Reuters: Russian Tobacco May Benefit from Foreign Firms Ills

[Robert Weissman <rob@essential.org>]

9/21/98

Russia Tobacco May Benefit from Foreign Firms Ills

MOSCOW -- (Reuters) Economic crisis has forced R.J. Reynolds to withdraw 
from Russia's multibillion-dollar tobacco industry but it may also be a 
golden opportunity for domestic producers, industry sources said on Friday. 

Like other Western manufacturers here, RJR -- maker of Camel, Winston and 
Salem brand cigarettes -- has seen sales dwindle as mounting price 
inflation put its product beyond the reach of Russia's smokers.

With a population of 150 million, Russia is the world's fourth largest 
tobacco market. About two thirds of Russian men and a third of Russian 
women smoke, according to the state statistics committee.

But while the sales slump forced RJR to halt production at its St. 
Petersburg facilities, some Russian cigarette manufacturers say they are 
gearing up to expand production.

"I'm not saying this will definitely happen, but we may be in a position to 
make the best of a bad situation," said a spokeswoman for one Russian 
company.

Before the start of the current economic crisis, Western cigarette makers 
controlled about 40 percent of Russia's $6 billion a year tobacco industry. 
RJR alone claimed 20 percent.

However, economic difficulties and a ruble collapse forced price increases 
of 300 percent or more on most Western brands.

"People were buying a lot of (Western cigarettes) at the start of the 
crisis," said a saleswoman at a tobacco kiosk in central Moscow. "Now when 
most see the latest prices they say 'how can I afford that?' "

But she said that Russians, who smoked an estimated 260 billion cigarettes 
last year, were not cutting back in the face of economic hardship.

"If anything, sales are up. Russians smoke when they are nervous and angry. 
People just choose the cheaper brands."

Many Russian labels cost about a third of the 20-25 ruble ($1.37-$1.71) 
price tag common for Western cigarettes.

Some Russian brands like the Soviet-era Belamorkanal cost even less, going 
for as little as two rubles a pack.

Given the sharp price difference Western companies could lose half of their 
market share to Russian producers within the next year, the daily Izvestiya 
said.

Increased demand for its product means that Belamorkanal is considering 
boosting output at least two factories.

"It's not what I want to smoke," grumbled a taxi driver as he dashed to his 
car carrying several bright red packs of "papirosi" -- traditional Russian 
cigarettes in cardboard holders. "But if I want to smoke, this is my only 
choice."

RJR's production stoppage is a significant blow to the manufacturer which 
pumped more than $400 million into its Russian operation over six years and 
had just a month earlier promised another $120 million.

The company's decision may also be a precursor to a wave of pullouts from 
Russia by other Western producers.

Britain's Cadbury Schweppes announced on Thursday that it had stopped 
chocolate production at a $120 million plant.

Analysts have also expressed doubts as to whether Italian Fiat will be able 
to continue with an $854 million project with Russian carmaker GAZ .

Some Russians though said price increases and production shutdowns had 
little to do with economic problems.

"It's a government ploy to start a new revolution," said a pensioner 
selling cigarettes on a Moscow street corner. "First they raise the price 
on cigarettes and medicines....When they start games like that with vodka 
it will be war." ( (c) 1998 Reuters)