Russia Crisis No Deterrent to Cig. Companies (fwd)

[Robert Weissman <rob@essential.org>]

New York Times
December 31, 1998


          Russian Financial Woes Take a Toll in Cigarettes


          By JOHN VAROLI

               ST. PETERSBURG, Russia -- After committing nearly $1 billion
to build new factories in
               Russia, most Western tobacco companies have been hit with
heavy losses since financial
          turmoil took hold this summer, but they say they will remain in
the market until the economy picks
          up again. 

          Russia's debt default and devaluation of the ruble in mid-August
devastated consumer purchasing
          power, and since then foreign tobacco companies have seen a
drastic decline in sales, losing
          ground to cheaper cigarettes made by Russian producers. 

          The drop in sales comes at a time Russia was gaining importance as
a market for Western tobacco
          companies. The cigarette makers, facing multibillion-dollar
lawsuit settlements and aggressive
          anti-smoking campaigns in the United States, saw Russia as a
lucrative new territory. Indeed,
          Russians smoke 250 billion cigarettes a year and there are few
restrictions on smoking, 

          While Russian companies sell their cigarettes for two to three
rubles a pack -- 10 to 13 cents --
          the cheapest local brands made by Western manufacturers sell for
six to seven rubles, while these
          companies' import brands sell for 20 to 30 rubles. 

          The average Russian earns about 1,000 rubles, or $50, a month, and
a quarter of the population
          does not receive its pay on time. 

          Declining sales forced Rothman's International to close its $88
million plant in St. Petersburg in
          September. It is tentatively planned to reopen early next year. 

          A $150 million new R. J. Reynolds factory in St. Petersburg, which
opened in July, shut down in
          September for two weeks. And early this month, Reynolds' parent
company, RJR Nabisco
          Holdings, announced that it would eliminate about 2,900 jobs in
the old Soviet republics, most of
          them in manufacturing, and take a $55 million pretax charge. 

          "There's no denying we're suffering like other companies," said
Axel Gietz, media relations chief at
          R. J. Reynolds International. He asserted that "while Russians now
have less purchasing power,
          they are smoking just as much as before but downgrading to cheaper
cigarettes." 

          The Philip Morris Companies continues to build a $330 million
factory outside St. Petersburg.
          While the company acknowledged that it had been affected by the
nation's financial turmoil, it
          refused to provide details or make any other comment about its
operations in Russia. 

          But British American Tobacco P.L.C., which has invested $170
million in Russia and acquired a
          venerable Russian brand in 1994, stands out as the exception among
international tobacco
          companies. It says it is increasing production and gaining in its
share of the market. 

          "There is opportunity in every crisis," said Sergei Krasnov,
managing director of British American's
          unit in Moscow. "While production and sales slumped in August and
September, since October
          production is back to pre-crisis levels.' 

          British American, which produced 25 billion cigarettes in Russia
in 1997, has two factories, one in
          Moscow and one in Saratov, south of Moscow on the Volga River. 

          Krasnov attributes his company's gain to aggressive distribution
and marketing strategies and to a
          popular product. Its Yava brand name, which it bought in 1994 from
the Russian company Yava
          Tabak, enjoys a 100-year-old reputation in Russia for quality. 

          Selling for six rubles a pack -- two to three times the cheapest
Russians brands -- Yava can still sell
          well because its home cities, Moscow and Saratov, are among the
best-off economically in Russia. 

          United States tobacco manufacturers increasingly viewed Russia,
with its chain-smoking
          population, as a key market. Russian cigarette sales totaled $6
billion a year before the financial
          crisis, and Western companies had 40 to 50 percent of the market. 

          The size of the Russian market has not been the only attraction
for the tobacco sellers. In contrast
          to the United States and Canada, there are few restrictions on
smoking in Russia, and health
          consciousness is among the lowest in Europe. 

          Heavy smoking is one reason the life expectancy of Russian men is
only 59. 

          Western cigarettes, though more expensive, have long been popular
with Russian smokers.
          Before the collapse of Communism, few items were as coveted as
Western cigarettes, which
          were often used as hard-currency equivalents to pay taxi drivers
or make bribes. 

          Aware of the demand for high-quality cigarettes, Western tobacco
manufacturers moved in force
          into Russia in the early 1990's. The first cigarettes were
imported, but many companies quickly
          began making them locally. Today, Western tobacco companies are
among the leading foreign
          investors in Russia, with almost $1 billion committed. 

          Since 1992, R. J. Reynolds International has sunk the most of any
Western company into
          manufacturing in Russia -- at least $400 million, with two major
plants in St. Petersburg. The one
          opened in July has a capacity of 50 billion cigarettes a year, and
it is R. J. Reynolds International's
          largest. Over all, the factory ranks as RJR Nabisco's second
largest after the one in
          Winston-Salem, N.C. 

          Despite the recent problems, all foreign tobacco companies say the
market's potential is too
          lucrative just to walk away. "While it will take about two or
three years to return to pre-crisis
          levels, I think basically it is still a hugely important market
for all manufacturers and they will remain
          here and continue to fight for market share," said John Dowd, head
of Rothman's International in
          St. Petersburg. "They've already invested too much, and it is too
big a market to give up." 

          "Russia is very important for our global strategy," Gietz, the R.
J. Reynolds publicist, said. "Since
          Russia opened up to the West, this large country with a tradition
of smoking has meant great
          business opportunities for us and other tobacco companies. We
expect things to pick up in the
          second half of 1999, but we are braced for however long it will
take."