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Russia: U.S. Tobacco Company Boosts Operations

Moscow, 17 April 1997 (RFE/RL) - With anti-smoking campaigns reaching a fever pitch in the West, U.S. tobacco giant Philip Morris has announced plans to expand operations in Russia, investing $300 million in a cigarette factory in St. Petersburg.

The company's managing director for Russia, Kursat Kocdag, told a news conference in Moscow this week that the factory will probably be the largest cigarette producer in Russia. Kocdag said he had signed an agreement last week with the Leningrad regional government to lease 50 hectares of land for Philip Morris to build a factory. However, he said Philip Morris' board still needs formally to approve the project.

Kocdag said he hopes construction will begin within a year's time, with the plant up and running in three to four years. He declined to say what cigarette brands Philip Morris intends to produce at the new facility, saying plans are still preliminary.

Multi-national tobacco companies such as Philip Morris and competitors British-American Tobacco and RJ Reynolds have been rapidly expanding operations here in the fierce battle for a slice of the multi-billion dollar Russian market. Russians consume an estimated 250 billion cigarettes annually.

With anti-smoking campaigns undermining cigarette sales in the U.S. and Western Europe, tobacco companies have been quick to move into the lucrative Russian market. Not only have they set up production facilities, but tobacco companies have poured millions of dollars into advertising and promotion schemes to grasp a larger market share from competitors.

They come armed with well-tried marketing techniques, including free samples, sports sponsorships and roving promotional teams that stage quirky, off-beat events across the country.

Kocdag said Philip Morris' worldwide sales growth, which he said is being driven by sales outside the United States, last year reached $8 billion, with the Russian market making up five percent of the overall total.

With the number of smokers in the West declining, and law suits growing, analysts say tobacco companies are increasingly relying on emerging markets in Eastern Europe and the Third World, where regulations are more lax, and adverse publicity is not a concern.

Nevertheless, Philip Morris showed it was keen to make pre-emptive strikes against possible negative press. At the elaborate Moscow press conference, which included slide-shows and videos, company officials boasted their support for local anti-smoking campaigns for Russian youth in schools around the country. They also stressed that Philip Morris' investments were creating jobs and contributing much needed revenue to the cash-strapped Russian Government.

Philip Morris already has invested $60 million in a tobacco factory in Krasnodar and $10 million in a small plant in St. Petersburg, but the two facilities produce only a fraction of the company's overall sales in Russia. Independent wholesale traders control what has been described as a corrupt and mafia-ridden cigarette import business, which has been plagued by smuggling operations to dodge Russia's steep import tariffs.

Kocdag said plans to bolster production facilities in Russia were part of the company's strategy to reduce its reliance on imports. He said 40 billion Philip Morris cigarettes were imported into Russia by independent wholesale traders last year.

Analysts said Philip Morris' plans to move ahead with a major production facility in Russia could signal an end to the company's relatively sluggish pace of investments in the Russian market since it began operations here.

Philip Morris has a strong foothold in Russia, having produced cigarettes locally in the 1970s and 1980s, under agreements with Soviet authorities. It also boasts being the main partner in what has been called the biggest tobacco transaction in history, when Soviet authorities approached the company in 1990 with a request to ship more than 20 billion cigarettes to avert "cigarette riots" caused by the collapsing tobacco industry.