have provided an excellent example of successful free enterprise by building modern cigarette factories in Russia. Their output of mostly blended American-type cigarettes has caused a shift to more quality products. During the recent decade a shift from predominately oriental cigarettes the blended brands contributed to a shift in the composition of leaf tobacco imports. Imports of flue-cured and burley tobacco increased, while arrivals of oriental type tobacco declined. About 99% of the leaf tobacco used in Russian cigarette factories is imported, and the value for those imports in 2008 may be in the range of $1 bn.
Russian cigarette exports increased to about $185 mn in 2007, compared with $163 mn in 2006. Competition from expanding cigarette exports from Ukraine and EU has been intense. In addition to competition from cigarette exporters from Germany and the Netherlands shipments from some countries not so important for cigarette exports in the past have had dramatic growth in recent cigarette exports. Poland and Lithuania had spectacular gains for cigarette exports in the last three years. That made it difficult for Russia to expand cigarette exports beyond the duty-free CIS markets. Russian cigarette imports declined in the recent decade as domestic output increased in both quantity and quality. Imports declined to $50 mn in 2004, but rebounded to $110 mn by 2006, with large arrivals from South Korea and the EU. Preparations to enter World Trade Organization may have contributed to a relatively flexible policy to allow larger imports of consumer goods since foreign exchange reserves are large and rising with greater revenue from petroleum exports.
Further Export Expansion Expected in 2008: Russian cigarette manufacturers are seeking to expand exports in 2008, and the average export price of about 30 cents per pack of 20 is attractive to some foreign buyers. Russia is the leading world importer of leaf tobacco and purchases are made in over 40 countries. The value for leaf tobacco imports increased to about $820 mn in 2007, compared with $667 mn in 2006.
The modernization of Russia’s cigarette manufacturing with tremendous investments from multinationals provided the setting for a change to higher quality brands, expanding exports, and a brief decrease of direct imports of US cigarettes. Russian cigarette output averaged about 400 bn pieces during 2005–07, after averaging 384 bn during 2002–04. Output during 2008 may be about 2% higher, and nearly double the level a decade ago. Many Russian smokers have shifted to higher quality blended American type brands as they eluded the brands made primarily from oriental tobacco.
Retail prices for cigarettes remain comparatively low at less than a third of the average for most EU countries, despite recent hikes and higher taxes. Shoppers have a wide array of brands to choose from and a chance to make purchases from kiosks or displays in privately operated neighborhood grocery stores or in supermarkets. The way private investments valued at more than $1 bn have been made for cigarette factories in Russia is an indication that the economy is prosperous. High world prices for petroleum and natural gas contributed to the enormous trade surplus for Russian trade with other countries. Increased government revenues from exports contributed to increased spending for many programs and projects. That added to the financial flows to many people. With rising income per capita, demand for cigarettes remained strong in 2007. It has been estimated that about 60% of the men and a fifth of the women smoke.
Multinationals Compete for a Share of the Dynamic Russian Cigarette Market: At times in the recent decade, profits for some multinationals operating in Russia have been among the best investments they had. The recent purchase by Japan Tobacco International (JTI) of Gallaher will push up the JTI share of the Russian cigarette market to a much higher level. This will give JTI a chance to rival Philip Morris in this market. Earlier, Gallaher bought out Liggett-Dulcat operations in 2000 with the purchase of the Moscow factory with a capacity to produce about 75 bn cigarettes annually. JTI had good profits from operations in Russia since the purchase from Reynolds Tobacco International in 1999. Total cigarette output from JTI factories in 2008 may be about 40% above the 2004 level.
The large Petro cigarette factory near St. Petersburg has been efficient and profitable. Winston produced by JTI was a major brand in sales during 2005–07 with about 9% of the market.
Philip Morris Sales Showed Upward Trend: Philip Morris has been increasing cigarette sales in Russia during the recent decade. PM accounted for about 26% of the Russian cigarette sales in 2006. Further investments are planned for the Izhora cigarette factory near St. Petersburg. The convenience of the busy St. Petersburg port for handling imported leaf tobacco and improved roads to other cities in Russia have added to the favor of this location for cigarette factories operated by multinationals. A new super-highway similar to the Interstates found in the United States from the St. Petersburg area to Moscow and beyond will enhance distribution efficiency for some cigarette manufacturers. This economic efficiency contribution may help to offset the loss of outdoor advertising, previously considered important for bolstering sales of some brands.
Outdoor Advertising Banned: Outdoor advertising has now been banned. Multinationals spent an average of about $60 mn annually for outdoor advertising during 2003–06. Now more funds may go for advertisements in magazines and newspapers. Sponsorship of lottery systems to give cash to a chosen winner has helped to provide an outlet for cigarette advertising. More cigarettes were recently sold in supermarkets as the share marketed in larger cities in street kiosks declined.
L & M is the Leading Brand: The leading brand sold by PM in the last two years was L&M, with over 9% of the market. Parliament was the second major PM brand in sales with about 5.7% of the total distribution in Russia estimated at about 398 bn pieces in 2006. Marlboro was the third major PM brand sold in Russia, with about 4% of total sales, and Bond was the fourth PM brand.
BAT has a Fifth of the Market: BAT had nearly a fifth of cigarette sales in Russia over the last two years, and Kent was their leading brand with sales of about 18 bn pieces annually during 2004–06. Menthol Kent production began in 2005. A new smaller pack of Kent was introduced in 2005. BAT has invested about $520 mn in three cigarette factories in Russia, and plans for further investments of $170 mn by 2009 have been launched.
Share for Smaller Manufacturers Declining: Smaller Russian cigarette manufacturers accounted for about a tenth of the quantity of cigarettes sold in the recent years, but their concentration upon less expensive brands left them with about 5% of the value of sales. Some of these firms have been busy with exports of low-cost brands.
Sales of inexpensive brands had a higher share of the market in 2002 when the average price for cigarettes was less than 9 cents per pack of 20. The 20% value added tax and a complex additional tax schedule based on the wholesale price of specific brands has pushed the average retail price much higher. The lower cost brands tend to be more important in rural areas and small towns. The most expensive brands are likely to have a greater share of sales in large cities with over 1 mn people.
Cigarette Exports go Mostly to CIS Trading Partners: Exports of cigarettes from Russia increased from 5.4 bn pieces in 2004 to a peak of 34.5 bn pieces in 2005, as the valued climbed from $66.4 mn to $128.3 mn. After the spike for exports of inexpensive brands in 2005, Russian cigarette exports declined by more than half to 13.4 mn pieces in 2006, but higher prices lifted the value to $163.5 mn. Ukraine was a major destination for inexpensive brands in 2005, but that trade dwindled by 2006.
Russian cigarette exports to Azerbaijan zoomed upward from 467 mn pieces in 2004 to 15.8 bn pieces in 2005, valued at $21 mn. Higher petroleum prices and rising purchasing power of consumers contributed to the 87% rise in the value for Russian cigarette exports to Azerbaijan up to $48.2 mn in January–September 2007.
Ukraine was a larger customer for Russian cigarette exports before multinationals expanded output there. Russian cigarette exports to Ukraine reached a peak of 11.6 mn pieces in 2005, valued at $20.6 mn, before falling to only 670 mn pieces, valued at $12.7 mn in 2006. Russian cigarette exports to Ukraine increased 58% in January-September 2007 to $13 mn, as the quantity shipped more than doubled, reaching 955 mn pieces.
Belarus was a major destination for Russian cigarette exports, apparently because of the location nearer to factories in the St. Petersburg area and the way smokers in Belarus appreciated the chance to buy premium blended brands at reasonable prices. Some of the cigarettes delivered to buyers in Belarus by suitcase traders and by small trucks were reported by trade data from Belarus, combined with the larger deliveries from cigarette factories operated by multinationals. Russian cigarette exports to Belarus had been in the range of 900 mn pieces annually during 2002–04, but deliveries were down in 2007.
Russian cigarettes exports to Moldova declined by half to 613 mn pieces and the value dropped by 46% to $9.8 mn during January–September 2007. Moldova was a more important supplier of oriental leaf tobacco for Russia in the past. The economy of scale for new cigarette factories in Russia and Ukraine has tended to leave Moldova at a disadvantage in comparison to the dynamic economy of the two major manufacturing countries of the CIS.
Russian deliveries of cigarettes to Armenia were valued at about $12.4 mn in the first nine months of 2007, a gain of 50% above the comparable months of 2006, for an average price of nearly 60 cents per pack of 20.
Georgia was a destination for Russian cigarette exports valued at $27.9 mn in the first nine months of 2006, but shipments were down to $9.3 mn in the comparable months of 2007. Increased competition from exporters in the EU and other CIS countries tended to trim prospects for Russian cigarette exports to Georgia.
Exports to Central Asia Increased in 2007: Earlier success with exports of cigarettes from South Korea at attractive prices provided a setting where Russian exporters apparently sought to become more competitive. Higher petroleum and other commodity prices added to the income flow for more smokers in Central Asia in the recent year. Kazakhstan was the second leading customer for Russian cigarette exports in January–September 2007 when shipments doubled, reaching $30.8 mn - double the value for the comparable months of 2006. Russian cigarette exports to Turkmenistan declined about a fourth in value during the first nine months of 2007 to $2.9 mn. Russian cigarette exports to Kyrgyzstan doubled in value during in the first nine months of 2007, reaching $1.5 mn.
Greater Exports to Markets Outside CIS Explored: Mongolia has been a market for Russian tobacco products for decades. Even before shipments of Russian cigarettes began to rise, Mongolia was a major destination for shipments of smoking tobacco and mixtures used traditionally by Mongolian smokers. Russian cigarette deliveries to Mongolia were about $568 mn in 2004, before declining about a third in 2005. Russian cigarette exports to Iceland increased to $194,000 in 2006, but were down about a third in 2007. South Africa opened as a market in 2005 with shipments valued at $125,000.
Direct Exports to EU Remain Small: The 57.4% import duty imposed for cigarettes into European Union countries has made it difficult for Russian cigarette exports to EU members. Cyprus traders made purchases of Russian cigarettes valued at about $123,000 in 2007. A large part of the shipments of Russian cigarettes to Finland in the recent decade were delivered to trading firms providing supplies for the busy boats transporting tourists from Finland to Estonia.
Russian Cigarette Imports Showed a Downward Trend in the Recent Decade: Imports of cigarettes into Russia increased from $50.3 mn in 2004 to $110.4 mn by 2006, as arrivals from South Korea climbed from $4.9 mn to $55.4 mn. Recent imports had a new set of important suppliers after arrivals from Bulgaria and the United States faded. Total Russian cigarette imports reached a peak of 75.1 bn pieces in 1998 valued at $722 mn. Arrivals from the EU showed surprising strength in 2007, especially arrivals from Germany and the UK. The average price for cigarette imports into Russia increased 7% to 33.3 cents per pack of 20 in 2005, but dropped back to 28.8 cents per pack in 2006. The average price for cigarettes from South Korea rose from 16 cents per pack of 20 in 2004 to 24.4 cents per pack by 2006. Prices for some premium brands from Germany were over 88 cents per pack in 2006.
The great investments by multinationals in cigarette manufacturing in Russia meant a near-collapse for US shipments to the previously important market. US cigarette direct exports to Russia dropped from 10.265 bn pieces in 1997 to 1.3 bn pieces in 2001 to zero in 2007. Some Russian traders buy US cigarettes from transit traders in Belgium for distribution to upscale restaurants and for the foreign workers in some important projects to utilize natural resources.
Shift to Greater Purchases of Flue-Cured and Burley Tobacco Follow Popularity of Blended Brands: Blending more flue-cured and burley tobacco to prepare certain premium brands has influenced the proportion of those types of tobacco in the mix of imports. Brazil, China, India, and the United States have been leading sources of leaf tobacco imported into Russia. Imports from Turkey and Greece were higher in the past, although they held up better recently than declining deliveries from some suppliers of oriental tobacco, including Kyrgyzstan and Uzbekistan.
Russian imports of US tobacco increased to 22,008 tons in 2005, drifted lower in 2006, and rebounded in 2007. Some US tobacco enters Russia with deliveries from EU transit traders and special orders from traders in Switzerland.
Total US exports of leaf tobacco to Russia increased 68% to 9,885 tons, valued at $55.7 mn in 2007. US exports of burley tobacco to Russia jumped from $829,000 in 2003 to a peak of $56.3 mn in 2004, before falling to $17.9 mn in 2006, and rebounding to $23.5 mn in 2007.
Lower prices for flue-cured tobacco from Brazil, China, and India have not stopped purchases of quality supplies of this type from the United States. Part of the reason for strength in US flue-cured sales to Russia has been the advantages provided for the blend of some premium brands. US exports of flue-cured tobacco to Russia increased to a new peak of 5,009 tons in 2007, valued at $31.3, double the $15.2 mn for shipments in 2006.
Prospects for arranging further gains for US flue-cured tobacco exports to Russia in 2008 depend on some price reduction and competition from Brazil, China, and Argentina. Without serious competition from Zimbabwe, sales of flue-cured tobacco by other suppliers will probably increase.
Blending experts in Russia appear to have a strong interest in finding specific types of tobacco with good quality and an attractive price. Russia was a market for Maryland Type 32 tobacco from the United States in 2006, valued at $1.1 mn. The tobacco buyout program in Maryland caused supplies of Type 32 to dwindle, although more farmers in Pennsylvania grew it in the last 3 years.
Tobacco Production Remains Comparatively Small in Russia: Production of oriental type tobacco in the Krasnadar area of southern Russia averaged less than 2,400 tons annually during 2003–07. This means that no drumbeat is made to push the import for leaf tobacco higher to protect Russian farmers. The 5% import duty is one of the lowest in the world. No quotas are made and manufacturers can import all of the leaf tobacco they need of an acceptable quality. Higher prices for cereals and oilseeds tend to limit plans for expanding tobacco cultivation in the future in Russia.