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Tag: Ukraine

  • PMI Ukraine Running at Full Capacity

    PMI Ukraine Running at Full Capacity

    Philip Morris Ukraine is considering exporting cigarettes manufactured at its newly built factory in the Lviv region, company CEO Maksym Barabash said during a roundtable discussion on Ukraine’s economic recovery. Ukraine Business News (UBN) said the PMI factory in Kharkiv, which closed at the outbreak of war with Russia, produced 20 billion cigarettes annually, 50% of which were exported, including to Japan.

    By launching a new $30 million factory in the Lviv region, the company sees the potential to resume exports to geographically close countries. The new factory in the Lviv region opened in May 2024 and features five production lines that this year reached their planned capacity of 10 billion cigarettes per year. This factory has become an important part of the company’s supply chain in Ukraine.

    Philip Morris Ukraine has been active in the Ukrainian market since 1994 and has invested over $750 million in the Ukrainian economy during this time, according to UBN.

  • JT Not Adjusting Russian Business

    JT Not Adjusting Russian Business

    In a statement issued to This Week in Asia, a Japan Tobacco (JT) official said: “As announced in early 2022, the JT Group has suspended all new investments and marketing activities in Russia. At present, the group continues its manufacturing and sales operations in the country in full compliance with all applicable regulations, including but not limited to economic sanctions and export controls. We continue to closely monitor legislative developments as well as the situation on the ground and review our options.”

    JT announcing that it was not pulling out of the lucrative Russian market makes news as the Ukrainian government continues its efforts to get some of the world’s largest companies to exit its combative neighbor. A Ukrainian report said JT contributed $182.3 million in taxes to the Russian government in 2023, fourth among taxpaying companies behind only Austria’s Raiffeisen Bank International ($491 million), China’s Chery Automobile, and Philip Morris, the world’s leading tobacco company.

    International companies that did not exit the Russian market immediately after the invasion of Ukraine began but later pulled out from bad press include Heineken, Citigroup, and Kraft-Heinz.

    JT, which is still one-third owned by the government, faces minimal criticism in Japanese media and as a result, the public – which is strongly supportive of Ukraine – is offering few objections.

    “There has been no comment from the government, no pushback from the public, and nothing in the media,” said James Brown, a professor of international relations at the Tokyo campus of Temple University who specializes in Russian affairs. “So the sense at [JT] headquarters appears to be ‘why should we walk away from it?’

    “The position in Japan was that if being there was not explicitly sanctioned, then it was fine to carry on. And that meant it was not a problem for the company, which was open about what it was doing.”

    In May 2024, Japan Tobacco CEO Masamichi Terabatake made that stance clear when he told the Financial Times that the company’s supply chains had been adjusted to meet international sanctions and that it would remain active in Russia to protect investors’ interests.

    “If worse comes to worst, there is even the risk of a shareholder lawsuit if we were to discontinue a business that we are able to continue,” he said.

  • PMI Describes Difficulties of Ukraine Production

    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.

  • Illicit Cigarette Market Deflates in Ukraine

    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.

  • PMI Opens Factory in Ukraine’s Lviv Region

    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.

  • PMI Boosts Investment in Ukraine

    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.

  • Ukraine: Activists Decry PMI’s tax privileges

    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.

  • A New Reality

    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.

  • Ukraine Tobacco Taxes to Match EU’s by 2029

    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.

  • Illicits Top Quarter Of Ukrainian Market

    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.