to be sky-high, then the state, in order to avoid a social explosion, can always reduce the excise tax and bring the price in line with consumer opportunities.
So we will have some tobacco. And it's even easier with filters and paper. This product is light, it is produced in many countries (but not in our country), and it can be delivered by air in sufficient quantities.

This will make it possible to load the existing factories with work. The reserve of the coin is that a window of opportunity opens up for counterfeiting.

If large tobacco manufacturers were abided by a professional "obbligo moral" and acted only legally , then flexible small companies that can replace them are able to create a parallel shadow industry.

- The "illegals" have their own shadow factories that do not appear in any registers, - Korolev confirmed.


SELF-PLANTING GARDEN…
The uniqueness of the domestic tobacco industry is that it is almost the only one that almost completely depends on imports. Cigarette paper, filters, film used to wrap packs, cardboard for making packs, other cardboard for blocks, sauces (flavoring additives for tobacco) — none of the above is done here. The only thing that we own is packaging cardboard for boxes in which cigarette blocks are transported.

But the most annoying thing is that tobacco itself is no longer grown. But it used to!

- In the USSR, up to 20 thousand tons of dry tobacco were grown — Evgeniya Gnuchikh, deputy director for scientific Work of the Krasnodar Research Institute of Tobacco, Shag and Tobacco Products, told KP. - This is a tenth of the total volume of the country's market. Now you can only dream of such results. After the tobacco industry was completely given over to international corporations in the 90s, its own cultivation declined.

Well, tobacco - the climate here is still inappropriate for growing this crop. So why don't we do the rest?

- We also have paper factories that could organize production of paper for cigarettes and cardboard for packs, - says Gnuchikh. - And chemical enterprises can produce filters from acetate fiber. But since our tobacco industry is almost entirely owned by multinational corporations, they choose suppliers. And the development of the industry in Russia is not included in their plans. Perhaps, import substitution will also begin in our tobacco industry now.

Meanwhile, farmers are involved in import substitution as much as possible.

- Recently, we have been very often asked for advice on tobacco cultivation. People are interested in technology, varieties. Near Novorossiysk, a farmer grew tobacco on 2 hectares. In Crimea, also, a person started growing — but there are difficulties with water. Even in Murmansk there was an enthusiast who started growing tobacco in a greenhouse and spinning cigars out of it.

But after all, you can't jump above those 20 thousand tons even together with farmers and enthusiastic summer residents. And it will take years to achieve this result.

So all hope is that large tobacco corporations and their staff left in Russia will be able to organize the supply of tobacco and other components for the production of cigarettes. Otherwise, smokers will have to switch to self-planting and smuggling.

And it's better to knock it off.


SPECIFIALLY    
Leading tobacco companies in Russia

The cigarette market of our country is almost completely divided between four world giants.

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

- After the transfer of assets, production and other business processes will be continued by the new owner, - the press service of the British American Tobacco company told Komsomolka.

Information has already leaked to the media that the giant's assets will be transferred to its distributor (a company that deals with wholesale purchases of products) - SNS Group of Companies.

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

Also reported on the transfer of business. The successors became four Russian top managers who worked in companies associated with the tobacco giant.


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

The most famous tobacco company is currently considering options for restructuring its business in Russia, including a possible transfer of assets. By the way, according to Forbes, Philip Morris earned more than all foreign companies in our market in 2020 and topped the ranking of the 50 largest companies in Russia (for more information, see "Only figures").


4. Japan Tobacco International (Winston, Camel, LD, Sobranie, More)
The only company whose messages have not yet heard the words about leaving. Diplomatic Asians evasively told that they suspended new investments in Russia and continue to "evaluate various options for the development of their business, including the potential transfer of ownership."


3. British American Tobacco will continue to sell products manufactured in Russia
The British tobacco manufacturer British American Tobacco, which is one of the largest in the world, will continue to sell goods produced in Russia. This was reported on Wednesday by Bloomberg with link to the company.
The British tobacco manufacturer British American Tobacco, which is one of the largest in the world, will continue to sell goods produced in Russia. This was reported on Wednesday by Bloomberg with reference to the company.
It is emphasized that British American Tobacco, which is known for brands such as Dunhill, Lucky Strike and Rothmans, will suspend "all planned investments in Russia." The company noted that it "continues to work in Russia" because "it has obligations to protect all employees at this extremely difficult and uncertain time."
British American Tobacco also informed that it "suspended all business activities and production in Ukraine." The company's branches in the countries bordering Ukraine provide humanitarian assistance to residents of the republic, the report says.
The Russian division of British American Tobacco was founded in 1991. The company's headquarter in Russia is located in Moscow, there are also 75 regional offices and a production facility in St. Petersburg. In total, about 2.5 thousand people work at British American Tobacco in Russia.
Earlier, the British tobacco company Imperial Brands announced the suspension of all activities in Russia, including the sale of its products, an advertising campaign and production at the factory in Volgograd. According to the Russian division of the company, Imperial Tobacco Sales and Marketing LLC, this decision is due to the inability to maintain full-fledged production against the background of serious failures in business processes, including due to the lack of materials. At the same time, the company does not close legal entities in Russia. It was reported that Imperial Brands, which owns the Davidoff, Richmond and Gitanes brands, will continue to pay salaries to Russian employees.

On February 24, Russian President Vladimir Putin announced a special military operation in Ukraine in response to a request from the leaders of the Donbass republics for help. He stressed that Moscow's plans do not include the occupation of Ukrainian territories. After that, the United States, the EU, the United Kingdom, as well as a number of other states announced that they were imposing sanctions against Russian individuals and legal entities.

A source:
kp.ru