Farmer's Voice

All May Be Changed Utterly in Russian Cigarettes

Announcing in late July the closure of its Moscow production facility Japan Tobacco International didn't mince its words regarding the current state of the Russia tobacco market. Press statements referred to a 'serious contraction' of sales and an operating environment that had 'changed dramatically' (one is tempted to wonder whether there is any other kind of change in Russia). The language, while at the florid end of what might generally be expected from the communications department of a large public company, did not feel overblown, as across a range of areas - from regulation, to price elasticity, to social attitudes to tobacco - things do indeed appear to have altered utterly and irrevocably in Russian tobacco.

Explosion in price elasticity 

In 2015, for the second consecutive year, the Russian market is expected to record a volume decline of over 8% (between 2000 and 2013 the Russian market had grown more often than not and never recorded a decline of more than 2%) and indications are that inflation, stagnant incomes and higher cost of living in the country have exerted an explosive effect on the price elasticity of cigarettes, more than trebling it to 0.6/0.7 by some accounts.

Further, at the same time as Russians are consuming fewer cigarettes, those they do smoke are of lower value. The low price segment is the only cigarette category with any momentum over the last 12 months, most major manufacturers have introduced larger value packs or have repositioned variants to address the demands of cost conscious consumers and more efficient formats such as queen size are reportedly performing robustly as the economy price band has gained anything upto five percentage points in share since this time last year.

Two contradictory analyses

It is possible to interpret these developments in two contradictory ways, seeing them through a prism of either knowing familiarity or of profound novelty. On one hand, one is led back to 1998's currency crisis when the ruble lost some two-thirds of its value and retail prices shot up, more than tripling the list price of many imported cigarette brands and decimating the mid to upper tiers of the market. Then, manufacturers dug in, reduced their imports and launched low price variants to support the market and their own shares. On this analysis, a similar approach to the current downtrading will stabilise the market outlook and return it in time to its supposed rightful uptrading narrative.

However, this analysis is one that relies on the belief that today's prevailing issue is the same as 1998's, simple affordability and that there is still an underlying disposition to tobacco in Russia - that the problem is liquidity, so to speak, rather than solvency. It is not a case without merit - as recently as December 2009, Nikolai Gerasimenko, who is credited as the parliamentarian who first proffered tobacco control legislation in Russia in the early 1990s, stated baldly 'There's no anti-smoking culture here'.  However, as mentioned above, the sense is that much has changed.

Systemic anti-tobacco culture

There is now an official, statewide and systemic anti-smoking culture. Admittedly, the annals of history are populated by instances of official stances which are at odds with the general popular feeling - and it remains an open question whether the wider attitude to smoking in Russia is substantially shifting. But equally, one often follows the other. When the Russian government has put in place all the depressive, denormalising and functionalising conditions for tobacco which have impacted more developed markets it seems illogical to expect that they will not have a similar impact. The Russian economy will recover, in time (though that is not to say it need not get worse before it gets better) but the tobacco market will forever after be darkened and increasingly challenged by alternatives so that it is far less clear that the demand for cigarettes will not continue to degrade in new and unprecedented ways. 

For further insight, please contact Shane Mac Guill, Senior Analyst - Tobacco at Euromonitor International on shane.macguill@euromonitor.com