Russia is introducing a wave of measures designed to curb smoking. This includes prohibiting the display of cigarettes in stores, adding to previous measures signed into law by President Vladimir Putin last year.
Last year's measures include the banning smoking in public areas (including workplaces) and setting minimum prices for cigarettes. The goal of these restrictions is to lower the smoking rate within Russia from 40% of the population to 25%.
Unfortunately for big tobacco, Russia is the world's second largest cigarette market. However, British American Tobacco (NYSE:BTI) and Philip Morris (NYSE:PM) insist that the measures will not cut smoking rates.
Both British American and Philip Morris believe that illegal suppliers are grabbing Russian market share, and this is now their largest threat.
According to Alexander Lioutyi, a spokesman for British American Russia, "The Russian tobacco market has been declining over the last several years, and the reason for that isn't smoking restrictions." Mr Lioutyi also stated "It is hard to imagine how the smoking ban in cafes, restaurants, hotels and night clubs will work during the cold time of the year." In Moscow, the average temperature is-10C during the winter months .
Nevertheless, big tobacco is known for weaving in and out of bad situations, often taking advantage of them and making a profit. Russia's clamp down on smoking is no different.
Despite the introduction of anti-smoking laws last year, Philip Morris' Russian business performed exceptionally well during the first quarter of this year.
Philip Morris reported that during the first quarter, its share of the Russian cigarette market expanded to 26.7% from the previously reported 26.3%. These gains were driven by a 1.7% increase in market share within the premium segment and a 3% increase in market share within the low-priced segment.
Profits within the region expanded at a double-digit rate (excluding currency movements) as Philip Morris hiked prices in line with rising taxes. The company expects the volume of cigarettes sold across Russia to decline 9% to 11% during 2014 ; these declines will be offset with further price hikes.
Not much detail
British American's first quarter update did not provide as much detail as Philip Morris' with regard to the Russian situation. However, the company did reveal that volumes fell in Russia.
The company commented that its five Global Drive Brands' cigarette volumes were up by 6.3% during the first quarter, with their combined market share growing strongly in the Group's key markets. Russia proved to be a problem, however.
Specifically, Dunhill volume increased by 4.1%, with good growth in Indonesia and Brazil that was partially offset by market decline in Malaysia. Kent was 1.6% higher, driven by Japan and the Middle East while being partially offset by market decline in Russia.
Lucky Strike volume was down by 1%, with increases in Russia and Spain more than offset by decreases in Chile, Germany and Poland. Pall Mall was up by 6.9% as a result of growth in Pakistan, Chile, South Africa, Argentina and Mexico, partially offset by declines in Russia and Italy .
It would seem that British America's sales in Russia are pretty mixed. That being said, if the company takes a play from Philip Morris' book and hikes prices in the region in line with rising taxes, it could see profits jump.
Russian lawmakers are trying to reduce the number of smokers within the country by introducing strict regulations. Russia is one of the largest markets in the world for big tobacco. As of yet, Philip Morris and British American do not appear to be suffering, though; if anything, they are profiting as they hike cigarette prices in line with rising taxes.
Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.