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Tag: Russia

  • Russian Vape Ban ‘Radical’: Korolev

    Russian Vape Ban ‘Radical’: Korolev

    Photo: Tobacco Reporter archive

    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.

  • Contraband Crackdown to Boost Russian Budget

    Contraband Crackdown to Boost Russian Budget

    Photo: Sabphoto

    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.

  • Russian Resolve

    Russian Resolve

    The Chestny ZNAK system tracks items from production to real-time sales. | Photo: CRPT

    A supplier of product labeling solutions claims its technology had helped shrink the Russian illicit cigarette market by a quarter.

    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.

    Marissa Dean joined Tobacco Reporter in the summer of 2018 as a copy editor. Since that time, she has taken on additional responsibilities, including feature writing. Her skills span the publishing industry from layout and design to copy editing to content creation.
  • Ukraine: Activists Decry PMI’s tax privileges

    Ukraine: Activists Decry PMI’s tax privileges

    Photo: Tania

    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.

  • Heated, Oral Tobacco Output Jumps in Russia

    Heated, Oral Tobacco Output Jumps in Russia

    Photo: Delovoy Petersburg

    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).

  • 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.”