Eastern Europe Beckoning: Independent Leaf Suppliers

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After years of keeping comparatively low profiles, independent tobacco merchants from Eastern Europe have begun making a strong showing internationally.

By Thomas Schmid

Wedged in between Romania and Ukraine, the Republic of Moldova reportedly is Europe’s least visited country, and its poorest in terms of GDP due to successive corrupt governments that have shamelessly plundered the nation since it gained independence from the former Soviet Union in 1991.

Yet Moldova is blessed with extraordinarily fertile soil perfectly suited for growing a vast variety of crops. Tobacco is among them, although this agricultural sector remains relatively small still, concentrating primarily on virginia, burley, and the local varietal, Moldavski. Highly resistant to tobacco mold, generally low in sugar, and with nicotine levels of between 1.2-4%, Moldovan tobaccos are sought after for their dense leaf structure, as well as excellent flavoring absorption capability.

Pasinfo-Grup: reigning supremely over Moldova

Moldova’s largest tobacco company by far is Pasinfo-Grup SRL. Owned by entrepreneur Mikhail Latsanovskyi and established in 1999, it’s a truly all-round operation, according to the firm’s director, Ivan Sevastian. “Not only are we the only tobacco seed producer and supplier in Moldova, but we also own the largest tobacco plantations, comprising around 700 hectares,” he explained. The harvest from these fields makes up about 80% of Pasinfo-Grup’s annual production, the remaining 20% being supplied by contract farmers.

“We currently have five farms under contract, which grow tobacco on approximately 150 hectares in total,” Ivan divulged. Altogether, that acreage in 2019 yielded the company some 1,600 tons of virginia, burley and Moldavski, of which roughly 70% were exported, the rest being for domestic use. “Our most important export countries are Germany, Greece, Poland, Russia, and Ukraine, where our tobaccos are mostly cut into cigarette blends,” said Ivan’s son and Pasinfo-Grup’s sales director, Sergiu Sevastian. “What makes our products so popular is the circumstance that we subject them to really rigorous quality control, and still are able to offer them at more competitive prices than merchants in adjacent countries,” he added.

Unlike some of its neighbors, Moldova’s government does not pay any subsidies to tobacco farmers. But, there are also no particular tobacco-specific taxes or licensing fees levied, and this, compounded by some of Europe’s lowest labor wages, might have a favorable impact on pricing. Further cost savings for Pasinfo-Grup also certainly arise from the fact that the company has its own primary processing facilities. “We exclusively use our own facilities, and indeed all our processes from seed germination to final product are entirely controlled by us,” elaborated Ivan. He added that “laboratory testing is carried out in-house as well because it instills customer trust in our product quality.”

That leaves the question of shipping, particularly overseas, as Moldova has no direct access to the sea. While rail or road transport can be comfortably deployed to virtually anywhere within Europe, Moldova’s peculiar location may pose some sort of an issue where potential transcontinental shipping is concerned. But Ivan Sevastian disagreed with that assumption. “While it is correct that we currently don’t deliver by sea shipping, we certainly will find a way if needed,” he said, pointing out that the nearest container port was Constanta on Romania’s Black Sea coast. “It is not an insurmountable problem,” he insisted. Yet he also conceded that although an exploration of lucrative markets like North America and Asia would be of interest to the company, “the geographical distance is quite an obstacle and would require considerable effort.”

Lukowa, there comes Poland!

Many Polish people dislike it when their country is grouped in with “Eastern Europe”. However, Poland is located beyond the river Oder, which, as most geographers would agree, marks the dividing line between central and east Europe. But this is not a dissertation of geography. As a matter of fact, Poland today is one of Europe’s best-known tobacco producers. And her southeastern region around the town of Lukowa (or Łukowa, as it is actually spelled in Polish script) produces some of the continent’s finest crops due to ideal soil and microclimate. Accordingly, the area is brimming with tobacco farmers and merchant companies. One of the most prominent among the latter is aptly named Lukowa Tobacco Company.

Started in 2013 by the local Pekala and Hyz families as a trading firm that bought leaf directly from farmers, Lukowa Tobacco expanded operations in 2015 by investing in its own primary processing facility. In a typical year, Poland produces some 22,000 tons of tobacco. While the Lukowa area is the country’s largest virginia-growing region, other areas in addition also farm quantities of burley and local tobacco varietals such as Skroniowski, almost all of which is exported. Lukowa itself is particularly noted for its lemon-colored virginia with low nicotine 0.8-1.2% and high sugar 26-30%, which makes the crop uniquely suited for producing shisha products, said Lukowa Tobacco’s c.e.o., Miroslaw Pekala.

“Our main export markets for this type of tobacco accordingly are all countries where shisha smoking proliferates.” He divulged that the company was buying produce from 1,500 contract farmers, adding that Lukowa Tobacco’s merchandise is mostly sold as strips “with very low stem content”. “Our customers are very sensitive to product that contains too many stems so we put great emphasis on ensuring that the proportion is as low as possible,” he explained.

Like so many others in the Lukowa area, Pekala’s own family has been deeply involved in tobacco growing for several generations, and they intend to plant even more this year. “For the 2020 crop, my family aims at 130 hectares under cultivation,” he said. Lukowa Tobacco’s agronomists work closely with the farmers, supporting them with knowledge and advice in all matters of tobacco cultivation.

“Our experts visit farmers every day in order to secure a good yield in the right light-lemon color that we primarily require,” Pekala elaborated. Cultivation practices are constantly adjusted according to the prevailing weather, as one mistake can potentially damage a whole crop.” Lab analysis and quality control – including for nicotine, sugar, stem content, moisture, and NTRMs - make sure that Lukowa Tobacco’s merchandise is always and uncompromisingly up to par.

Overseas exports are handled through the Polish container ports of Gdańsk and Gdynia on the Baltic Sea. Although Lukowa Tobacco does brisk business with the Middle East, where shisha culture is a way of traditional life, the rest of Asia is of no particular importance to the company, because “there are no large shisha markets there”.

However, Poland’s regulations for tobacco growing and trading are not the most lenient. ”The tobacco supply chain is strictly controlled by the government,” explained Pekala. “First of all, farmers must register their acreage and expected yield, as well as their contracted volumes. But that is only the start. Merchants face even more hurdles, being required to obtain a special permit from the government that allows them to sign supply contracts with farmers.” Apart from that permit, a customs guarantee must be paid depending on the total contracted volume.

“Each 1,000,000 kilograms of tobacco requires a deposit of one million Polish zlotys [nearly US$260,000], which is a heavy financial burden,” Pekala said.

Additional barriers exist for newly established companies that do not have previous history in tobacco trading. “They must come up with even higher bonds,” Pekala said, adding that this often overwhelms the financial capacities of nascent firms as the requirements “freeze considerable amounts that would be sorely needed elsewhere, while at the same time commercial banks usually don’t extend loans for this kind of business.” Moreover, there are special customs requirements for transporting tobacco within Poland. “We must register each transport to enable the customs department to monitor all tobacco movements,” Pekala pointed out. If such registration is neglected, large penalties are imposed.

Alphabet Leaf: the ABCs of Ukrainian tobacco

When Ukraine was still a Soviet republic, it not only served as the former USSR’s breadbasket but also was one of its largest tobacco suppliers. That legacy has lingered on. Among European countries, Ukraine always has been famous for its agricultural potential, mostly owing to her rich black soil, which yields an incredible array of crops. And the country’s western regions, where the climate is favorable, harbor a burgeoning tobacco-growing industry. The main tobacco types grown there are virginia and burley (Ternopilskiy), said Nazar Verbytskyy, owner of Alphabet Leaf Limited. Although the company, founded only in 2015, is registered in the UK, Verbytskyy conducts much of his business from his native Ukraine. For international sales he has partnered with long-time tobacco industry entrepreneur, Maria Minayo, who hails from Spain. “Having our company registered in the UK helps us trade throughout Europe,” explained Verbytskyy. “Indeed, 90% of our annual sales are in western Europe, the rest goes to customers within Ukraine.”

Almost all of the firm’s merchandise comprises virginia whole-leaf and strips at this point, but according to Verbytskyy, “in 2020 we also plan to offer burley in our portfolio.” Besides Ukrainian crops, the company also imports product from Poland, India, and Bangladesh. “Ukrainian and Polish viriginia is very similar,” asserted Verbytskyy, “as they both are low in nicotine and high in sugar.” In 2019, Alphabet Leaf had 35 hectares under contract in Verbytskyy’s native country, as well as 15 hectares with Lukowa Tobacco in Poland. “They also support us with valuable advice how to further develop our own tobacco cultivation,” said Verbytskyy. With his company’s business expanding, he plans to increase the contracted acreage to 100 hectares this year. Alphabet Leaf supplies its contract farms with French and German virginia seeds because “they have superior quality and mature into a crop that can later be used for hookah tobacco manufacturing.”

Although foremost concentrating on Europe, Alphabet Leaf is “carefully evaluating any market that might be potentially interesting for us, watching out for obstacles and issues that might be encountered.” While Verbytskyy said the firm currently had some sales in India and Bangladesh, “we, unfortunately, don’t supply anything to the Middle East at this moment.” But the European focus notwithstanding, Verbytskyy also pointed out that “Asian markets have been [our] best-performing ones, helped by volume growth and rising market share, as well as several trends favorable to the tobacco industry in general, such as demand for special grades used for shisha products.” Alphabet Leaf, he said, was “a fast-growing company despite the fact that we are a young team.” All efforts were currently geared towards investing in the development of tobacco production in Ukraine. “We want to restore the scale of cultivation to that of the 1980s, intensively engaging and encouraging our farmers to bring Ukrainian tobacco back to the level of its glory days.”