The share of smokers in Russia’s population has plunged from 40 percent in 2009 to 19 percent today, reports Interfax.
Russian Deputy Prime Minister Tatyana Golikova credited a national project that included the development of health centers, the creation of medical prevention offices and an informational campaign.
“We were able to only partially change citizens’ attitude to their health, reduce alcohol and tobacco consumption, reduce bread consumption considerably,” she said.
Russia’s alcohol and tobacco regulator wants to extend the country’s tobacco licensing requirements to retailers, reports Interfax.
Doing so would improve regulatory oversight, boost budget revenues and reduce the share of illegal tobacco on the market, according to Rosalkogoltabakkontrol head Igor Aleshin.
Manufacturers of tobacco products have been subject to licensing since March 1. Among other things, they are required to register their machinery. Unused equipment must be mothballed under the regulations.
According to Aleshin, 225 tobacco market participants have received licenses so far, of which 190 are producers and the rest are importers.
The current law does not call for the licensing of retail sales, but it does prohibit retail sales of tobacco-containing and nicotine-containing products that are not in consumer packaging.
On Sept. 1, 2023, lawmakers expanded the role of the former Federal Alcohol Market Regulation Service, giving it the right to regulate tobacco and nicotine-containing products and renaming it Rosalkogoltabakkontrol.
The Russia government is seeking to suspend the corporate rights of Megapolis Distribution, the Dutch owner of Russian tobacco distributor Megapolis Group, reports Interfax.
On July 18, Russia’s Industry and Trade Ministry filed a lawsuit against Megapolis Distribution in the Arbitration Court of the Moscow Region, according to records.
The Russian company was earlier included in Russia’s list of economically significant organizations.
The court has agreed to hear the lawsuit, and the first hearing is scheduled for August 8.
Shortly after Russia’s invasion of Ukraine in February 2022 and just before the EU imposed sanctions on him, Russian billionaire Igor Kasaev, who owns 40 percent of Megapolis, funneled €8 million ($8.71 million) through the Netherlands, according to the NL Times.
Kasaev is known to have ties to the Kremlin and the Russian arms industry. He keeps his shares in Megapolis, the largest distributor of cigarettes in Russia, in the letterbox company registered in The Hague. The sanctions froze Kesaev’s assets in his Hague company, “trapping” some €650 million in assets in the Netherlands.
Japan Tobacco CEO Masamichi Terabatake said the company will keep its Russian business to satisfy investors following a supply chain reshape to comply with sanctions, reports the Financial Times.
According to the paper, JT is routing some business through Turkiye and has moved key personnel to Hong Kong. JT had originally said it would consider selling its Russian business following Russia’s invasion of Ukraine in 2022. Russia accounted for 20 percent of JT’s overall profits, according to Terabatake.
“If I said, for example, that we are going to quit the business, investors may face the risk of losses,” said Terabatake. “If worse comes to worst, there is even the risk of a shareholder lawsuit if we were to discontinue a business that we are able to continue.”
JT has more than 4,000 employees and four factories in Russia, one of the largest foreign companies left in the country. In 2023, JT’s overall profits were ¥482 billion ($3 billion).
“There are various things we need to be careful of from sanctions—what kind of people can be involved or not in decisionmaking, excluding people from unfriendly countries for Russia’s management … to putting people unrelated to sanctions in places such as Hong Kong,” said Terabatake on JT’s new structure following wide-ranging sanctions on Russia. “But otherwise, it’s business as usual.”
“We are making various efforts to ensure a sort of a ringfence by sending things from Turkiye, for example, since there are countries that cannot do trade with Russia,” he said.
Following the sanctions, many companies and investors left Russia. However, some have opted to stay, including Philip Morris International.
Japan has also implemented sanctions on Russia.
“It’s true that initially there was a question about reputation in regard to continuing our business, but more recently, it’s less of an issue,” said Terabatake. “There are fewer occasions where people are demanding to know why JT is continuing its business [in Russia].”
JT has not yet answered investors about how profits will get out of Russia and back to shareholders; to date, no dividends have been paid by the Russian entity from its 2022 and 2023 financial results.
Terabatake said he remains prepared to split off or sell the Russian unit “in the worst-case scenario,” but he does not believe it will be necessary under the current sanctions regime.
I.T.M.S. entered into ruble-yuan currency swaps in 2023 to generate interest income, reports Interfax.
Income from the purchase and sale of currency under swap transactions reached RUB2.56 billion ($27.23 million) last year, with a loss of RUB1.654 billion rubles, the company wrote in its annual report.
The Bank of Russia launched a new permanent instrument for the provision of yuan in January 2023. In March 2024, the Central Bank announced that at the beginning and end of each month it would temporarily double the maximum limit on transactions for currency swap transactions.
On the first two and last two trading business days of each month, the maximum daily transaction volume would be RMB20 billion, with the limit on other trading remaining at RMB10 billion.
I.T.M.S. comprises British American Tobacco’s former Russian assets, which the multinational sold to a consortium led by local management after Russia invaded Ukraine.
Russia has been partially cut off from the Western financial system due to war-related sanctions. In response, Moscow has been strengthening ties with China and boosting its own systems.
A proposed ban on vapes in Russia is a “radical measure,” according to Maxim Korolev, editor-in-chief of the industry news agency Russian Tabak, reports HCH.
In an interview with NSN, Korolev commented on the recent bill that would completely ban the retail sale of nicotine and nicotine-free vapes in the Russian Federation “for the purpose of saving people.”
“The ban is too radical a measure because it will deprive a significant number of Russians of the opportunity to receive nicotine without carcinogens,” said Korolev, estimating this size of the impacted group at between 30 million and 40 million people.
At the same time, he noted, a significant share of tobacco sales in Russia avoids taxes and regulations. “What our smokers who want to quit are now getting as an alternative is also not very clear,” said Korolev. “Perhaps this is not the worst measure if it later makes it possible to introduce legal products for alternative purposes, that is, with nicotine, but with carcinogens, without combustible tobacco.”
Korolev insisted that Russians should be given the opportunity to choose alternative options to tobacco products.
“[F]or decades, we hooked the entire male population on the nicotine needle through military service: almost everyone there started smoking. Now, we need to give people the opportunity to use alternative options before simply banning everything indiscriminately.”
In 2023, the smoking rate in Russia was 18.7 percent, down from 24.2 percent in 2019. In 2022, there was a noted increase in smokers using e-cigarettes and vapes.
Recent measures to strengthen control over the tobacco market could significantly boost Russia’s budget, reports Interfax, citing comments by Finance Minister Anton Siluanov.
“Together, we estimated that the volume of funds mobilized from measures to control the tobacco market could reach about 150 billion rubles [$1.64 billion]. This is a significant amount of a resource that we now need,” Siluanov said at an April 2 meeting of Rosalkogoltabakkontrol, which assumed regulatory authority over the production and circulation of tobacco and nicotine-containing products on March 1.
Tax-avoiding products accounted for 13 percent of Russia’s tobacco market in 2023, up from 11 percent in 2021, according to Siluanov.
Rosstat data show that tobacco companies produced 198 billion cigarettes in 2023, which is 10.7 percent less than the previous year. In response to Russia’s invasion of Ukraine, some multinationals have exited the market.
Tax authorities expect to collect RUB824.152 billion in excise taxes from tobacco products this year.
As part of its new responsibilities, Rosalkogoltabakcontrol must identify and stop the illegal production and trafficking of tobacco and nicotine-containing products. In addition, it will monitor manufacturer compliance with licensing and mandatory requirements for production, supply and the purchase and transportation of raw materials and finished products.
By Marissa Dean
The black market and illicit trade are hot topics. Confronted with ever-rising taxes, consumers of tobacco products in many markets are increasingly tempted by more affordable black market offerings. Many places are adjusting and implementing technologies and processes to help curb black market trade. Russia is one of these areas, having recently been listed by the World Health Organization among the countries with policies providing the highest level of protection for its citizens from tobacco.
During a side event at the third Meeting of the Parties (MOP3) to the Protocol to Eliminate Illicit Trade in Tobacco Products, officials gave a presentation on Russia’s Chestny ZNAK track-and-trace system. The event, which took place on Feb. 13 in Panama, was aimed at familiarizing the parties “with proven approaches to ensuring traceability of tobacco products in accordance with Article 8 of the protocol,” according to Revaz Yusupov, deputy general director for the Center for Research in Perspective Technologies (CRPT) in Moscow. “Special attention during the presentations was given to the impact of the system on reducing the illicit tobacco trade in Russia. Representatives from Nigeria, Brazil and Panama were present at the event, facilitating discussions on the potential implementation of the system in their respective countries.”
Introduced by the CRPT in 2019, the Chestny ZNAK system tracks items from production to real-time sales. According to Yusupov, the system is the first of its kind globally. “The fundamental approach involves assigning a unique digital data matrix code to each product,” explained Yusupov. “This code undergoes scanning at every stage, spanning from production to sale. The entire product journey is traced through electronic document management and online cash registers, mandated by law across the country.”
Products with the assigned digital codes are deemed legal, complying with all requisites and documentation. Attempting to illegally introduce goods into the Russian market without proper documentation and labeling is “impractical,” according to the CRPT, because of the success of the Chestny ZNAK system—the digital codes are safeguarded by cryptographic protection, which makes forgery impossible.
The information about the products within the system is tamper-proof as well, according to the CRPT, and the system blocks the sale of expired goods or goods lacking proper documentation. Currently, 667,000 companies and individual entrepreneurs use the system, which boasts a processing capacity exceeding 350,000 operations per second (“surpassing that of Uber or Netflix,” said Yusupov) and a data volume of nearly 100 petabytes.
The Chestny ZNAK system isn’t specifically for tobacco products, though it has been successful in curbing the illicit tobacco market. The system can be used across goods, and it has been implemented in 16 categories of goods, including dairy products, water, clothing, footwear, perfumes, tobacco, medicines, beer and low-alcohol beverages, biologically active additives, antiseptics, medical products, soft drinks and juices, wheelchairs and children’s water, according to the CRPT. When asked about how the system works across goods, Yusupov stated that “The implementation process kicks off with pilot tests for each product category. While participation is not mandatory, it is in the business’ interest as it provides an opportunity to prepare equipment and practice with free Data Matrix codes. Workgroups are formed, comprising representatives from both the business sector and the system operator. Collaboratively, they develop a labeling concept that aligns with the unique requirements of each area within the circulation of goods.”
And the system has been quite successful, according to its manufacturer. “Before the introduction of labeling,” said Yusupov, “the illegal tobacco market in Russia consistently grew, surpassing 15.6 percent by 2019. Following the implementation of labeling, it decreased by a quarter, with 18 productions legalized and 45 illegal ones shut down. Authorities claim that the combined impact of cracking down on illegal trade resulted in RUB245 billion ($2.7 billion) in increased tax revenues.”
By the end of 2025, it’s estimated that the overall economic impact will reach RUB1.6 trillion ($17.6 billion).
In addition to the Chestny ZNAK system, Russia has also enacted a law to systematize control over the circulation of tobacco raw materials and equipment through the licensing institute along with the establishment of an authorized government body for supervision. This government body has instituted a system for registration of equipment. Requirements have also been introduced for tracking the volume of production and circulation of tobacco products and raw materials and for the seizure and destruction of illegal tobacco products and the associated manufacturing equipment, and customs and border authorities have been granted additional powers in regard to illicit trade. Administrative and criminal liability are enforced for a broad range of violations related to mandatory product labeling requirements, including smuggling, production, introduction into circulation and transportation of unmarked goods. There are also quantitative restrictions on the movement of individuals within the territory of the Russian Federation with unmarked tobacco and nicotine-containing products. All of these reforms in combination with the Chestny ZNAK system have led to Russia’s success in curbing illicit trade, according to the CRPT.
Activists are urging the Ukrainian government to crack down on international companies still operating in Russia following reports on Philip Morris International’s preferential tax treatment, according to Eureporter.
Despite being labeled as an “international sponsor of the war,” PMI continues to enjoy a discounted tax rate in Ukraine.
After Russia invaded Ukraine in February 2022, many international tobacco companies, including PMI, announced they would retreat from Russia or substantially scale down their operations. In early 2023, however, PMI CEO Jacek Olczak told the Financial Times that negotiations had stalled as the company does not want to sell the business on unfavorable terms for its shareholders.
Since the start of the war, Russia has made it exceedingly difficult for foreign investors to exit the market without taking a significant financial hit. Among other provisions, the government reserves the right to dictate the valuation of foreign companies’ Russian assets as well as the new owners’ dividend and access to cash flow.
PMI’s revenue in Russia increased to RUR399.9 billion ($4.33 billion) in 2023 from RUR359.53 billion in 2021, the last fiscal year before the war. The company is among the five largest foreign taxpayers in Russia.
PMI’s continued presence in Russia prompted Ukraine to designate the company as a war sponsor.
Despite such considerations, Ukraine levies an ad valorem tax rate of only 12 percent on PMI products—a level that critics say has caused its cash-strapped government to miss out on some UAH100 billion ($2.55 billion) in tax revenues over the decade that the discount has been in place.
Activists have called on Ukraine to introduce restrictions on tobacco companies that have not left Russia and increase the ad valorem tax rate for the products that these companies sell in Ukraine. They cite the example of Estonia, which in March prohibited the trade of products from international companies still operating in Russia.
Cigarette manufacturers in Russia produced 182 billion cigarettes in 2023, reports CRPT, which operates the Honest Mark product labeling system. Accounting for 87.7 percent of domestic tobacco production, cigarette manufacturing was largely stable (up 1 percent) from the previous year.
Production of heated tobacco products, by contrast, jumped 26 percent to 1 billion packs, claiming 10 percent of the Russian tobacco market in 2023. Output of oral tobacco products more than doubled to over 5.8 million. Production of cigarillos increased to 61.5 million packs in 2023 from 32 million in 2022.
The only categories of tobacco products whose production decreased in 2022-2023 were cigars and smoking tobacco, according to CRPT. The production of cigars fell by 38 percent to 4.2 million packs, and smoking tobacco decreased by 8 percent to 1.3 million packs.
Domestic tobacco companies manufactured 96.6 percent of the nicotine products on the Russian market in 2023.
Following Russia’s 2022 invasion of Ukraine, leading international nicotine companies, such as British American Tobacco and Imperial Brands have sold their operations to domestic investors.
The multinationals that remain are finding it increasingly difficulty to extract themselves from the market due to onerous government restrictions on such transactions (see, “A New Reality,” Tobacco Reporter, March 2024).