The conflict between Russia and Ukraine has lasted for more than a year, so far, Europe and the United States have introduced more than a dozen rounds of sanctions against Russia, the severity of which is unprecedented, and the future does not rule out the joint introduction of more powerful and far-reaching sanctions by the West. However, the panic that this caused in the market has diminished. So, as far as the tobacco(heatsticks supplier) industry is concerned, what is the current state of the Russian market?

Russian tobacco tycoon faces sanctions

Since the war between Russia and Ukraine, the scope of European and American sanctions against Russia has been increasing, involving enterprises and individuals in military, aerospace, communications, finance, economy, science and technology and other industries. Recently, sanctions have been extended to include individuals in the tobacco(heat not burn tabac manufacturer) industry. Igor Kesaev was sanctioned by the European Union, the United Kingdom and the United States for "assisting Russia in its invasion of Ukraine."

About Igor Kesaev, co-owner of Mercury Group, a leading distributor in the Russian tobacco market. Mercury Group is also a local developer and distributor of luxury goods in Russia and helped many international brands enter the Russian market during the economic boom of the early 2000's. Kesaev, listed by Forbes as Russia's 35th richest man in 2022, is the main shareholder of the V.A.Deegtyarev factory, which produces machine guns, anti-tank and anti-aircraft weapons, some of which have been used in the Ukrainian battlefield. As of April 2022, Kesaev is also Chairman of the Board of Directors of Megapolis, a joint venture trading company under the Mercury Group.

In the early 1990s, Kesaev started working in the tobacco(heated tabak supplier) industry. According to a profile of the tycoon published by ForbesRussia in 2014, with the collapse of the Soviet Union, international tobacco companies, eager to get their products into the Russian market, teamed up with Kesaev. Over time, Kesaev built Russia's largest tobacco distributor, Megapolis, by acquiring regional competitors. As of 2022, Megapolis serves 160,000 retailers across the country.

In addition, Kesaev established the Ukrainian branch of Megapolis to participate in the tobacco business in Ukraine. After the ouster of Ukraine's former Pro-Russian president Viktor Yanukovych in 2014 and Russia's takeover of Crimea, Ukrainian officials began scrutinizing Russian companies in various sectors of its economy.

According to the research of the Ukrainian Anti-Monopoly Commission, Megapolis Ukraine controlled 99% of the tobacco distribution market in Ukraine at that time. Kiev imposed sanctions on Kesaev in 2016, saying his unspecified actions threatened Ukraine's national security. A senior Ukrainian prosecutor later accused Kesaev of supporting a "terrorist organization" by supplying arms to Russian-backed separatist groups.

Multinational tobacco companies face a dilemma

According to the International Institute for Management Development, many Western companies vowed to exit Russia immediately at the start of the Russia-Ukraine war, but by the end of 2022, less than 9% of the EU and G7 countries had left the country's market. This is due to the introduction of new regulations in Russia, including a clause giving the government the power to determine the valuation of foreign companies' assets in Russia and the dividends and cash flows of the new owners, making it difficult for multinationals to exit the Russian market without taking a huge financial hit.

In terms of the tobacco industry, Russia has historically been a huge market for the tobacco industry, with high smoking rates and consumer acceptance of E-cigarettes and heated tobacco products.

According to the International Institute for Management Development, many Western companies vowed to exit Russia immediately at the start of the Russia-Ukraine war, but by the end of 2022, less than 9% of the EU and G7 countries had left the country's market. The Russian government's new regulations do pose a dilemma for multinational tobacco companies. Soon after war broke out between the two countries, Imperial Brands had sold its Russian business to a local partner, taking a hit to its annual profits of $463 million. Japan Tobacco has suspended investment and expansion in the Russian market, but has no plans to leave for now. British American Tobacco (BAT) controls nearly a quarter of the Russian market. Since the outbreak of the war between the two countries, the company has announced that it will withdraw from the Russian and Belarusian tobacco markets in 2023, and has been in advanced talks with its distributors in Russia to sell the business, but has not made significant progress.

Since the new rules came into force in Russia, Philip Morris Chief Executive Jacek Olczak has said he has a responsibility to recover shareholder value, preferring to keep the company in Russia rather than sell it on the Kremlin's strict terms. Philip Morris International's attempt to sell its Russian business has stalled, with discussions with at least three "serious" potential buyers going nowhere. Although the asking price was not disclosed, Philip Morris International has assets worth $2.5 billion in the country, according to company filings. In 2022, Philip Morris International revenue was $31.7 billion, of which 8% came from the Russian and Ukrainian markets. This is due to the introduction of new regulations in Russia, including a clause giving the government the power to determine the valuation of foreign companies' assets in Russia and the dividends and cash flows of the new owners, making it difficult for multinationals to exit the Russian market without taking a huge financial hit.

In terms of the tobacco industry, Russia has historically been a huge market for the tobacco industry, with high smoking rates and consumer acceptance of E-cigarettes and heated tobacco products.

Due to significant changes in the regulatory environment in Russia, Philip Morris International is considering returning to Ukraine in a more sustainable manner and is currently exploring options to resume production in Ukraine. Philip Morris International had previously halted production at its Kharkiv plant due to safety concerns caused by the ongoing war. Some of its brands in Ukraine are currently produced by Imperial Brands under temporary arrangements. But now Philip Morris International is committed to building its own alternative production facility in Ukraine. There are two main reasons: first, Philip Morris International wants to produce its own products in Ukraine, and second, to show that the company is committed to investing in Ukraine, even during the war.

Opportunities for Chinese e-cigarette companies

Although multinational tobacco companies have not completely withdrawn from the Russian market, the number of foreign e-cigarette brands operating in Russia has gradually decreased. As the Russian tobacco industry relies heavily on the support and investment of foreign brands, which has led to a large shortage of products in the Russian tobacco market and a sharp rise in prices, Chinese E-cigarettes have the opportunity to achieve growth in Russia.

By the end of 2021, there are more than 5,000 stores selling E-cigarettes in Russia, including more than 1,100 in the Moscow region. According to real estate platform DNA REALTY, the number of tobacco shops in Russia grew by at least 20 percent in 2022, with most of the profits coming from e-cigarette sales. E-cigarettes have great potential as an alternative to the tobacco market in Russia, where e-cigarette consumers account for 6.8% of the total number of smokers. Russia is the world's third largest importer of electronic nicotine delivery systems after the United States and Europe.

China accounts for 90 per cent of the global e-cigarette market. In 2021, China's exports to Russia reached 82.5 billion rubles. It is likely to grow by 35 percent this year to 111 billion rubles, with great potential for the future.