Cigarette Makers Wage Final Battle to Tame Russian Bill

Cigarette makers including Philip Morris International Inc. (PM) and British American Tobacco Plc (BATS) are fighting a last-ditch battle against a smoking crackdown in Russia, with three weeks left to change the government’s mind.

Russia should scale back the proposal that would ban smoking in public places, tobacco sponsorship and cigarette sales in kiosks, Alexander Shokhin, head of the Union of Industrialists, a lobby group for big business, said yesterday. Government legal advisers in August reversed their original approval of the anti-tobacco bill, recommending changes to the planned measures.

While cigarette producers and the business sector support steps to cut tobacco-related health damage, “it’s another question how exactly to proceed and which measures are effective and which aren’t,” Shokhin said in Moscow. “In several countries, a total ban has had the opposite effect.”

President Vladimir Putin wants to curb smoking and alcohol consumption to stem the country’s population decline. Thirty- nine percent of the 143 million people in Russia, the world’s largest tobacco market behind China, are habitual smokers, according to the World Health Organization. That compares with 28 percent in China and 27 percent in the U.S.

Advertising, Sponsorship

The government is due to submit the bill to lawmakers by Nov. 1, outlawing all cigarette advertising and sponsorship immediately, with the bans on kiosk sales and smoking in public places taking effect Jan. 1, 2015. It will resist pressure to weaken the proposal, said Alexei Levchenko, an aide to Russian Deputy Prime Minister Olga Golodets, who’s responsible for health and social affairs.

“There won’t be any fundamental relaxation of these measures, though some language may be adjusted,” Levchenko said yesterday by phone after Shokhin’s organization met ministers responsible for the law the day before.

Smoking-related diseases kill 23 percent of Russian men and cause economic damages equal to 6.3 percent of gross domestic product, according to the Health Ministry, which says the law may save 200,000 lives a year and cut smoking in half.

Market Share

Philip Morris, the world’s largest publicly traded tobacco company and BAT, Europe’s biggest cigarette maker, generate about a third of global sales in eastern Europe, Africa and the Middle East. Japan Tobacco Inc. (2914) relies on the region encompassing Russia, the other ex-Soviet states excluding the Baltic countries, the former Yugoslavia, Bulgaria, Romania, Croatia and Mongolia for 46 percent of global sales volumes, according to its website.

Tokyo-based Japan Tobacco, whose brands include Camel and Winston and is Asia’s largest listed cigarette producer by market value, has about 37 percent of the Russian cigarette market. It is followed by 26 percent for Marlboro-maker Philip Morris, 21 percent for BAT and 9 percent for London-based Imperial Tobacco Group Plc (IMT), according to the companies.

Japan Tobacco shares advanced 3.6 percent today in Tokyo trading, the biggest one-day increase since Aug. 16, as the Nikkei 225 Stock Average fell 0.6 percent. BAT gained 0.6 percent and Imperial Tobacco Group Plc rose 0.8 percent in London. Philip Morris increased as much as 1.2 percent in New York trading.

Higher Tax

BAT and Imperial, the maker of Davidoff cigarettes, fell the most in about a month in London trading on Oct. 8 after Russian health regulators suggested raising cigarette taxes almost eightfold.

The Health Ministry proposed raising the tax to 4,000 rubles ($129) per 1,000 cigarettes by the end of 2015 from 510 rubles this year, according to a letter dated Sept. 22 from Minister Veronika Skvortsov to Golodets obtained by Bloomberg News.

The move escalates Russia’s anti-smoking efforts as excise taxes were scheduled to increase about 40 percent a year between now and the end of 2014 under current government policy. A pack of Marlboros now sells for about $2 in Russia.

The tax increase, if it becomes law, may push Russian cigarette consumption down by as much as 20 percent in 2015, according to Erik Bloomquist, an analyst at Berenberg Bank, compared with his current estimate for an annual decline of 1-2 percent.

Nomura analyst David Hayes on Oct. 8 downgraded his outlook for the tobacco industry to bearish from neutral, citing the risk of underperformance after three years of outperformance. He cut his recommendation for Imperial Tobacco to reduce from neutral, while maintaining a buy rating on BAT shares.

Plain Packaging

Governments from Europe to Asia have toughened restrictions on smoking. China aims to completely ban cigarette advertising and sponsorship and raise tobacco taxes, the country’s Health Ministry said in August.

Australia this year became the first country to require cigarettes to be sold in plain packaging without any company logos. New Zealand and the U.K. are among countries whose governments have indicated interest in implementing similar action, which takes effect in Australia Dec. 1.

Russia should continue to allow smoking in bars and restaurants in specially isolated zones as well as tobacco sponsorship and cigarette sales in kiosks, according to Shokhin, a senior member of the ruling United Russia party. He wrote a letter to Golodets last month urging her to reconsider the anti- smoking legislation.

‘Constitutional Principles’

The Institute of Law and Comparative Jurisprudence, a government agency charged with vetting legislation whose board of trustees is headed by the speaker of the lower house of parliament, Sergei Naryshkin, in August criticized the anti- tobacco law.

The institute, which last year gave its stamp of approval to the bill, said in a new assessment that “many aspects of the legislation don’t correspond to constitutional principles of fairness, proportionality and adequacy.” The same government body accepted a contract by Philip Morris to report on the legal aspects of planned warning labels on packs of cigarettes.

Among aspects of the bill criticized by the institute were the planned ban on tobacco sponsorship and advertising and restrictions on the sale and display of cigarettes.

The tobacco companies’ efforts to overturn the anti-smoking legislation are “worrying because they have hired some very expensive lobbyists,” said Dmitry Yanin, head of the Moscow- based International Conference of Consumer Societies.

To contact the reporters on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net; Stepan Kravchenko in Moscow at skravchenko@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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