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The Ukraine-Russia war shows no signs of coming to an end anytime soon.
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Operations of multinational tobacco companies in Russia have been snuffed out.
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Economic sanctions caused the ruble to plummet and a plethora of companies, including tobacco companies, to leave Russia.
While multinational tobacco companies suspended operations in Ukraine and Russia, they proved wary in sharing detailed information.
At press time, the war of aggression waged by Russia’s military against Ukraine shows no signs of coming to an end anytime soon. While Ukraine is standing up valiantly to the assault, Russia is confronted with an increasingly stringent basket of international economic sanctions designed to bring Vladimir Putin’s government to the negotiating table. A plethora of companies from around the world more or less temporarily suspended (or even ceased) operations and investments in both countries – in Ukraine primarily for the safety of local staff, in Russia for the sake of adhering to the sanctions imposed on the Putin regime. This also applies to the five multinational companies that dominate the global tobacco product market: JTI, BAT, PMI, ITG (Imperial), and KT&G.
BAT Ukraine: deeply concerned
Established in 1993, BAT Ukraine maintains a head office in Kyiv and operates a manufacturing facility in the town of Pryluky that employs more than 1,000 people. Located about 150km east of the capital, Pryluky unfortunately also is the site of Ukraine’s largest air force base, coming under repeated Russian attack. In Russia itself, BAT set up a subsidiary even earlier, in 1991. Apart from the head office in Moscow, the company runs 75 regional offices, as well as a manufacturing facility in St. Petersburg with around 2,500 employees.
“We are deeply concerned about the conflict in Ukraine," a spokesperson from BAT's corporation headquarters office offered on March 4 following an inquiry from Tobacco Asia. "The safety and well-being of our people in Ukraine and across the region is our first priority. We have suspended all business and manufacturing operations in Ukraine and are providing all the assistance we can to our colleagues, including relocation and temporary accommodation.
“In Russia, our wholly-owned subsidiary has been in operation for more than 30 years. BAT always complies with relevant regulation and legislation wherever we operate, and we are aligned with all international sanctions. We continue to closely monitor the situation as it evolves.”
According to reports carried by international news agencies, including Reuters and Bloomberg, BAT has since resolved to pull out of Russia completely and sell off its local assets. Reuters quoted BAT c.e.o. Kingsley Wheaton as saying that the company would continue paying local employees’ salaries until its business had been transferred to another entity. One potential buyer could be BAT’s Russian distribution partner of 30 years, which Wheaton however declined to name. Yet it remains to be seen if such a handover is even possible, for a Russian government commission reportedly has already approved the basic framework of a new national law that would permit the state to nationalize the assets of any foreign firm that exits the country as part of international economic sanctions. According to its own data, BAT’s combined sales in Ukraine and Russia accounted to only 3% of the company’s total global revenue in 2021.
KT&G - Ukraine distribution suspended; Russian facilities still open
The only multinational tobacco company that granted Tobacco Asia a more elaborate interview was South Korea’s KT&G. Speaking on condition of anonymity, a spokesperson told us that the company had no presence with its cigarette brands in Ukraine. However, its proprietary heated tobacco device brand, lil, as well as its compatible tobacco sticks under the Fiit brand name, have been marketed in Ukraine through KT&G’s exclusive distribution agreement with PMI. That is no longer the case, though.
“We have been notified that PMI has temporarily suspended its operations in Ukraine as of February 25th,” the KT&G spokesperson pointed out. PMI also handled marketing and distribution of lil and Fiit in Russia. The company has since also suspended planned investments and is planning to scale down manufacturing operations in Russia. That will inevitably affect the availability of KT&G’s heated tobacco products in the country, too.
Unlike in Ukraine, KT&G operates a cigarette manufacturing plant in Russia, located some 150km southwest of Moscow in the Kaluga administrative region (Kaluga Oblast). According to the KT&G spokesperson, the plant’s annual production capacity is 4.8 billion sticks. The main brands produced there include Esse and Blooming, among several others. “The plant is still operating because it is geographically distant from Ukraine and business impact [from the war] is currently considered to be limited,” the spokesperson said. “We nevertheless shall keep a close eye on the [developing] situation and make sure [that] lo-cal business operation and employee safety are not compromised.” Just before this issue of Tobacco Asia went to press, we reconfirmed with KT&G that the plant was indeed still operating.
JTI "Shocked", suspends operations in Ukraine; investment/marketing in Russia
After initially agreeing to consider our request for a short interview, JTI informed us only a little while later that the company “unfortunately will not be able to participate in this or [any] other [editorial] at this moment.” The company has since also quasi-suspended the publication of official press releases on its website. However, mother company Japan Tobacco Inc. on March 10 published an announcement under the title “JTI suspends investments in Russia and continues to prioritize the safety of its employees and their families.” The suspension also extends to marketing activities as well as the planned launch of [JTI’s] latest heated tobacco product, Ploom X, in Russia. “The challenges of operating in Russia at this time are unprecedented and JTI needs some time to assess the long-term implications of the situation which all large international investors in Russia are currently facing. Unless the operating environment and geopolitical situation improve significantly, JTI cannot exclude the possibility of a suspension of its manufacturing operations in the country,” the communique said, but also assured that “all employees will be retained for the foreseeable future.”
Meanwhile, in the same press release, Masamichi Terabatake, president and c.e.o. of the JT Group, also commented on the situation in Ukraine. “We have all been shocked to see the human tragedy unfolding in front of us. In Ukraine, where we employ about 1,000 people, the company has suspended its operations, prioritizing the safety of our employees and their families. The JT Group is extending all possible support to affected people and has already committed significant resources towards humanitarian aid and continues to support many employee-led initiatives both locally and in the surrounding countries. I sincerely hope peace will return soon,” he was quoted as saying.
Imperial Brands first to suspend Russia operations
While ITG (Imperial) did not respond to our queries, the company suspended its operations in Russia as of March 9, being among the first multinationals to react to the situation. The measures include halting production at ITG’s factory in Volgograd and ceasing all sales and marketing activity in Russia. “This decision comes amid a highly challenging environment in Russia as a result of international sanctions and consequential severe [business] disruption. We will be supporting our Russian employees, who continue to be paid while operations are paused,” the tobacco company said in a press release. Operations in Ukraine likewise were suspended “in order to prioritize the safety and wellbeing of our 600 employees in that country.”
Russia and Ukraine are relatively small markets for ITG, representing just around 2% of net revenues and 0.5% of adjusted operating profit in 2021.
PMI - safety and security prime concern
Several attempts by Tobacco Asia to contact PMI’s head office for comments failed. However, the company had already announced the temporary suspension of its operations in Ukraine as of February 25, including shutting its factory in the eastern city of Kharkiv, which had become one of the first targets of the Russian military. PMI c.e.o. Jaczek Olczak was quoted as saying in a press statement published on the corporate website “The safety and security of our colleagues and their families is our primary concern, and we have therefore temporarily suspended our operations in Ukraine. Our employees are advised to stay at home or in any safe place and follow instructions from local authorities.” In 2021, Ukraine accounted for around 2% of PMI’s total cigarette and heated tobacco unit shipment volume and under 2% of PMI’s total net revenues. Less than a week later, on March 8, the company also had suspended investments in Russia and activated “plans to scale down manufacturing operations in the Russia.”