Philip Morris International Inc. (PM), Reynolds American, Inc. (RAI): Will Russia’s Monkey Wrench Cripple the Tobacco Industry?

Chalk up another strike against Big Tobacco. For a change, however, it isn’t domestic tobacco producers that are on the defensive but global companies that could be facing a whirlwind of change if Russia, the world’s third-largest tobacco market, is successful in implementing stringent anti-smoking laws.

Passed by Russian President Vladimir Putin in February and going into effect yesterday, new regulations ban smoking at schools and universities, in hospitals, sports facilities, and museums, and on public transportation. Smoking is predominantly banned in these areas already, but this is more of a uniform countrywide ban, as Reuters notes.

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The real challenge is coming up next year, when the smoking contingencies widen to include a ban in cafes, restaurants, hotels, and street kiosks and will set a minimum countrywide price on a pack of cigarettes. Outside of mandating a new minimum price that would certainly be much higher than the current price, this is sounding awfully familiar to some of the policies enacted by California and the city of New York.

The purpose behind President Putin’s actions is to reverse a precipitous downtrend in life expectancy rates for Russia compared with other developed countries that have significantly lower smoking rates. In Russia, about 40% of the population smokes, and if we learned anything from the Tackling Cancer series I just wrapped up, the chances of getting nearly any of the most commonly diagnosed cancer types, as well as a plethora of other common diseases like diabetes, can be exacerbated by smoking.

Russia’s move could pose a threat to global cigarette producers such as Philip Morris International Inc. (NYSE:PM) and British American Tobacco PLC (ADR) (NYSEMKT:BTI). Although both tobacco producers operate around the globe, a dramatic shift in curbing smoking from the world’s third-largest tobacco consumer is bound to sting. In Philip Morris International Inc. (NYSE:PM)’ case, according to Trefis, Russia accounted for approximately 6% of its total revenue last year, and the Eastern Europe, Middle East and Africa region accounted for roughly one-quarter of sales.

Luckily for Philip Morris International Inc. (NYSE:PM) and British American Tobacco PLC (ADR) (NYSEMKT:BTI), burgeoning middle-class growth in China and India could prove to be more than enough to curb any sales weakness in Russia, but the potential for a “monkey-see, monkey-do” effect could be an even more worrisome signal that the glory days for Big Tobacco are in the rearview mirror.

Things aren’t much better here, either
Domestically, Altria Group Inc (NYSE:MO) and Reynolds American, Inc. (NYSE:RAI) have performed well, all things considered, with both stocks near an all-time high (adjusting for Altria Group Inc (NYSE:MO)’s spinoff of Philip Morris International Inc. (NYSE:PM)).