Tag: Russia

Russian Tobacco Mogul Faces Scrutiny

Photo: GAlexS
Metro published a profile of Russian tobacco mogul Igor Kesaev, who has been sanctioned by the EU and the U.K. for aiding Russia’s invasion of Ukraine.
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 sources.
Until recently, Kesaev was also the board chairman of Russia’s leading tobacco distributor, TC Megapolis. Kesaev resigned from the board on April 11, 2022, according to a Russian-language press release, which stressed that Megapolis was not subject to EU sanctions and Kesaev did not influence the company’s business.
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.
Russia was—and continues to be—an attractive market for international tobacco companies, with its large population of around 145 million people and one of the highest smoking rates in the world. More than 40 percent of men there light up, according to the World Health Organization.
According to the Forbes profile, Kesaev graduated from Russia’s prestigious Moscow State Institute of International Relations. In the 1990s, he lived in Switzerland, where he developed personal connections with executives at Philip Morris International’s regional headquarters in Lausanne.
Over time, Kesaev built the largest tobacco distributor in Russia through acquisitions of regional competitors, according to Forbes’ Russian website. Today, Megapolis delivers to 160,000 retailers across the country, according to the firm’s website. In 2013, PMI and Japan Tobacco International both purchased 20 percent stakes in Megapolis’ holding company for $750 million each.
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.
April 26, 2022
Imperial to Transfer its Russian Business

Photo: GerMann
Imperial Brands today announced the transfer of its Russian business to investors based in Russia, subject to finalization of the registration of the transaction with local authorities, which is expected to take place shortly.
The transaction aligns with the company’s desire to divest its entire Russian operation as a going concern in order to provide the best outcome for its 1,000 Russian employees.
Imperial Brands’ Russian operations include a sales and marketing business, and a factory in Volgograd.
“We continue to support our Ukrainian colleagues and their families, including with transport and accommodation to enable them to escape the areas most heavily affected by war, and resettlement assistance for those who have left Ukraine,” the company wrote in an update.
Imperial Brands said its previous guidance on the financial impact of its exit from Russia and suspension of our Ukraine operations remains unchanged.
In fiscal year 2021, Russia and Ukraine represented in total around 2 percent of Imperial Brands’ net revenues and 0.5 percent of adjusted operating profit. The company anticipates a non-cash write off of around £225 million ($293.78 million) for this transaction, which it expects to be treated as an adjusting item.
April 21, 2022
Russia Sanctions Target Tobacco Tycoon

Photo: Zerophoto
Tobacco tycoon Igor Kesaev is among the targets of the latest tranche of EU and U.K. sanctions against individuals believed to be supporting the Russian-backed breakaway regions of Luhansk and Donetsk in Ukraine, according to The Herald of Scotland.
Kesaev reportedly controls 70 percent of the Russian cigarette market and is Russia’s 35th richest person.
Other individuals on the sanctions list include the wife of Russian foreign minister Sergei Lavrov, Maria Lavrova; Alexander Ananchenko and Sergey Kozlov, self-styled Prime Minister and Chair of Government of the so-called Donetsk and Luhansk People’s Republics.
Relatives of Russian oligarchs have been targeted as well, including Pavel Ezubov, cousin of Oleg Deripaska, and Nigina Zairova, Executive Assistant to Mikhail Fridman.
April 17, 2022
Heading for the Exit

Photo: Matvey Salivanchuk
Following Russia’s invasion of Ukraine, tobacco companies to retreat from one of the world’s top cigarette markets.
By Stefanie Rossel
Amid growing pressure, the four leading international tobacco manufacturers have joined the exodus of U.S. and European companies that has followed Russia’s invasion of Ukraine. In early March, after the United States, the European Union and Great Britain imposed economic sanctions, all major cigarette makers announced that they would suspend operations or pull out of Russia altogether—although some did so less enthusiastically than others.
After initially announcing it would merely suspend its planned capital investments in Russia, BAT quickly made a U-turn, signaling a far greater retreat. On March 11, the company announced that its ownership of the business in Russia was no longer sustainable in the current environment, which it described as “highly complex, exceptionally fast-moving and volatile.” BAT is in advanced talks to transfer its Russian business to the SNS group of companies, its distributor in the country since 1993. According to SNS, the level of production and the supply and distribution chain would be maintained with a transfer. As a result of the withdrawal, BAT reduced its annual revenue growth outlook to between 2 percent and 4 percent from the 3 percent to 5 percent announced in February.
BAT’s move came a day after a Russian government commission approved the first step toward nationalizing the assets of departing foreign companies. On March 10, Russia’s economic development ministry published a draft bill that would give state-owned Vnesheconombank and the state export guarantee agency the right to seize the property of foreign firms that left Russian markets of their own accord. The proposed law would treat a corporate decision to exit the business as a criminal bankruptcy and empower authorities to initiate criminal justice proceedings against local management, BAT Chief Marketing Officer Kingsley Wheaton told Reuters in an interview.
After announcing plans to scale down its operations in Russia on March 9, Philip Morris International in late March specified the concrete steps it would take, saying it was working on options to exit the Russian market “in an orderly manner.” The company stated that it had discontinued some of its cigarette brands offered in the market and suspended its marketing activities. Furthermore, it had canceled all product launches planned for this year in Russia, including the introduction of its new tobacco-heating product (THP), IQOS Iluma, and its plans to manufacture more than 20 billion Terea sticks, the consumables for IQOS Iluma. Production of the latter would have involved an ongoing investment of $150 million, which the company also canceled.
JTI, meanwhile, limited its withdrawal from Russia to a suspension of all new investments and marketing activities along with the launch of its most recent THP, Ploom X.
Imperial Brands, which has a relatively small footprint in Russia, announced on March 15 that it had started negotiations with a local third party about a transfer of its Russian assets of operations. “We believe that, in the current circumstances, an orderly transfer of our business as a going concern would be in the best interests of our Russian colleagues,” Imperial Brands wrote in a statement.
In addition to their actions in Russia, all four cigarette manufacturers temporarily closed their production sites in Ukraine to protect their workforce and have pledged to continue paying the salaries of employees in the affected countries.

The decision to leave Russia not only has financial consequences, but it also presents practical challenges. (Photo: Tobacco Reporter archive)
Between a Rock and a Hard Place
In deciding their course of action, cigarette manufacturers faced a dilemma of choosing either to leave and protect their reputations or to stay and continue to benefit from the world’s fourth-largest tobacco market.
The decision to leave not only has financial consequences, but it also presents practical challenges, according to Jon Fell, partner at Ash Park Capital. “It’s one thing to say, ‘we’re no longer going to send our luxury handbags or fashionable training shoes to Russia,’ but if, in addition to factories or distribution centers, you have hundreds or thousands of employees in the country—who up until now have been seen as an integral part of your international company—then you have to take difficult and complex decisions, and there’s no obvious easy, right answer,” he says.
“Sorting the mess out takes time, and you can’t just abandon employees,” adds Fell. “I don’t think the approach of the tobacco industry overall is very different to that of other consumer packaged goods companies, quite a few of whom are continuing to operate in Russia right now—and drawing criticism because of that.”
Russian cigarette makers sold 206 billion cigarettes with an estimated value of $717 billion in 2020, according to Euromonitor International. The market has been declining at a 6 percent compound annual rate over the past 10 years and almost 7 percent over the past five years.
At the same time, the country has developed into a promising market for THPs, which, according to Moningstar, accounted for 11 percent of the total tobacco market in 2021, making the country one of the largest markets for these products outside of Asia.
With a volume share of 38 percent in 2021, JTI has the greatest exposure to Russia of the tobacco multinationals, according to Euromonitor. The company, which in 2018 acquired Donskoy Tabak, has four factories and 4,000 employees in the country. It has invested over $4.6 billion in the past 20 years. In 2020, its tax payments accounted for 1.4 percent of Russia’s state budget. Russia represented almost 16 percent of group volume in 2021, according to Morningstar.

It’s one thing to say, ‘we’re no longer going to send our luxury handbags or fashionable training shoes to Russia,’ but if, in addition to factories or distribution centers, you have hundreds or thousands of employees in the country, then there’s no obvious easy, right answer.
Jon Fell, partner at Ash Park Capital
Costly Exits
For PMI, Russia accounted for almost 10 percent of cigarette and THP unit shipment volume and around 6 percent of its total net revenues in 2021. With a market share of 26 percent, the company has three factories, more than 100 sales outlets and approximately 4,100 employees in the country. Ukraine, where PMI runs a factory in Kharkiv with around 1,300 employees, represents about 13 percent of PMI’s regional volume and contributed almost 2 percent to PMI’s total net revenues in 2021.
Morningstar expects PMI’s tobacco volume from Eastern Europe to decline by 45 percent in 2022 with a slow recovery thereafter as the collapse of the ruble is likely to create translational foreign exchange pressure.
Both Russia and Ukraine are important markets for IQOS, accounting for about 23 percent of PMI’s THP sales. PMI’s shipments of THP consumables in Russia increased from 13.6 billion units to 16.3 billion sticks in 2021 while shipments of cigarettes continued to fall. Considering Russia’s worsening economic outlook in the wake of international sanctions, however, a J.P. Morgan analyst doubted that PMI would still be able to achieve its next-generation product growth targets. Morningstar assumes that PMI’s write-down in case of a market exit could be approximately $7 billion, corresponding to 5 percent of the company’s market capitalization.
Ukraine and Russia combined accounted for 3 percent of BAT’s group revenue in 2021 and a slightly lower proportion of adjusted profit, the company said on its website. Morningstar estimates that the bulk of net revenue from these two countries, 2.5 percent, was generated by Russia, where BAT, according to Euromonitor, held 25 percent of the market in 2021. Employing some 2,500 people in Russia, BAT has a factory in St. Petersburg and 75 regional offices. Since the company entered the market in 1991, it has invested more than $1 billion in Russia. Morningstar reckons that the value of BAT’s operations will depreciate by around $2.2 billion, or about 2.4 percent of its market capitalization, as a result of its withdrawal from Russia.
Among the four players, Imperial Brands is a distant fourth, holding 8 percent of the Russian cigarette market. It operates a production site in Volgograd and has a workforce of 1,000. In 2021, the company said, Ukraine and Russia represented in total around 2 percent of net revenues and 0.5 percent of adjusted profits. Due to the limited profit contribution of the two markets, Imperial Brands explained it expected “a relatively small impact” on its constant currency adjusted profit.

Seeking a Backdoor
How the multinationals’ retreat will impact Russia’s illicit cigarette market is anyone’s guess. “It’s very hard to know how demand and supply of tobacco products will evolve in Russia given all that’s going on with sanctions, ownership of the industry and, presumably, local purchasing power,” says Fell. “I would certainly think that an increase in the size of the illicit market is a risk, and that’s also going to depend on how long this situation lasts.” Illegal cigarette sales represented 10.7 percent of the total Russian tobacco market in 2021, up from 4.6 percent in 2017, according to Statista.
Much will depend on how long the conflict continues. Considering the large amounts invested in Russia over the past 20 years, it’s safe to assume that cigarette manufacturers will do their best to minimize their losses. The companies have built strong positions in the Russian market, and there is demand for their products.
“I’d be surprised if any of the companies—not just the tobacco manufacturers—now exiting Russia are doing so in a way that would prevent their going back in the future, assuming that the war stops at some point, relations are normalized and reentry becomes conceivable,” says Fell. “But arranging that in a way which allows you to say you have exited the country for the time being is no doubt very tricky and is likely to be contributing to decisions taking some time to reach and to be implemented.”
Stefanie Rossel is Tobacco Reporter’s editorial contributor. An experienced trade journalist, she combines sharp reporting skills with in-depth knowledge of the tobacco and vapor industries. Prior to joining Tobacco Reporter, Stefanie was editor-in-chief at Tobacco Journal International, where she worked for a decade. Fluent in English, German and French, Stefanie covers tobacco news around the world. She is based in Germany.

April 13, 2022
PMI Scaling Down Russian Operations

Photo: Matvey Salivanchuk
Philip Morris International today announced the concrete steps it has taken to suspend planned investments and scale down its manufacturing operations in Russia, following that country’s military invasion of Ukraine.
PMI said it has discontinued a number of its cigarette products offered in the market and is reducing its manufacturing activities accordingly. It has also suspended marketing activities in the country and canceled all product launches planned for 2022 in Russia, including the launch of its flagship heated tobacco product IQOS Iluma, originally planned for March 2022. In addition, PMI has canceled its plans to manufacture more than 20 billion Terea sticks (for IQOS Iluma) in Russia and the related ongoing investment of $150 million.
PMI’s board of directors and senior executives are working on options to exit the Russian market in an orderly manner, in the context of an increasingly complex and rapidly changing regulatory and operating environment.
“Our focus and all our efforts over the last four weeks have been to ensure the safety and security of our Ukrainian colleagues. We stand in solidarity with the innocent men, women and children who are suffering,” said PMI CEO Jacek Olczak in a statement. “We employ more than 3,200 people in Russia. We continue to support them, including paying their salaries, and we will continue to fulfil our legal obligations. We will continue to make decisions with their safety and security as a priority.”
Russia accounted for almost 10 percent PMI’s total shipment volumes and around 6 percent of PMI’s net revenues in 2021.
March 25, 2022
BAT in Talks to Transfer Russian Business

Photo: scaliger
BAT is in advanced talks to transfer its Russian business to Russia’s SNS Group of Companies after Moscow suggested it could nationalize assets of foreign firms that left the country, reports Reuters.
BAT controls just under 25 percent of the Russian tobacco market.
“The process of transferring the management of BAT business in Russia to SNS GC is well underway at remarkable speed,” said an SNS spokesperson.
BAT declined to comment but said last week that it was looking for parties interested in the transfer of the Russian business. Kingsley Wheaton, BAT’s chief marketing officer, stated that BAT’s distributor could be interested in a transfer, adding that exiting the business or stopping sales or manufacturing would be seen as a criminal bankruptcy by Russia and BAT would face legal consequences.
The level of production and the supply and distribution chain will be maintained with a transfer, according to the SNS spokesperson. Whether BAT will pull out completely or continue to supply SNS with raw materials or manufacturing support is unclear.
March 21, 2022
Morningstar: Stocks Hit Too Hard By Ukraine War

Photo: Engdao
Tobacco companies’ retreat from Russia will materially impact their cash flows, at least in the short term, according to Morningstar. Nonetheless, the financial services company believes investors have overstated the valuation impact as the tobacco companies will be able to recoup some their losses after hostilities end.
Following Russia’s invasion of Ukraine and the imposition of sanctions by Western countries, the leading multinational tobacco companies have all reevaluated their operations in Russia.
Philip Morris International ceased investment in Russia and plans to scale down its business there. BAT will exit Russia and transfer its Russian assets to a third party. Imperial Brands has begun negotiations with a local third party about a transfer of its Russian assets and operations. Japan Tobacco has ceased planned investment in Russia.
Russia is the world’s fourth-largest cigarette market, with market volume of almost 206 billion sticks in 2020, according to Euromonitor. Japan Tobacco is the most exposed with a volume share of 38 percent, representing almost 16 percent of group tobacco volume in 2021. Philip Morris International and BAT are the next largest with shares of 26 percent and 25 percent, respectively, representing 9 percent and 8 percent of group volume. Although Imperial Brands is smaller, with only 8 percent share, Russia represents 7 percent of group volume, according to Morningstar.
The Russian cigarette market has been declining at a 6 percent compound annual rate over the past 10 years and almost 7 percent over the past five years, according to Euromonitor. However, it has been a promising market for tobacco-heating products. Morningstar estimates that heated-tobacco units accounted for 11 percent of the total market in 2021, making Russia one of the largest markets for heated-tobacco outside Asia.
Exiting Russia would be especially painful for PMI because it would jeopardize its medium-term targets for IQOS HeatStick sales, according to Morningstar
Meanwhile, the collapse in the ruble will create translational foreign exchange pressure for all manufacturers and is likely to make an already low-margin market even lower. Regional margins are also likely to contract materially in the near term. Some manufacturers have pledged to continue paying the salaries of employees in Russia and Ukraine even as revenue will probably be decimated.
March 21, 2022
Imperial Negotiates Transfer Russian Assets

Photo: Casimirokt | Dreamstime.com
Imperial Brands has begun negotiations with a local third party about a transfer of its Russian assets and operations.
“We believe that, in the current circumstances, an orderly transfer of our business as a going concern would be in the best interests of our Russian colleagues,” the company wrote in a press release. “We employ 1,000 people in Russia in our sales and marketing operations and in our factory in Volgograd—and their safety and well-being is our key priority in this process. We will also continue to pay their salaries until any transfer is concluded.
“Meanwhile, we are also supporting our Ukrainian colleagues and their families, including with transport and accommodation to enable them to escape the areas most severely hit by conflict as well as [with] resettlement assistance for those who have left Ukraine.
“We have evaluated the financial impact of an exit from Russia and the previously announced suspension of operations in Ukraine on our full-year guidance for FY22. We now expect full-year constant currency net revenue growth of around 0 [percent] to 1 percent. While there will be some ongoing costs related to the suspension in Ukraine, we expect a relatively small impact on our constant currency adjusted operating profit, reflecting the limited profit contribution of the two markets. In FY21, Russia and Ukraine represented in total around 2 percent of net revenues and 0.5 percent of adjusted operating profit. Any transaction relating to our Russian business is subject to agreement being reached.”
March 15, 2022
BAT Withdraws from Russia

Photo: Anton Gvozdikov
BAT is withdrawing from Russia, the company announced on its website.
“Building on our announcement of 9th March 2022, we have now completed the review of our presence in Russia. The context is highly complex, exceptionally fast-moving and volatile,” the company said in a statement, referring to the Russian military invasion of Ukraine.
“We have concluded that BAT’s ownership of the business in Russia is no longer sustainable in the current environment,” the company wrote.
“Today, we have initiated the process to rapidly transfer our Russian business in full compliance with international and local laws. Beyond continuing to pay our 2,500 employees, we will do our utmost to safeguard their future employment.
“Upon completion, BAT will no longer have a presence in Russia.
“Following our decision today, and in light of the continuing uncertainty related to Ukraine and Russia and the possible indirect impact on the rest of the group, we consider it prudent to revise our guidance for full-year 2022. We now expect constant currency group revenue growth of 2 percent to 4 percent and mid-single figure constant currency adjusted diluted EPS [earnings per share] growth. In 2021, Ukraine and Russia accounted for 3 percent of group revenue and a slightly lower proportion of adjusted profit from operations.”
BAT faced heavy criticism for an earlier decision to continue operating in Russia. “If you are a member of the board of British American Tobacco, courting popularity was probably never a top personal priority. Even so, the people overseeing a large and widely held FTSE-100 company might still feel obliged to explain why, amid the broad boycott of Russia by multinationals, they think its fine to carry on business in the country roughly as normal,” wrote Nils Pratley in The Guardian.
Earlier, Philip Morris International, Japan Tobacco International and Imperial Brands announced the suspension of their operations in Russia.
March 11, 2022
J.P. Morgan: War Could Thwart PMI’s Smoke-Free Ambitions

Photo: Sergey
The war in Ukraine could seriously impact sales of Philip Morris International, reports MarketWatch. Earlier this week, J.P. Morgan downgraded the multinational’s shares to “neutral” from “overweight,” citing the company’s exposure to Russia and Ukraine.
PMI derives about 8 percent of group sales from Russia and Ukraine combined, according to the investment bank. The two countries account for about 23 percent of PMI’s heated-tobacco unit (HTU) volume. Heated-tobacco products are key to PMI’s next-generation growth strategy as they are reportedly less harmful than cigarettes.
PMI entered the Ukrainian market in 1994. In 2021, Ukraine accounted for around 2 percent of PMI’s total cigarette and HTU shipment volume and under 2 percent of PMI’s total net revenues. The company has one factory and approximately 1,300 employees in the country.
Russia accounted for almost 10 percent of PMI’s total cigarette and HTU shipment volume and around 6 percent of PMI’s total net revenues in 2021. PMI opened its first representative office in Russia in 1992 and has more than 3,200 employees in the country.
PMI’s cigarette shipments to Russia in 2021 fell to 52.5 billion units from 55.6 billion units in 2021, and the percentage of total cigarette shipments fell to 8.4 percent from 8.8 percent, according to a company filing with the U.S. Securities and Exchange Commission.
For HTUs, Russian shipments rose to 16.3 billion units from 13.6 billion units while the percentage of total HTU shipments slipped to 17.2 percent from 17.9 percent.
Meanwhile, PMI’s HTU market share in Russia improved to 7.4 percent from 6.3 percent while the company’s overall HTU market share increased to 3.5 percent from 3 percent.
On March 9, PMI announced the suspension of its planned investments in Russia, including all new product launches and commercial, innovation and manufacturing investments. PMI has also activated plans to scale down its manufacturing operations in Russia amid ongoing supply chain disruptions and the evolving regulatory environment.
March 10, 2022