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BAT and Imperial Tobacco Slide on Proposed Russian Tax Boost

British American Tobacco Plc and Imperial Tobacco Group Plc fell the most in about a month in London trading after a report that health regulators in Russia, the second-largest tobacco market, proposed raising cigarette taxes almost eightfold.

BAT, the London-based maker of Dunhill cigarettes, declined as much as 1.8 percent to 3,249 pence, the steepest intraday drop since Sept. 12. Davidoff maker Imperial Tobacco slid as much as 2.3 percent to 2,316 pence, the most since Sept. 7.

The Russian Health Ministry proposed the tax increase from the end of 2012, Finmarket reported today, citing a ministry document. The move would raise the tax to 4,000 rubles ($128) per 1,000 cigarettes by the end of 2015 from 510 rubles this year, according to Finmarket, a subsidiary of the Moscow-based Interfax news service. Under current policy, excise taxes are scheduled to increase about 40 percent a year between now and the end of 2014.

“If the proposal were passed into law, it could slow profit growth from Russia,” Erik Bloomquist, an analyst at Berenberg Bank, said in an e-mail. The move could push Russian cigarette volumes down by as much as 20 percent in 2015, he said, compared with his current estimated annual decline of 1 percent to 2 percent.

Russia is also due to submit a law banning smoking in public places to Parliament by Nov. 1, defying opposition from leading cigarette makers including Japan Tobacco, Philip Morris International Inc. and BAT. The Russian government wants to reduce premature deaths caused by smoking, Deputy Health Minister Sergei Velmiaikin said Sept. 3.

BAT had 20.8 percent of eastern Europe’s cigarette market in 2011. Russia accounts for about 8 percent of BAT’s revenue and 7 percent of operating profit, Barclays analysts estimate. Russia is the biggest tobacco market after China.

Imperial Tobacco controls about 9.4 percent of Russia’s cigarette market, the company said in May.

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

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