Tobacco group Philip Morris admits it may never sell its Russian business
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Philip Morris International has admitted it would “rather keep” its business in Russia than sell on stringent Kremlin terms, highlighting the challenges for companies trying to leave the country without taking a huge financial hit.
Chief executive Jacek Olczak told the Financial Times the tobacco group, which sells Marlboro cigarettes outside the US, had been in discussions with at least three “serious” potential buyers but “the talks have stalled because nobody knows how I can make it work”.
Many western companies vowed to exit Russia immediately after last year’s invasion of Ukraine, but less than 9 per cent of EU and G7 groups in the country had left by the end of December, according to research by the International Institute for Management Development, a business school.
Olczak’s comments underscore the bureaucratic difficulties for companies now seeking to divest their Russian assets and the potential cost of giving up on the country’s market, a highly lucrative one for tobacco groups such as PMI.
He said he had a “duty to my shareholders to recover” value, pointing to regulations that allow the Kremlin to dictate the valuation of foreign companies’ sale of Russian assets as well as the new owner’s dividend and access to cash flow.
While the asking price for PMI’s Russian operations has not been disclosed, the group has $2.5bn worth of assets in the country, according to company filings.
“I cannot just lose the patience and I leave it. It’s their money, it’s not my money, I’m managing this for them,” Olczak said. “If I had a buyer who could execute the transactions, yes we would do it — but it doesn’t exist . . . there is no hope . . . So then I’d rather keep this whole thing.”
As the first anniversary approaches of the February 24 invasion, some of the biggest names in international business have left the country.
Energy groups from BP and Shell to ExxonMobil and Equinor have either ended joint ventures or written their remaining shareholdings down to zero. French lender Société Générale is the biggest bank to have pulled out, while almost all international carmakers with plants in the country have sold out or walked away.
But European banks Raiffeisen and UniCredit remain in the country, as do Unilever and Procter & Gamble, although both consumer groups say they have pared down operations.
Imperial Brands, the maker of Davidoff cigars and cigarettes, sold its Russian operations to a local partner soon after the invasion, taking a $463mn hit to annual profits.
That contrasts with other tobacco groups. Japan Tobacco does not plan to leave and British American Tobacco has struggled to get a sale over the line, although it said this month it was in “advanced talks”.
Russia has historically been a huge market for Big Tobacco because of high smoking rates and consumer willingness to switch to vapes and heated tobacco products. Together with Ukraine, it accounted for 8 per cent of PMI’s $31.7bn revenues last year.
As well as Marlboro, the company sells cigarette brands including L&M and Chesterfield, owns smoke-free tobacco product IQOS and recently bought Swedish Match, maker of the Snus oral nicotine pouch, for more than $15bn.
“I know some people . . . think that we make a decision not to leave, but we haven’t made any decisions because . . . we cannot execute the decision,” said Olczak. “When I say I’m leaving or not leaving, it’s completely irrelevant because I tried last year and the reality is I’m [stuck] with this whole thing.”
In a tacit acknowledgment that a sale is a distant prospect, PMI this month reincorporated Russia and Ukraine into its future earnings projections. But it has suspended new investment and scaled down operations in the country.
Olczak said he would “very likely” request a buyback clause if Philip Morris does sell its Russian assets, providing a chance to return if the war ends. But he said this goal was not slowing down the process.
Danish drinks company Carlsberg said this month it was also pursuing a buyback clause as it neared a deal to leave Russia.
Olczak responded to criticism, including from within the Ukrainian government, that by not immediately leaving Russia, PMI is helping to bankroll the Kremlin war effort.
“I’m not supporting anybody. I just get trapped in that situation and . . . what’s the way out?”
Before the war, the four main tobacco conglomerates paid an overall $7.8bn in tax annually to the Kremlin.
Rae Maile, an analyst at Panmure Gordon, said PMI’s exit from Russia had dragged on since it was a “bloody complicated process” and the group was trying to “eke out as much value as possible for shareholders”.
Additional reporting by Tom Wilson, Owen Walker and Peter Campbell