Kremlin cracks down on Big Tobacco

Russia, the world's second-largest cigarette market after China, plans 'harsh' anti-smoking rules.

The Kremlin is finally getting tough on Big Tobacco, with a determined push to pass strict anti-smoking rules in the world's second-largest tobacco market.

"We are ready. This is going to be a harsh measure, but it is absolutely necessary. It will take time—maybe another generation—but we will succeed in defeating smoking and promoting a healthy lifestyle," said a spokesman for Russia's First Deputy Prime Minister Igor Shuvalov.

A bill that would establish nationwide smoking restrictions similar to those seen in much of the West—such as limits on advertising and smoking in restaurants—is expected to be submitted to parliament on Nov. 1 for a vote early next year.

A separate effort to raise excise duties nearly 135% by 2015 has already passed a parliamentary committee.

The battle represents a stark challenge to the world's big four tobacco companies that control 90% of the Russian market. After losing ground in the West for years, Russia has remained one of the last unfettered bastions for the industry and a major driver of profits for global players like Philip Morris International Inc. and British American Tobacco PLC.

In Russia, cigarettes cost a little over a dollar a pack, restaurants and bars are normally thick with smoke, and nearly 40% of the population (60% of men) light up, so the bill is a radical step.

Half of the country's 44 million smokers consume a pack or more a day. Overall, Russians smoke 390 billion cigarettes a year, second only to China, and outpacing the U.S.—which has double the population and about the same number of smokers—by 20%.

"It is necessary to remove this dangerous habit from our lives," said newly appointed Agriculture Minister Nikolai Fyodorov, an ex-smoker who was behind the strictest regional anti-smoking law in Russia and has played a role in clearing the way for the national bill.

Vladimir Putin ordered up the legislation in 2010 with the target of slashing smoking by 10% to 15% by 2015. Analysts, however, say similar efforts in other countries resulted in only a 3% to 5% drop-off in the first year, after which smoking rates leveled out.

Either way, Big Tobacco isn't going down without a fight.

"The lobbying effort is huge," said Sergei Kalashnikov, head of the Russian parliament's health committee. "We feel tremendous pressure. The tobacco lobby is quite well organized."

A spokesman for Japan Tobacco International Russia, which controls 37% of the market, characterized the industry's efforts more benignly.

"We have expressed our opinions on certain aspects of the bill. I wouldn't say we are lobbying. We are just letting our position be known," said Anatoly Vereshchagin. "Nobody has any doubt that the draft bill will be approved but nobody knows at this point what kind of amendments may be added."

Mr. Kalashnikov said the bill will ultimately pass because Mr. Putin—a nonsmoker known for his devotion to sports—has thrown his weight behind it.

"This law would not exist without Vladimir Vladimirovich [Putin]. There is tremendous opposition to it, but it will be adopted," he said.

Russia has long been reluctant to deal with its high smoking rate. In 1990, as the Soviet Union was near collapse, cigarette shortages led to riots throughout the country. But health officials say the rising cost to public health can no longer be ignored.

Around 400,000 Russians now die each year due to smoking, costing the country 1.5 trillion rubles ($48.1 billion) annually in health costs and lost productivity, health officials say. Since 1998, smoking by volume has shot up 51%.

The tide began turning in 2008, when Mr. Putin signed the World Health Organization Framework Convention on Tobacco Control, requiring Russia to enact strong smoking regulations by 2015.

As it stands, the bill would outlaw cigarette advertising immediately upon passage. Kiosk sales and smoking in restaurants, hotels and cafes would be banned by 2015. It also calls for graphic warnings on cigarette packs.

The tobacco companies argue that eliminating kiosk sales will bankrupt small businesses and that barring display ads has had little effect on smoking rates in other countries. They also say if prices fall out of line with neighboring countries, where cigarettes are cheaper, it will result in increased smuggling.

"We do not oppose any of the provisions of the draft bill that are designed to promote a healthy lifestyle, protect the public against environmental tobacco smoke and prevent underage smoking. What we object to are unjustified measures that do not take into consideration the realities of Russian market and the unintended consequences they can give rise to," said Alexander Lioutyi, the head of corporate affairs for British American Tobacco Russia.

Meanwhile, traders have kept a close eye on developments—sending tobacco stocks tumbling following every twist as the bill marches closer to passage. Analysts estimate that Japan Tobacco sees 11% of its global profit in Russia, followed by Philip Morris International at 9%, British American at 8% and Imperial Tobacco at 5%.

The bill has been well received by the public, smokers included. A poll last year by the Russian Public Opinion Research Center found that 81%—including 63% of smokers—approved of a ban on smoking in public.

"These are reasonable measures that will dramatically reduce tobacco use in this country," said Kirill, a 24-year-old customer-service worker, and pack-a-day smoker, as he took a cigarette break last week in central Moscow. "It may be unfair to smokers, but it affects people's health and the health of the nation."

(Published by WSJ - October 15, 2012)