The Russian Tobacco Market Under the Shadow of the Russo-Ukraine War
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The Russian Tobacco Market Under the Shadow of the Russo-Ukraine War
The Russia-Ukraine conflict has lasted for more than a year. Up to now, Europe and the United States have introduced more than a dozen rounds of sanctions against Russia. The severity is unprecedented. In the future, it is not ruled out that the West will jointly launch more powerful and far-reaching sanctions. However, the panic this caused the market has faded. So, what is the current state of the Russian market in terms of the tobacco industry? What opportunities does this bring to China's tobacco industry?
Russian tobacco tycoon hit with sanctions
Since the start of the war between Russia and Ukraine, Europe and the United States have increasingly imposed sanctions on Russia, involving enterprises and individuals in industries such as military industry, aerospace, communications, finance, economy, and technology. More recently, sanctions have been extended to individuals involved in the tobacco industry. Igor Kesaev is sanctioned by the EU, UK and US for "assisting Russia's invasion of Ukraine".
About Igor Kesaev, he is the co-owner of the Mercury Group, the leading distributor of the tobacco market in Russia. Mercury Group is also a local developer and distributor of luxury goods in Russia. During the economic growth period in the early 2000s, it helped many international brands enter the Russian market. In 2022, Kesaev was listed by Forbes as the 35th richest person in Russia and is the main shareholder of the V.a. Degtyarev factory, which produces machine guns, anti-tank and anti-aircraft weapons, some of which have been used in the Ukrainian battlefield. As of April 2022, Kesaev is also the Chairman of the Board of Directors of Megapolis, a joint venture trading company under the Mercury Group.
Kesaev started working in the tobacco industry in the early 1990s. According to a 2014 profile of the tycoon published on the Forbes Russia website, with the collapse of the Soviet Union, international tobacco companies, eager to get their products into the Russian market, partnered with Kesaev. Over time, Kesaev built Megapolis, Russia's largest tobacco distributor, by acquiring regional competitors. By 2022, Megapolis serves 160,000 retailers across the country.
In addition, Kesaev established the Megapolis Ukrainian branch to participate in the tobacco business in Ukraine. Following the 2014 overthrow of Ukraine's former pro-Russian president Viktor Yanukovych and Russia's takeover of Crimea, Ukrainian officials began scrutinizing Russian companies in every sector of its economy.
At that time, Megapolis Ukraine controlled 99% of the tobacco distribution market in Ukraine, according to the Ukrainian Antimonopoly Committee. Kiev sanctioned Kesaev in 2016, saying his unspecified actions threatened Ukraine's national security. A senior Ukrainian prosecutor later accused Kesaev of supporting "terrorist groups" by supplying weapons to the Russian-backed separatist group.
Dilemma for multinational tobacco companies
According to research by the International Institute for Management Development, many Western companies vowed to withdraw from Russia immediately at the beginning of the Russo-Ukrainian war, but by the end of 2022, less than 9% of the EU and the G7 have left the country's market. This is due to the introduction of new regulations in Russia, including a provision that the government has the right to determine the valuation of foreign companies' assets in Russia, as well as the dividends and cash flow of new owners, making it difficult for multinational companies to survive without taking a huge financial hit. Withdraw from the Russian market.
As far as the tobacco industry is concerned, Russia has always been a huge market for the tobacco industry, with high smoking rates and consumers accepting e-cigarettes and heated tobacco products.
The new regulations introduced by the Russian government have indeed put multinational tobacco companies in a dilemma. Shortly after the war between the two countries broke out, Imperial Brands had sold its Russian business to a local partner, taking a $463 million hit to its annual profit. Japan Tobacco has suspended investment and expansion in the Russian market, but does not currently plan to leave. British American Tobacco (BAT) controls nearly a quarter of the Russian market. Since the outbreak of the war between the two countries, the company announced that it will withdraw from the Russian and Belarusian tobacco markets in 2023, and has been in in-depth negotiations with its distributors in Russia on the sale of the business, but no significant progress has been made.
Since the implementation of the new rules in Russia, Philip Morris International Chief Executive Jacek Olczak has said he has a responsibility to recover shareholder value, preferring to keep the company in Russia rather than sell it on strict terms from the Kremlin. Philip Morris International's attempt to sell its Russian business has stalled, with discussions with at least three "serious" potential buyers going nowhere. Although the asking price was not disclosed, Philip Morris International has assets in the country worth $2.5 billion, company filings show. In 2022, Philip Morris International's revenue will be US$31.7 billion, of which 8% will come from the Russian and Ukrainian markets.
Due to major changes in the regulatory environment in Russia, Philip Morris International is considering a more sustainable return to Ukraine and is currently exploring options to resume production in Ukraine. Philip Morris International had previously halted production at its Kharkiv plant due to security concerns caused by the ongoing war. Some of its brands in Ukraine are currently produced by Imperial Brands under ad hoc arrangements. But now Philip Morris International is working to build its own alternative production facility in Ukraine. There are two main reasons: one is that Philip Morris International wants to produce its own products in Ukraine, and the other is to show that the company is committed to investing in Ukraine, even during the war.
Opportunities for Chinese e-cigarette companies
Although multinational tobacco companies have not completely withdrawn from the Russian market, the number of foreign e-cigarette brands operating in Russia has gradually decreased. Since the Russian tobacco industry relies heavily on the support and investment of foreign brands, this has led to a large shortage of products in the Russian tobacco market and a sharp rise in prices, so Chinese e-cigarettes have the opportunity to grow in Russia.
As of the end of 2021, there are more than 5,000 stores selling e-cigarettes in Russia, including more than 1,100 in the Moscow region. According to data from the real estate platform DNA REALTY, the number of tobacco shops in Russia will increase by at least 20% in 2022, with most of the profits coming from e-cigarette sales. E-cigarettes have great potential as an alternative to the tobacco market in Russia, where vapers account for 6.8% of all smokers. Russia is the world's third-largest importer of ENDS after the US and Europe.
China accounts for 90% of the global e-cigarette market. In 2021, China's exports to Russia will reach 82.5 billion rubles. It may grow by 35% this year, reaching 111 billion rubles, and there is great potential in the future.
