Tag: Russia

  • New Tobacco Control Measures in Russia

    New Tobacco Control Measures in Russia

    Photo: Kalyakan

    Russia has strengthened state control over the production and circulation of tobacco and nicotine-containing products, effective March 1, reports Mail.ru.

    The Federal Service for Control of Alcohol and Tobacco Markets, Rosalkogoltabakcontrol, will now monitor production and circulation of tobacco, suppressing illegal production and trafficking of products and monitoring compliance with licensing and mandatory requirements during production supply, purchase and transportation.

    Control activities include on-site inspections, test purchases and inspection visits.

    Effective March 1, manufacturers are required to have a license to produce tobacco. An electronic register of these licenses came into effect on Sept. 1, 2023.

  • A New Reality

    A New Reality

    Photo: Delovoy Petersburg

    Two years into the Ukrainian conflict, tobacco businesses still scramble to adapt.

    Contributed

    Since Russian forces crossed the Ukrainian border on Feb. 24, 2022, tobacco business on both sides of the conflict has been a roller-coaster ride. As the second anniversary approaches, tobacco companies have yet to fully adapt to the new reality.

    In 2022, sweeping Western sanctions triggered massive disruptions in the supply of raw materials for tobacco factories in Russia and Belarus. The logistics havoc that followed the first EU sanctions packages took a heavy toll on production costs. Besides, the restrictions directly prohibited the delivery of some raw materials to the country.

    Nearly two years since, this issue is yet to be fully solved, according to Sergey Glushkov, head of the communications department at Japan Tobacco International Russia.

    “Two years ago, 100 percent tobacco and more than 90 percent of nontobacco materials were produced abroad. However, after necessary raw materials were included in the list of dual-use products and were placed under the U.S., EU and Japanese sanctions, tobacco companies operating in Russia started diligently looking for suppliers in China, India and other markets,” Glushkov said on the company’s social media networks in Russia.

    In addition, to mitigate risks, the company puts a lot of effort into import replacement. JTI Russia has localized foil, plastic film, cardboard packaging, most paints and some raw materials. As a result, the share of localized raw materials has nearly tripled compared to pre-sanction times, though it is still falling miles short of the desired level.

    Raw material supply is still a pressing issue, which is far from being sorted out, Glushkov admitted.

    There are many reasons why sanctions keep executives of the Russian tobacco factories awake at night. As Western technologies are no longer available on the Russian market, modernization issues also come to the fore.

    Some necessary equipment and production lines are nearly impossible to get, Glushkov stated, adding that this situation might push factories to somehow rejiggle operations. He didn’t elaborate, only admitting that this would incur costs.

    Numerous reports indicated that Russian businesses find creative and effective ways of circumventing Western sanctions, sourcing necessary raw materials in third countries like Turkiye, China, Kazakhstan and Georgia.

    However, as Western countries double down on their efforts to close the existing loopholes allowing Russian firms to bypass the restrictions, this work is growing trickier by the day. U.S. President Joe Biden signed an executive order in December announcing secondary sanctions on foreign banks suspected of supporting Russia’s campaign in Ukraine.

    This move has seemingly hit the target, as banks in Turkiye, one of the largest hubs for re-exporting Western goods to Russia, have started closing Russian corporate accounts following threats of secondary sanctions from the United States, the local press reported, citing market players.

    There are problems in China as well. A major Chinese bank for Russian importers, Chouzhou Commercial Bank, ceased operations with Russian and Belarusian companies. Occasional reports indicate difficulties Russian business has in other jurisdictions.

    In Ukraine, plans are drafted to move cigarette factories to safer territories (Photo: Fifth Channel)

    Seeking a Safe Harbor

    On May 28, a kamikaze drone hit Imperial Tobacco Group’s factory near Kyiv, Ukraine. Although the destructions reportedly were insignificant, this event once again reminded foreign investors operating in the country that in the context of constant shelling, no place can be considered entirely safe.

    Imperial Tobacco Group resumed operation soon after the Russian troops fell back from Kyiv. Galina Vorobieva, director of Imperial Tobacco Production Ukraine, claimed that the company faced a hard choice whether to resume operation, as safety risks were undeniable.

    Plans were drafted to move the production to a Western region, which is considered safer, but the wheels are yet to be set in motion.

    Philip Morris International, in turn, has recently confirmed plans to build a new cigarette factory near Lviv, not far from the Polish border, to manufacture around 7 billion cigarettes per year.

    Maxim Barabash, director of Philip Morris Ukraine, explained that the company is primarily driven by safety concerns, as the factory in Kharkiv in the eastern part of Ukraine sits too close to the battlefields.

    The Ukrainian authorities estimated that every third building in Kharkiv had been damaged by shelling. For this reason, putting the local factory into operation never seemed like a feasible option.

    “We understand that in the medium term, it will be challenging for us to put the Kharkiv factory back into full operation. And we need local production as soon as possible to meet the demand on the Ukrainian market,” Barabash told local press.

    In the good old days, the Kharkiv factory manufactured 20 billion cigarettes per year, of which nearly half was exported. It is hard to imagine this now, but a share even landed on the Russian market.

    The Lviv factory will manufacture less because export is not in the cards. Besides, the demand on the domestic market has plummeted by roughly a third as millions of Ukrainians fled from the country seeking shelter in the neighboring countries.

    The fate of the Kharkiv factory remains vague. According to Barabash, Philip Morris is not contemplating shutting it down completely, but the company also won’t need two production assets.

    Almost all smaller tobacco factories continue operation in the country despite multiple challenges, spanning from worsening labor shortage to waning demand and flourishing illegal trade. A recent report by the Kyiv School of Economy indicated that the share of the shadow segment of the cigarette market in Ukraine spiked to a record-breaking 20 percent.

    Illicit cigarettes remain a problem in both Russia and Ukraine. (Photo: Russian government)

    Looming Nationalization

    Since early 2022, all leading Western firms have been pressured to sever their ties with the Russian and Belarussian markets. Not all tobacco firms, however, were quick to do so.

    In August 2023, Ukraine’s National Agency on Corruption Prevention even added Philip Morris International and Japan Tobacco International to the list of “international war sponsors” for not pulling a plug on Russian operations. The Ukrainian government agency claimed that both companies generated solid revenue in Russia and kept paying taxes to the Russian budget.

    Imperial Brands was the first of the global tobacco firms to leave Russia in April 2022, followed by BAT in September 2023.

    JTI Russia decided to continue its business in the country to not deprive customers of the products they are accustomed to, Glushkov unveiled. Despite that, JTI will not introduce a new generation of tobacco-heating devices to the Russian market. JTI also complies with all regulatory rules when working on the Russian market, Glushkov emphasized.

    In March 2022, JTI announced that it suspended new investments and marketing activities in Russia. In April 2022, the company claimed it mulled various options for developing its business in Russia, including transferring it to new management.

    Negotiations on the sale of PMI’s Russian business have reached a dead end, Jacek Olczak, CEO of PMI, told the Financial Times in February 2023. He explained that PMI’s position was that it would rather keep its business in Russia than sell it on unfavorable terms, at an unfair price to shareholders.

    However, the reality is that Western firms running business in Russia no longer have an option to sell it, at least under reasonable terms. Since the middle of 2022, the Russian authorities have been consistently tightening screws for the foreign companies seeking an exit from the market.

    In October 2023, the Russian government stipulated that to sell Russian assets, investors from the countries deemed as unfriendly will need to make a voluntary contribution to the Russian budget comprising at least 15 percent of the cost of the deal. During the previous year, this contribution was limited to 10 percent.

    Besides, the Russian government commission on foreign assets requires Western firms to offer a nearly 50 percent discount on their assets for the deal to get a green light from the Russian regulator.

    However, even fulfilling these terms doesn’t guarantee a success. In July 2023, Russian President Vladimir Putin signed an order to nationalize the Russian operations of Danone and Carlsberg—both companies were working on selling their Russian assets.

    The move, among other things, has largely discouraged other foreign firms from executing their exit plans. The threat of forced nationalization has been looming over assets of foreign firms during the past two years.

    The Russian tobacco industry must be nationalized, claimed Biysultan Khamzaev, a member of the State Duma Committee on Security and Anti-Corruption, in an interview with state press on Jan. 19, 2024.

    “I would nationalize [assets of] all tobacco corporations in Russia. I would do it following the example of China. They established the China National Tobacco Corp. The system should be in the hands of the state, not private corporations. But it turns out that they earn money while the burden on the state, healthcare and social services rise,” Khamzaev said.

    Although the public attention to hostilities in Ukraine has tangibly diminished, the challenges they brought to the tobacco business are still as real as ever. As the war grinds into the third year, the future of the tobacco factories in all countries involved remains highly uncertain.

  • Russia Tackles Illicits

    Russia Tackles Illicits

    Photo: Center for Research and Perspective Technologies

    Russia’s national digital track-and-trace system, Chestny ZNAK, has achieved a 25 percent reduction in illegal tobacco within a year of implementation, according to the Center for Research and Perspective Technologies in Moscow. Furthermore, it contributed to the legalization of 18 tobacco production and the dismantlement of 45 illegal ones.

    Russia’s accomplishments were recognized during the 10th Conference of the Parties (COP10) to the World Health Organization’s Framework Convention on Tobacco Control in Panama City this week.

    Chestny ZNAK tracks each cigarette pack in real-time, from the point of production to final consumption. The technology relies on digital data matrix codes assigned to each pack. This code contains information including production point, date, expiration and licensing documents. The information is updated at every stage of the product’s lifecycle until final sale. Illegal products are flagged by cash registers in stores, making them impossible to sell.

    To empower citizens and enhance transparency, a sophisticated mobile application has been introduced. This application allows users to verify the legality of various products, including tobacco and 16 other categories such as pharmaceuticals, dairy, footwear and photographic equipment.

    The system has also helped other sectors protect their businesses against brand piracy, contributing to a 12-fold decrease in substandard dairy products, a 20 percent reduction in the illegal perfume trade, and a more than a two-fold decrease in the illicit tire market, among other advances.

    Authorities estimate the tax impact of the system to be nearly RUB500 billion ($5.5 billion) and expect this figure to at least triple by 2025.

  • ‘BAT Unlikely to Buy Back Russian Assets’

    ‘BAT Unlikely to Buy Back Russian Assets’

    Image: Framestock

    British American Tobacco is unlikely to exercise its option to buy back its Russian assets, given the perceived risk of investing in Russia, reports Interfax.

    Following the 2022 invasion of Ukraine, many Western-headquartered firms pulled out of Russia. BAT sold its assets in Russia and Belarus to a consortium led by local management. The sale included an option to buy back the assets within two years.

    After the transaction, the assets were renamed ITMS Group. As of September 2023, ITMs was owned by BFI Holding of the United Arab Emirates, according to Russia’s Unified State Register of Legal Entities.

    BAT’s retreat from Russia depressed the company’s 2023 results. BAT reported revenue of £27.28 billion ($34.38 billion) a loss of £15.75 billion on Feb. 8, and attributed the declines over 2022 in part to the loss of its Russian business and its decision to write-down of the value of several U.S. cigarette brands to reflect the dimming prospects for combustible products.

    BFI Holding is owned by Faruk Yener, Oleg Barvin, Elena Zavarzina, Andrey Osavolyuk and Sergey Kudinov. Yener was general director of BAT for Russia, Turkey, the Caucasus, Central Asia and Belarus, while Barvin headed the company’s legal department.

    ITMS posted revenues in 2022 of RUB42.74 billion ($467.34 million) versus RUB38.94 billion in 2021, while net profit was RUB2.21 billion versus RUB1.73 million, respectively.

  • Russian Duma Supports Move to Digital Labels

    Russian Duma Supports Move to Digital Labels

    Image: Glitter_Klo

    Russia’s State Duma Budget Committee supports a bill that regulates the procedure for collecting excise taxes and their administration following the transition to digital labeling of tobacco and nicotine-containing products, according to Interfax.

    “The development of the bill is due to the fact that from March 1, 2024, the requirements for labeling tobacco and nicotine-containing products will change. We are abandoning paper stamps and moving to using digital stamps for labeling,” Deputy Minister of Finance Alexey Sazanov said.

    “The term accounting and control special mark is being introduced. This is essentially the bar code that will be applied to the pack. Certain control requirements are being specified—the tax base cannot be less than the corresponding volume of production—tobacco or nicotine-containing products, fixed in state information system,” Sazanov said.

    Regarding the appearance of the digital mark, Sazanov said, “Instead of a physical excise stamp, there will be a barcode, like on medicines, on dairy products. There will be an identification sign.”

  • Former BAT Russia Subsidiary Renamed

    Former BAT Russia Subsidiary Renamed

    Image: Patcharida

    BAT’s former Russian subsidiary in St. Petersburg has been renamed ITMS following the change in ownership, reports AB News.

    Last year, BAT announced problems with its Russian business and its intention to leave the Russian market following Russia’s invasion of Ukraine.

    The Russian and Belarusian businesses of BAT were acquired by a consortium led by BAT Russia’s management team.

  • BAT Took Big Hit on Russian Sale: CEO

    BAT Took Big Hit on Russian Sale: CEO

    Photo: Matvey Salivanchuk

    BAT took a big hit from the sale of its Russian and Belarussian assets, according to CEO Tadeu Marroco, reports Reuters.

    During a Dec. 6  trading update, Marroco said that the proceeds received by BAT represent only a fraction of the Russian and Belarussian businesses’ true value

    In September, BAT sold the assets to a consortium led by its Russian local management team, ending an 18-month long process to exit the world’s fourth-largest cigarette market following Russia’s invasion of Ukraine.

    At the time, BAT did not disclose the sale price or whether the deal included a clause allowing the company to buy back the businesses at a later date.

    Marroco noted that the company was unlikely to exercise the sales contract’s buyback option because Russian authorities restricted this to two years.

    The company had already recognized £629 million pounds ($792.35 million) in impairments and associated costs related to the sale by the time the deal was announced

  • A Mixed Reception

    A Mixed Reception

    Photos courtesy of Vladislav Vorotnikov

    E-cigarettes enjoy booming popularity in the CIS region—but not among lawmakers.

    By Vladislav Vorotnikov

    A meteoric rise in the popularity of vapes in Russia, Belarus, Ukraine and Kazakhstan is pushing the governments to act. Severe measures up to a complete ban are on the table in many markets, but the looming risks of black market expansion prevent the authorities from hustling moves.

    As of March 1, 2024, selling flavored vapes will be illegal in Russia, according to a draft government decree.

    Among the additives due to be banned are vanilla, spices, ginger, cinnamon and sweeteners along with caffeine, guarana and taurine, which increase energy and mental and physical performance.

    No matter whether the measure will come into force, the end of the anti-vape campaign in Russia is nowhere in sight. In October 2023, a bill altogether banning selling vapes in the country was tabled in the Russian Parliament. 

    The bill was originally prepared two years ago and has recently been resubmitted by lawmakers, Yaroslav Nilov, a member of State Duma, the lower chamber of the Russian Parliament, stated.

    “We realize that the ban means certain lost revenues, but the health of citizens is more important, so we will strive to make the ban real,” Nilov commented.

    Restrictive measures against selling vapes are easily being circumvented by unscrupulous sellers in Russia, the lawmakers said in an explanatory note to the bill, referring to the law prohibiting selling vapes and e-cigarettes to customers below 18 years, which came into force earlier in 2023.

    In addition, the Russian government now struggles to ban selling vapes through the internet. In November 2023, it was disclosed that a Russian regulator seeks to close 250 online stores selling such products. These efforts have gained little traction so far. 

    Russian authorities are not alone in the CIS region in their vaping crackdown. In July 2023, the idea of banning all forms of e-cigarettes was put forward by the Youth Parliament of Belarus, a public organization designed to raise future lawmakers.

    In July 2023, a Kazakhstan government commission hammered out a recommendation to prohibit selling e-cigarettes, liquids and vape flavors, though no concrete timeframe for the measure to come into force has been disclosed yet.

    Again, potential harm to the health of the citizens has been cited as the primary rationale behind the initiative.

    “The harm of vaping is undeniable,” Nurgul Tau, deputy of the Kazakh Majilis, the lower chamber of the Kazakh Parliament, said, emphasizing that the Health Ministry had been advocating the prohibition on selling vapes since 2021.

    Ukraine is the only country in the CIS region where a ban on selling vapes and e-cigarettes has already been put into place.

    The idea of banning vapes has been brewing in the Ukrainian Verkhovna Rada, the national Parliament, for the past few years. Retailers and tobacco companies urged the authorities to consider alternative options, including partial restrictions, but the legislators appeared to be adamant about banning vapes.

    A Booming Market

    Public discussions about banning vapes in the post-Soviet area have been spurred by a skyrocketing rise in sales in the past few years.

    In 2022, the Russian market of single-use vapes has nearly tripled, NielsenIQ, an international consultancy, estimated without providing concrete figures. Companies operating in this segment saw their revenues rise by about 350 percent.

    Between 2018 and 2021, the Russian vaping market expanded by a factor of 50, estimated an alliance of participants of the electronic nicotine-delivery systems market. Last year, the sales were nearly RUR250 billion ($2.5 billion).

    The scale of the market boom can be seen with the naked eye. While in 2021, only 7 percent of tobacco stores sold vapes, by May of 2022, this figure reached 35 percent, NielsenIQ said. Another study indicated that at the beginning of 2023, the number of stores selling vapes in Russia was equal to that of conventional tobacco products.

    The picture is similar on the neighboring markets. Since 2020, sales of vapes in Kazakhstan jumped by a factor of 300 times, the Kazakh finance ministry estimated.

    In Ukraine, the state budget collected UAH2 billion ($55.6 million) from the companies selling vapes, calculated Yuri Suptel, head of the Ukrainian Vaping Association. In 2023, this figure was projected to reach UAH5 billion, but the actual figure will be much lower due to the ban that came into force in July.

    Over the past few years, nearly 1 million Ukrainian smokers “migrated” to vapes, so the restrictions will be quite painful for a large number of customers, Suptel estimated.

    Time for the Black Market

    Ukrainian retailers have largely ignored the government ban on vapes imposed in July, local press reported, showing numerous pictures of tobacco stores selling vapes after the restrictions were enacted.

    Since August 2023, the black market of vapes has been flourishing in Ukraine, Suptel said, estimating that smugglers illegally delivering vapes to Ukraine from neighboring countries earn around UAH500 million per month.

    “In the shadow market, it is impossible to ensure compliance with the laws that regulate the sales of cigarettes, electronic devices and other tobacco products. For example, the access of minors to nicotine products is not limited. The National Police of Ukraine must fight this phenomenon. But unfortunately, they simply do not have enough resources,” Suptel admitted.

    “We hope that the government and members of the parliament will think about the absurdity of the ban and make the right decision,” Suptel added.

    The risk that the ban will push the entire vape market underground is believed to be one of the key reasons why Kazakhstan is not rushing to implement the restrictions.

    “I’m sure that our deputies, due to their naivety or bias, will ban vapes eventually. In a year or two, we will come to the point where this ban will have to be lifted,” commented Dmitry Zhukov, executive director of the QazSpirits Ale, a local vaping company.

    It is one thing to ban a product that is difficult to import into the country and challenging to make and entirely another to ban vapes, which “any schoolchild can assemble on his knee,” Zhukov said.

    Currently, Kazakhstan companies selling vapes have no plans to curtail their activities, even if the ban gets a green light. They explained that the demand on the market is not likely to be affected. On the other hand, when the entire market moves underground, there will no longer be a need to pay excise fees, according to Zhukov.

    Russia would lose RUR38 billion per year in tax revenue from a ban on vapes while the black market is going to flourish, reaching RUR500 billion to RUR600 billion in annual sales, calculated Dmitry Vladimirov, head of the Union of Enterprises of the Industry of Nicotine-Containing Products.

    “Significant losses of the Russian budget in such a difficult geopolitical situation, the growth of the black market, and the rising number of deaths due to the use of counterfeit products are just the tip of the iceberg [Russia will face],” Vladimirov stated.

    In the countries that opted to ban e-cigarettes, their illegal sales skyrocketed by a factor of 200 to 300, Vladimirov estimated.

    Russia analysts also pointed out that the black market of vapes will find itself on fertile ground as illegal sales of conventional tobacco products still exist in the country, especially in the provinces remote from Moscow. This business is doing well and even growing despite the government’s efforts to take it down, and there are reasons to believe that the ban will only buttress it.

    Production Perks Up Despite Uncertainty

    While all countries in the region are primarily importing vapes, there are signs that local production is also on the rise.

    “The industry could develop under the balanced control of the state; some operators, for example, planned to start producing such products on the territory of Ukraine, contribute to the economy through exports, help GDP growth [and] create jobs,” Suptel said.

    However, even if the ban is removed now, it will take time for the market players to reconsider their plans, owing to high uncertainty about the legal status of this business, according to him.

    Some capacities for producing e-cigarettes are being established in Russia, though the lion’s share of the sold products still comes from China.

    One local publication wrote about an entrepreneur who managed to earn RUR90 million in one year, investing a relatively small amount of money into the production of vapes. On the other hand, most vape manufacturers prefer to keep a low profile. One possible reason is that some plan to continue operations when the ban is enforced.

  • Russia to Criminalize E-liquid Trafficking

    Russia to Criminalize E-liquid Trafficking

    Photo: diy7

    Traffickers of illegal vape liquids could face up to seven years in prison in Russia if a proposal by the Committee of the Federation Council on Economic Policy becomes law, reports AIF.

    Lawmakers are concerned about the ingredients in illegal vapes, which evade regulatory scrutiny.

    Anatoly Vyborny, Deputy Chairman of the Committee on Security and Anti-Corruption, supported the provision, saying that the measure would help protect the health of young Russians.

    Currently, in Russia, there is no criminal liability for the illegal import of vaporizers and e-liquids.

  • UAE Firm Buys BAT’s St. Petersburg Assets

    UAE Firm Buys BAT’s St. Petersburg Assets

    Photo: Igor Sobolev

    BFI Holding of the United Arab Emirates has purchased the St. Petersburg asset of BAT, reports Kommersant, citing data from Russia’s Unified State Register of Legal Entities.

    According to the Abu Dhabi Global Market registry, one of BFI Holding’s owners is Faruk Ener, who previously was responsible for Russia, Turkiye, the Caucasus, Central Asia and Belarus at BAT.

    BAT started operating in Russia in 1991. Three years later, the company began producing its own tobacco products in St. Petersburg. After the start of hostilities in Ukraine in May 2022, BAT announced the suspension of investments in Russia and later transferred the business in Russia and Belarus to a consortium led by the Russian