Tag: Ukraine

PMI Describes Difficulties of Ukraine Production

Image: Filipp
The realities of war make it cheaper for Philip Morris International Ukraine to import cigarettes from Poland than to manufacture them domestically, reports Interfax-Ukraine, citing comments made by PMI Ukraine Deputy General Director for Corporate Relations Mykhailo Poliakov during a seminar devoted to business and the ongoing conflict with Russia.
PMI opened a cigarette factory in the Lviv region in May 2024 and recently compared the production costs of its new facility with that of its factory across the border, in Krakow, Poland.
Due to the war, PMI’s Ukrainian operation must contend with higher rates of employee absenteeism. In addition, the Lviv facility is forced to cease operations during air raids. Frequent power failures add to the production cost, as the local grid was not designed to accommodate the large number of enterprises that have relocated to the region after the start of the conflict. Curfews too pose challenges for PMI’s workforce.
The combination of these factors makes it 10 percent cheaper for PMI to produce cigarettes in Poland and bring them to Ukraine.
Since starting operations in Ukraine in 1994, PMI has invested more than $700 in the country. After Russia’s 2022 invasion, the multinational suspended operations at its factory in the Kharkiv region and started importing products from PMI factories outside the country. It also temporarily licensed the production of some PMI brands to another multinational factory in Ukraine.
In 2022, due to the war, PMI reduced shipments to Ukraine by 30.1 percent to 11.07 billion cigarettes and tobacco sticks, but in 2023, it managed to increase shipments of finished products by 8.4 percent, including 14.9 percent in the fourth quarter. In October last year, the company reported the restoration of its share in the Ukrainian market to 24 percent after falling to 14 percent from 28.5 percent in the first months after the Russian invasion.
PMI has invested $30 million in its Lviv factory. Eventually, the factory will have five production lines. The first was launched in May, and four more will be put into operation by the end of 2024, which will bring the factory’s production capacity to 10 billion cigarettes per year.
October 3, 2024
Illicit Cigarette Market Deflates in Ukraine

Photo: IvanSemenovych
The share of illicit products in Ukraine’s tobacco market dropped to 14.6 percent in July, down from 19.1 percent at the start of the year, reports UNN, citing data from the “Monitoring of the illegal trade in tobacco products in Ukraine” study.
According to Kantar Ukraine, the state misses out on an estimated UAH23 billion ($556.01 million) in tax income as a result of duty-avoiding tobacco. The volume of the illicit cigarette market in Ukraine is estimated at 6.65 billion units.
Oleksandr Ruvin, director of the Kyiv Scientific Research Institute of Forensic Expertise, said that despite recent progress, efforts to combat the illicit cigarette trade were not as effective as they could be.
“At one time, we had an idea to create a thematic register of manufacturers. The State Tax Service provided us with a list of companies licensed to sell tobacco products—more than 50 representatives. The companies were supposed to provide us with reference product samples. We received some of the information, but this work is not being used as effectively as it could be,” he was quoted as saying.
September 23, 2024
PMI Opens Factory in Ukraine’s Lviv Region

Photo: Vitezslav Vylicil
Philip Morris International opened a $30 million cigarette factory in Ukraine’s Lviv region, creating 250 jobs, reports Interfax.
According to a company press release, the factory will have five production lines. The first started operating in May, the second should be launched in June and the rest before the end of the year, bringing the factory’s annual production capacity to 10 billion cigarettes, enough to meet the Ukrainian demand.
PMI has no plans to export from the facility, which currently employs about 100 people from the company’s Kharkiv factory, which was mothballed in the wake of Russia’s 2022 military invasion.
PMI has invested about $750 million in Ukraine since entering the market in 1994.
Before opening the Lviv facility, PMI supplied to Ukraine from eight factories outside the country.
The company reduced shipments to Ukraine by 30.1 percent to 11.07 billion cigarettes and heated-tobacco units in 2022. In 2023, it increased shipments to the country by 8.4 percent.
The cigarette manufacturer controls almost a quarter of the Ukrainian cigarette market.
May 16, 2024
PMI Boosts Investment in Ukraine

Photo: Taco Tuinstra
Philip Morris International will launch the latest version of its IQOS Iluma heat-not-burn device in Ukraine, reports Interfax. The debut had been delayed in the wake of Russia’s military invasion.
“It is another proof of our support to the economy of Ukraine in the difficult times alongside our investing in the factory in the Lvov region,” Philip Morris Ukraine General Director Maxim Barabash was quoted as saying.
In order to meet anticipated demand, PMI has opened 40 stores in 24 cities, launched express shipping across Ukraine and established 120 recycling stations across the country accepting used products for reprocessing or eco-disposal.
“Philip Morris launched the first IQOS tobacco-heating system in 2016. Since then, about 1.3 million of adult smokers in Ukraine abandoned cigarettes and chose our companies’ smoke-free alternatives,” said Roman Ivanov, head of PMI Ukraine’s smoke-free products department. “We will continue developing our brand retail and testing new formats of our commercial infrastructure in 2024.”
PMI says it has invested more than $700 million in Ukraine since starting operations there in 1994. In February 2022, following Russia’s attack, the company suspended the operations of its factory in Kharkov and started importing products from eight PMI factories outside Ukraine while partnering with another international manufacturer in Ukraine.
The company plans to launch a new, $30 million factory in the Lvov region in the second quarter of 2024.
PMI held a 24 percent share of the Ukrainian cigarette market in October 2024, up from 14 percent after Russia’s invasion but still short of its 28.5 percent share before the conflict.
May 6, 2024
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.
March 27, 2024
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.
March 1, 2024
Ukraine Tobacco Taxes to Match EU’s by 2029

Image: andriano_cz
Ukraine will reform its tobacco and fuel excise taxes, gradually introducing excises minimal for the European Union market over the next five years, reports Interfax.
The country previously aimed to increase its tobacco excise tax rates to the EU’s minimal rates before 2025, but the anticipated windfall has since been eaten away by inflation due to the use of the hryvnia as its base rather than the euro. Under the new strategy, Ukraine’s tobacco excise tax rates will be tied to the euro.
The government expects the measure to generate additional revenue equal to between 1.5 percent and 2.2 percent of GDP.
Ukraine also plans to implement an electronic tracking system for tobacco products and e-liquids.
The 2024-2029 National Revenue Strategy is one of the structural benchmarks of the cooperation program with the International Money Fund that Ukraine pledged to fulfill before the end of 2023.
January 2, 2024
Illicits Top Quarter Of Ukrainian Market

Image: IvanSemenovych
The share of illegal tobacco products reached 25.7 percent of the Ukrainian market in October, up from 19.5 percent in June and 20.2 percent in February, reports Interfax-Ukraine, citing data from the most recent Kantar Ukraine study.
The figure represents the highest share since Kantar began collecting information on the Ukrainian tobacco market.
The share of counterfeit products increased to 11.3 percent, and the share of products labeled for duty-free sales or export but sold illegally in Ukraine grew to 12.9 percent.
Measured over the entire year, illegal cigarettes accounted for 21.8 percent of the Ukrainian tobacco market.
The Ukrainian government missed out on an estimated UAH23.5 billion ($625.67 million) in tobacco tax revenues in 2023 due to illicit cigarette trade, according to calculations by Kantar.
December 21, 2023
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.
December 5, 2023
Ukraine Restricts Duty-Free Tobacco Sales
Ukraine has restricted the duty-free sales of cigarettes and alcohol, reports Interfax.
The law, which signed into law by President Volodymyr Zelenskyy on Sept. 1, 2023, prohibits goods that fall under a certain categories of the Ukrainian Classification of Commodities from being registered as duty-free commodities until the country lifts the martial law that has been in effect since Russia’s invasion.
The measure is intended to tackle illegal trade in tobacco products. Despite restrictions on foreign travel after the breakout of hostilities in early 2022, the number of cigarette packs purchased near borders rose sharply compared with those sold at other outlets, causing the Ukraine to miss out on substantial tax earnings.
An ad hoc investigative commission created at the urging of the State Tax Service in May 2023, suggested stricter controls on tobacco manufacturers and exporters.

September 1, 2023