Tag: Russia

  • In Demand

    In Demand

    Photo: RTF

    Suppliers of reconstituted tobacco step up production to satisfy market requirements.

    By Stefanie Rossel

    Danil Bekmamatov

    Demand for reconstituted tobacco leaf (RTL), also known as homogenized tobacco, has held up remarkably well in recent years. In 2021, amid the Covid pandemic, the global RTL business grew by $8 million, according to Russian Tobacco Factory (RTF). And despite the political and economic upheaval in the wake of the Ukraine war, the upward trend continues, prompting some RTL companies to expand their production capacity.  

    Pioneered in the 1930s, recon tobacco fits well with the current zeitgeist, with its focus on sustainability. Initially, RTL was developed to allow tobacco companies to use the leftovers from cigarette production that were previously discarded. The process saved the valuable raw materials, such as tobacco dust, scraps and stems, and reintegrated them into manufacturing process. Today, homogenized tobacco has a variety of applications. In addition to a cost-saving filler material, it is an essential ingredient in cigarette blend design that enables cigarette manufacturers to lower the nicotine content of their products.

    There are several methods to manufacture RTL. Next to the papermaking method invented by Schweitzer-Mauduit International, there is the nano fiber technology developed by Recon Inc. and employed by Star Agritech International (SAI) and a process called band cast, which is also known as slurry-type recon.

    A fourth method is the pressing technology, for which patents began to appear in the 1960s. RTF has perfected a variety of this technology known as the roller-rolling method. Using high pressure, the process creates a tobacco sheet with such tensile strength and elasticity that it can be processed in the same way as tobacco leaf. According to RTF, the sheet will retain its shape when passing through all stages of the primary, including the drying conditioning cylinder.

    According to RTF CEO Danil Bekmamatov, the process is the result of extensive laboratory work along with trial and error. “The technology has been honed for three years,” he says. “At the beginning, we used only short stems and scrap as raw materials; now, we have developed the practice of processing sections of tobacco veins from a cigarette machine in the amount of 100 percent of the used tobacco material. We have also learned how to introduce up to 5 percent of tobacco dust from the aspiration systems of the cigarette shop without losing RTL quality.”

    The strength of RTF’s approach lies in the simplicity of the concept. “Our technology avoids the costly process of producing nano-fiber cellulose,” says Bekmamatov. “Our product contains 90 percent tobacco and the minimal amount of adhesives necessary. Our proprietary method involves multi-stage rolling with the proper roller friction. We enhance the strength properties of recon tobacco through mechanical action alone, minimizing the use of chemicals.”

    The process also consumes less water than competing technologies, an increasingly important factor as tobacco companies seek to lower the ecological footprint of their products. Skipping the nano-fiber cellulose production step allows users to save energy, leading to a more affordable recon product. “Only by reducing the amount of water to the required production minimum—in our case, up to 40 percent—is it possible to obtain an environmentally friendly technology with low production costs,” says Bekmamatov.

    A More Sustainable Process

    Reducing the carbon footprint was not the primary objective when RTF set out to develop its recon technology. According to Bekmamatov, it was just a positive consequence of the simplicity of the process and recipe. “For our recon production, less water is used than for the floor polisher that serves this line,” he says. “It is the simplicity of the technology and the recipe—all the components of which you have repeatedly seen in the patents of other researchers—that is a key factor in the spread of technology. Due to reverse engineering, the technology is easily repeatable. Therefore, we are interested in creating joint ventures anywhere in the world on an equal partnership basis—and not in selling ready-made production lines. In this regard, two negotiating processes are currently carried on—one is inside Russia, and the other one is outside of it.”

    Based in Samara, about 1,100 km southeast of Moscow, RTF was established in 2017. In addition to recon, it sells cut-rolled stems and cut-rag tobacco. The company inaugurated Russia’s first RTL production line in 2019. A second line is set to become operational at the end of 2023. RTF caters to customers worldwide.

    “Both for the client and for us, only the economy at the stage of logistics is important,” says Bekmamatov. “Logistic costs also become decisive in the issue of processing tobacco byproducts of the primary and secondary process on a give-and-take basis. For example, a number of contracts with neighboring CIS enterprises make it possible to process third-party tobacco waste with low road transport costs. On the other hand, the supply of secondary process tobacco material in sea containers from the UAE turned out to be unviable. I do not want to say that sea transport is expensive and makes it unprofitable to process waste from other countries. I just want to convey the idea that each direction needs to be calculated, and that we are ready to do this work with a great deal of responsibility. We do not exclude the possibility of building new RTL plants in other countries to reduce the cost of RTL for the end customer.”

    Difficult Conditions

    According to Bekmamatov, Russia has been importing increasing volumes of cigar tobacco and inexpensive machine-made cigars containing recon—yet there is virtually no import of RTL bobbins for cigar machines. “There is only one conclusion that can be drawn: there is a great interest in inexpensive cigars on the part of the consumer despite the hypocritical dispute in the cigar community about the quality of machine-rolled products using recon and the unwillingness of the tobacco business to invest in this area, mastering new technologies, processes, purchasing new equipment,” says Bekmamatov.

    Meanwhile, Russia has been producing and importing increasing volumes of cigarillos. “I can only assume that this is due to the excise policy when premium cigarettes are almost equal in price to more prestigious cigarillos and also due to a low entry threshold for secondary manufacturers, who have enough existing equipment to launch a new product line based on papermaking recon wrapper cigarillos,” he says. “Moreover, among smokers, there are no loud discussions about the ‘insufficient naturalness’ of such tobacco products.” 

    Like other Russian companies, RTF has been impacted by the Western sanctions following the Ukraine war. Among other things, the restrictions have forced the company’s engineering department to source components such as electronics, gears and belts from Russian and Chinese suppliers rather than Western ones. In addition, the sanctions have made it difficult to source tobacco from traditional suppliers and conduct foreign exchange transactions. It has also driven up the price of logistics.

    Yet RTF proved resourceful and solved the problems as they arose. “We were the first in the Russian Federation to build new routes for the supply of raw materials, which are now used by other companies,” says Bekmamatov. “And we solved banking problems by opening new companies outside the Russian Federation.”

    Increasing Capacity

    Expansion is also on the agenda of SAI, an international supplier of unmanufactured tobacco and tobacco derivatives based in Istanbul. Since 2018, SAI has been operating a nano fiber recon factory in Brazil. In early 2019, it opened a slurry-process recon plant in Bondowoso, Indonesia. “Recon demand has not changed as far as the usual players go,” says SAI President and CEO Iqbal Lambat. “Our factories in Brazil and Indonesia are running at full capacity, and we have added a second line in Bondowoso to double capacity.”

    SAI’s recon production capacity exceeds 6,000 tons annually, making it a top 3 global supplier alongside SWM’s LTR Industries and KT&G’s Tae-A Industrial Co. affiliate, according to Lambat. “Demand for recon continues to increase as small[-sized] and medium-sized cigarette manufacturers understand the benefits of incorporating recon in their blends,” he says. “Recon is half the price of cheap tobacco in the current tobacco undersupply situation. Recon is becoming a worldwide phenomenon as small[-sized] and medium-sized companies come on board with better understanding of the benefits.”

    To cater to increasing demand, Start aims to complete a second nano fiber plant with an annual capacity of 6,000 tons by early 2026 in Brazil. “This will ease the pressure on our current Brazilian factory,” says Lambat. “We are also planning a nano fiber plant in Tunisia and in Uganda. Both plants are slated to be operational in early 2025 as well. The Tunisian plant is relatively advanced and could come on stream in the Free Zone of Bizerte in 2024.”

    To Lambat, nano fiber is the recon gold standard in terms of sensory impact, as it has half of the stem content as other RTLs, the highest filling power of all RTLs and excellent combustibility. In addition, nano fiber is a sustainable solution. “Nano fiber remains the most eco-friendly RTL production process within the industry,” he says. “As an example, production of 1,000 kg of nano fiber requires less than 50 liters of water. By comparison, the papermaking process requires three liters of water per kilogram of recon produced. So, for 1,000 tons of papermaking recon, 3,000 liters of water will be used and turned into brown water, which then needs industrial scrubbing to be able to release the water into existing effluent systems. So, by comparison, a ton of nano fiber produced uses 50 liters of water versus papermaking at 3,000 liters. So, I’d say, nano fiber is already ahead of the game.”

    Specialized Solutions

    Nano fiber technology does not work well for the kretek cigarettes that dominate the Indonesian cigarette market, however. “Because kretek has as much as 30 percent cloves, it is necessary to use an alternative binding method, and slurry-type production is better suited,” says Lambat.

    The company broke new ground when it opened its recon plant in Java four years ago to turn the waste from clove cigarettes production into kretek recon. “In the startup early experience, Indonesian cigarette manufacturers expected the kretek recon to ‘crackle and spark’ as normal cloves do when lit up,” recalls Lambat. “Of course, kretek recon cannot do that, and now, some four years later, our product has achieved broad product acceptance in Indonesia, and we have more demand than capacity—hence the addition of a second line to double capacity in Indonesia, which is already being commissioned for startup by the end of 2023.”

    SAI has more ideas for specialized RTL products in the pipeline. One is the development of a shisha-type recon offering similar chemical characteristics as original shisha tobacco. “Absorption is in the high five to six ratio limits,” says Lambat. “The product was developed with nano fiber recon from the Star Brazil factory in conjunction with a leading tobacco flavor company in Germany. Prototype products have received broad product acceptance across major markets of the Middle East. As shisha tobacco is in short supply globally, this innovation will alleviate demand.”

    The other novel product is a 100 percent recon manufactured with oriental tobacco from Turkiye, Greece and Macedonia. “Given the current high—and increasing—price of oriental tobacco, this will prove to be a welcome substitute at literally half the price for classical oriental tobacco,” says Lambat.

  • Russia Introduces Flexible Export Duties

    Russia Introduces Flexible Export Duties

    Image: selensergen

    Russia has introduced flexible export duties on tobacco products, alcohol products, live animals, fish, dairy products, vegetables, fruits and many other goods, reports Tass.

    The temporary measure is set at 4 percent to 7 percent at an exchange rate above RUB80 ($0.83) per dollar. At RUB80 per dollar and below, the duty will be zero.

    The measure is aimed at protecting the domestic market, and there are exceptions for some items.

  • BAT Completes Sale of Russia Business

    BAT Completes Sale of Russia Business

    Photo: Matvey Salivanchuk

    BAT has completed the sale of its Russian and Belarusian businesses, the company announced its website. According to the multinational, the sale has been carried out in compliance with local and international laws and follows the receipt of all necessary approvals.

    “BAT Group announced conclusion of an agreement on sale of business in Russia and Belarus today. All trademarks being used now will remain in the ownership of the Russian business. Consequently, consumers will continue receiving high-quality products they are used to under familiar brands,” the press service of the company’s Russian office said.

    “Throughout the transfer process, same as after it, among the new owner’s key priorities are uninterrupted business processes, ensured employment of the staff and the implementation of the investment plan approved by the governmental subcommittee,” the company noted.

  • BAT Sells Russian Business

    BAT Sells Russian Business

    Image: Tobacco Reporter archive

    BAT has formally entered into an agreement to sell its Russian and Belarusian businesses.

    The buyer is a consortium led by members of BAT Russia’s management team, which, upon completion, will wholly own both businesses. Post completion, these businesses will be known as the ITMS Group.

    “Throughout the transfer process, one of BAT’s key priorities has been the interests of its colleagues in Russia and Belarus,” BAT wrote in a statement. “As part of the agreement, their employment terms will remain comparable to their existing BAT terms for at least two years post-completion.”

    BAT anticipates that the transaction will complete within the next month once certain conditions have been satisfied. Upon completion, BAT will no longer have a presence in Russia or Belarus and will receive no financial gain from ongoing sales in these markets.

    BAT remains confident of delivering its full-year guidance as set out at its half-year results on July 26, 2023.

    BAT’s operations in Russia include a head office in Moscow, 75 regional offices and a manufacturing facility in St. Petersburg. BAT also has an office in Belarus.

    On June 30, 2023, on a constant currency basis, Russia and Belarus accounted for approximately 2.7 percent of group revenue and approximately 2.5 percent of group adjusted profit from operations.

    BAT’s decision to sell its Russian business is a response to Moscow’s military invasion of Ukraine.

  • Russia Blames Illicit Trade for Tax Losses

    Russia Blames Illicit Trade for Tax Losses

    Photo: Ivan Semenovych

    The Russian government lost more than RUB46 billion ($481.33 million) in tax earnings in the first half of 2023 as a result of the illicit trade in cigarettes, reports Interfax.

    “According to the latest study, which ended this month, the share of illicit cigarette trafficking was 13.3 percent in terms of smokers,” said Vladislav Zaslavsky, director of the Russian Industry and Trade Ministry’s department for the system of digital marking of goods and the legalization of the circulation of products.

    “The minimum amount of losses, according to the NNCC [National Scientific Center for Combating Illicit Trafficking in Industrial Products], is estimated at RUB46.5 billion,” Zaslavsky said on Aug. 24 during a retail round table in the Volga region.

    According to Zaslavsky, each percent of the share of illicit cigarette trafficking costs the federal budget about RUB7 billion in excise taxes alone.

    The NNCC will conduct a study on “nicotine-containing products” in the second half of 2023. As of the end of 2022, the market share of illegal nicotine-containing products was 79 percent, including 93 percent in illegally sold nicotine-containing liquids.

  • Industry Group Lobbies Against Flavor Ban

    Industry Group Lobbies Against Flavor Ban

    Photo: fotofabrika

    The Russian Union of Nicotine Industry Enterprises (Spini) has called on the government to exclude food flavorings and nicotine salts from the list of active ingredients and additives that are expected to be banned by the Ministry of Health for issues of nicotine dependence, reports ECigIntelligence.

    Representatives of Spini, which has more than 50 members, have sent a corresponding letter to the minister of finance asking for the exception to the ban.

  • Putin Signs Tobacco Law

    Putin Signs Tobacco Law

    Photo: sezerozger

    Russian President Vladimir Putin has signed a new tobacco law, reports Interfax.

    The legislation requires the licensing of production, tobacco imports, nicotine-containing products and raw materials. It also compels manufacturers to register their machinery and mothball any unused equipment.

    While the law does not require retailers to obtain licenses, it bans the retail sale of tobacco products and nicotine-containing products not in consumer packaging and imposes restrictions on the movement of products.

    Titled “On the State Regulation of Production and Turnover of Tobacco Products, Nicotine-Containing Products and Raw Materials for Their Production,” the law is modeled on Russia’s regulatory framework for the tobacco industry. Observers expect Russia to extend the Federal Service for Alcohol Market Regulation’s remit to include tobacco and nicotine-containing products.

    Prepared by the Ministry of Finance, the legislation passed the State Duma on June 1 and the Federation Council on June 7. The law will come into force on Sept. 1, 2023, and the articles introducing licensing will take effect March 1, 2024.

  • Russian Tobacco Mogul Sanctioned

    Russian Tobacco Mogul Sanctioned

    Photo: Natalia Merzlyakova

    The United States has sanctioned Igor Kesaev, co-owner of the Mercury group, which manages Megapolis, a major Russian tobacco distributor, reports Interfax.

    Listed by Forbes as Russia’s 35th-richest person last year, Kesaev’s holdings have included a major stake in the V.A. Degtyarev factory, which makes machine guns, anti-tank and anti-aircraft weapons, some of which have been used in Ukraine, according to Metro.

    Until April 2022, Kesaev was also chairman Megapolis.

    Kesaev’s involvement in tobacco dates to the early 1990s. As the Soviet Union broke up into its constituent republics, he started an importing business that worked with international tobacco companies eager to get their products into the Russian market, according to a 2014 profile of the magnate published on Forbes’ Russian website.

    Over time, Kesaev built the largest tobacco distributor in Russia through acquisitions of regional competitors, according to Forbes’ Russian website. By 2022, Megapolis delivers to 160,000 retailers across the country, according to the firm’s website.

    Kesaev has also been involved with the tobacco business in Ukraine. Following the toppling of Ukraine’s pro-Russian president, Viktor Yanukovych, in 2014 and Russia’s subsequent annexation of Crimea, Ukrainian officials began scrutinizing the role of Russian companies in various sectors of its economy.

    At the time, Trading Company Megapolis-Ukraine controlled 99 percent of Ukraine’s tobacco distribution market, according to research from the Anti-Monopoly Committee of Ukraine.

    Kyiv sanctioned Kesaev in 2016 for unspecified actions that it said threatened Ukraine’s national security. A top Ukrainian prosecutor later accused Kesaev of supporting “terrorist organizations” by supplying arms to Russian-backed separatist groups that have been fighting for nearly a decade to carve out two independent states—Donetsk and Luhansk—in eastern Ukraine.

    Kesaev has also been sanctioned by the EU and the U.K. for aiding Russia’s invasion of Ukraine.

  • PMI Struggles to Sell its Russian Business

    PMI Struggles to Sell its Russian Business

    Photo: alex83ch

    Philip Morris International’s attempts to sell its Russian business have stalled due to the challenge of leaving the country on favorable terms, according to an article in the Financial Times.

    Discussions with at least three “serious” potential buyers have gone nowhere in part because of the strict government requirements, according to PMI CEO Jacek Olczak.

    Kremlin rules make it difficult for companies to exit Russia without taking a huge 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.

    Olczak told the Financial Times he had a duty to shareholders to recover value, adding he would “rather keep” the business in Russia than sell on stringent Kremlin terms. While the asking price was not disclosed, PMI has $2.5 billion worth of assets in the country, according to company filings.

    Many western companies vowed to exit Russia immediately after last year’s invasion of Ukraine, but less than 9 percent of EU and G7 groups in the country had left by the end of December, according to research by the International Institute for Management Development.

    Russia has historically been a huge market for the tobacco industry because of high smoking rates and consumer willingness to switch to vapes and heated-tobacco products. Together with Ukraine, it accounted for 8 percent of PMI’s $31.7 billion revenues last year.

    Imperial Brands sold its Russian operations to a local partner soon after the invasion, taking a $463 million hit to annual profits.

    Japan Tobacco does not plan to leave and BAT has struggled to get a sale over the line, although it said this month it was in “advanced talks.”

  • PMI: New Rules Make Leaving Russia Difficult

    PMI: New Rules Make Leaving Russia Difficult

    Jacek Olczak
    (Photo: PMI)

    New rules are making leaving Russia more difficult, Philip Morris International CEO Jacek Olczak told Bloomberg.

    Following Russia’s military invasion of Ukraine, PMI and other tobacco companies announced they would scale down their operations and eventually exit the country.

    In anticipation of that move, PMI throughout 2022 provided financial figures that excluded its Russian business. Its full-year results, however, included Russia again.

    Olczak told Bloomberg the decision does not signal a change in plans. Rather, it reflects the difficulty of exiting Russia. “As long as we are the owner, we will include the [Russian] number,” Olczak said.

    According to Olczak, new regulations have made it more difficult for foreign investors to exit Russia. In any transaction, the government now has an important voice on asset valuations, access to cash flow and dividends, he said. This makes it hard for any party interested in taking over the business.

    Meanwhile, Olczak said PMI was considering coming back on a more sustainable basis to Ukraine.

    In related news, BAT expects to complete the sale of its Russian business to local partners in 2023, according to Reuters.

    BAT said it was in advanced discussions with a “joint management distributor consortium” on the sale of its businesses in Russia and Belarus but did not reveal the identity of the party or divulge further details on the talks.

    The company said in March 2022 that it was in talks to transfer its Russian business to its Russian distributor, SNS Group of Companies.