Philip Morris, BAT Battle Putin's Russian Smoking Crackdown - Bloomberg

By Henry Meyer - 2012-05-31T14:49:47Z

Cigarette makers led by Philip Morris International Inc. (PM) and British American Tobacco Plc (BATS) are scrambling to derail Russian plans to halve smoking in the world’s largest tobacco market after China.

The companies, along with Japan Tobacco Inc. (2914), are trying to convince the government to scale back a plan to restrict the sale, advertising and public use of cigarettes, they said yesterday. BAT, Europe’s largest tobacco company, is seeking a “mutually acceptable decision,” it said in an e-mail.

President Vladimir Putin has backed curbs on smoking as part of a wider effort to stem the country’s population decline. A draft law published by the Health Ministry May 20 calls for outlawing all cigarette advertising immediately, ending retail sales at kiosks within 18 months and banning smoking in public buildings such as bars and restaurants in three years.

“While we support comprehensive and effective tobacco regulation, the Health Ministry’s bill contains a number of extreme measures that will not reduce smoking and are likely to lead to adverse consequences,” Irina Zhukova, a spokeswoman in Moscow for Marlboro-maker Philip Morris, said by e-mail May 30.

Russia, where a pack of Marlboros goes for about $2, already approved raising its excise tax on cigarettes by 40 percent a year through 2015.

‘Russian Realities’

The World Health Organization estimates that about 39 percent of Russia’s 143 million people are habitual smokers, compared with 28 percent in China and 27 percent in the U.S. Smoking-related diseases kill 23 percent of Russian men and cause economic damages equal to 6.3 percent of gross domestic product, according to the Health Ministry, which says its draft law could save 200,000 lives a year.

Any legislative changes “should take into account the realities of the Russian market,” BAT said. Any new restrictions “should be reasonable, well thought-out and consistent,” the press service of the London-based company, the maker of Kent, Pall Mall and Dunhill brands, said in an e-mailed response to questions from Bloomberg.

The international unit of Japan Tobacco, the maker of the Camel and Winston brands, relies on the region encompassing Russia, the other ex-Soviet states without the Baltic countries, former Yugoslavia, Bulgaria, Romania, Croatia and Mongolia for 46 percent of its global sales in terms of volume, according to the company’s website.

The Tokyo-based company, Asia’s largest cigarette producer by market value, is hopeful the new government will amend the draft law. Putin, who returned to the Kremlin for a third term in May, replaced the health minister who submitted the tobacco legislation, Tatyana Golikova, as part of a broader reshuffling of the Cabinet.

‘Achieve the Goals’

“There is hope that the new government is trying to work effectively to produce a law that really works and can achieve the goals set by the Health Ministry,” Anatoly Vereshchagin, a spokesman for Japan Tobacco in Moscow, said by phone.

The tobacco companies say that a total ban on smoking in public places and on advertising cigarettes is too draconian, while ending kiosk sales will only end up hurting small businesses. They also argue that steep tax increases won’t impact demand as much as the ministry hopes because it will only lead to a flood of cheaper imports from neighboring countries such as Belarus, Kazakhstan and China.

Russia has already asked Belarus and Kazakhstan, its partners in a customs union, to raise their excise taxes on cigarettes to prevent this from happening, Finance Minister Anton Siluanov said yesterday.

Cigarette Price

The Finance Ministry says the average price for a pack of “inexpensive” cigarettes will rise to ($1.19) 40 rubles in 2014 from 16.50 rubles last year, while prices for the “most popular” brands will rise to 61 rubles from 36 rubles.

The World Health Organization, which helped the Health Ministry draft the legislation, is worried that cigarette makers may succeed in watering down the ministry’s bill.

“It is a huge concern,” said Natalya Toropova, program coordinator for the WHO’s Tobacco Control program in Moscow. “There is interference of the tobacco industry in public health all over the world, and specifically in Russia,” Toropova said by phone. The fact that the ministry’s bill hasn’t been submitted to parliament yet shows “that the tobacco industry is interfering,” she said.

Japan Tobacco has about 36 percent of the Russian cigarette market, followed by 26 percent for Philip Morris, 21 percent for BAT and 7 percent for London-based Imperial Tobacco Group Plc (IMT), according to AC Nielsen Co., a market research company.

Smoking Rates

None of the companies make their sales in Russia public. BAT would only say that 33 percent of the 705 billion cigarettes it distributed last year went to eastern Europe, Africa and the Middle East. Philip Morris said 32 percent of its global cigarette sales were in the same region.

The government said in an October 2010 report that smoking rates among women and minors had tripled in the previous five years and that tobacco use caused about 500,000 deaths a year. In some regions as many as 80 percent of men and 47 percent of women smoke, the study found.

“The interests of the tobacco companies aren’t what this law is about,” Health Ministry spokesman Alexander Vlasov said by phone. “It’s about stopping people from suffering from this damaging habit.”

To contact the reporter on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net