Moscow’s open, revolving door for big tobacco

When it comes to setting up no-smoking zones and limits on tobacco advertising, the World Health Organization has a simple rule for governments: Don’t save a place for the industry at the negotiating table.

The fear is big tobacco’s aggressive work behind-the-scenes to derail public health campaigns designed to stem smoking-related deaths and illnesses. But in Russia, the industry has more than a chair at the talks.  It appears to run the table.

A turning point should have come in 2008, when Russia signed on to the WHO’s tobacco-control convention, which calls for tighter controls on the industry. But even before lawmakers approved the treaty, they had already struck a deal with tobacco companies on a set of Russian rules – lighter restrictions – that pre-empted the WHO mandate.

That legislative victory highlighted a fine harvest for the tobacco industry, which in the years leading to the new tobacco rules had worked hard to spread its influence across Russia’s political landscape. In an eight-month probe, the International Consortium of Investigative Journalists found a Russian government tobacco regulatory system hijacked by an industry intent on diluting tougher controls on smoking. Among the findings:

• Tobacco companies in Russia have long been financial backers of key politicians, making charitable donations to their pet causes. Among the contributions: $52,000 to a charity run by the wife of the finance minister, the key official in deciding how much excise tax will be levied on tobacco.

• An extraordinary revolving door exists between the Russian government and the tobacco industry, with officials at times holding concurrent positions with both industry groups and the agencies that oversee them.

• The country’s principal rules on smoking and tobacco advertising were drafted by tobacco lobbyists working with an influential former deputy prime minister. 

• One of Russia’s leading tobacco companies, Donskoy Tabak, is controlled by the wife of a powerful member of the State Duma, the nation’s federal legislature. The company continues to sign lucrative sales deals with the Russian military.

• Russian tobacco lobbyists, listed as experts from the Ministry of Agriculture, participated in multinational talks designed to apply new tobacco controls in former Soviet nations.

Public health advocates say the findings help explain a lack of progress in Russia against tobacco-related health threats, despite its adoption of the WHO’s Framework Convention on Tobacco Control. “The link between tobacco companies and the Russian government is unprecedented,” said Dmitry Yanin, head of the Russian Confederation of Consumer Associations, which promotes tobacco control policies.

Per-capita smoking rates in Russia are among the highest in the world, and its market is a prize for tobacco companies which see their growth flat or even declining in the West. Russia is the world’s fourth largest cigarette consumer – behind only China, the U.S, and Japan, consuming an estimated 400 billion cigarettes each year. And the number is growing. According to the Confederation of Consumer Associations, some 44 million people smoke in Russia, about 40 percent of the population. More than 60 percent of men and 22 percent of women smoke. Female smokers are a particular worry; in 2001 only 16 percent of them smoked.

The costs are considerable, both in public health and in money. According to the Public Chamber of Russia, an oversight agency, smoking kills about 400,000 Russians each year – about the same number as in the United States, a country with more than twice Russia’s population. The chamber estimates these deaths rob Russia of about three percent of its annual GDP – approximately $36 billion.

Meanwhile, the industry enjoys some of the lowest taxation in the world. Taxed heavily to discourage smoking in the West, tobacco companies in the EU pay a minimum excise for filter cigarettes 15 times larger than what they pay in Russia. And, in 2004, the Russian Finance Ministry limited the retail price of tobacco products, making a pack of cigarettes cheaper today than a loaf of bread or tub of butter.

A history of extraordinary influence

Big tobacco’s influence inside Russia dates back to 1992, when the Russian government’s monopoly in tobacco products ended. Multinational tobacco giants Philip Morris and British American Tobacco swiftly moved in, followed by Japan Tobacco, attracted by one of the world’s largest and fastest growing cigarette markets. The attractions for the industry were numerous: a substantial pool of current smokers, large numbers of potential new smokers among women and youths, weak anti-tobacco legislation, and a political climate in which the tobacco companies could exert political influence – both in Russia and among other former Soviet republics.

In 1995 about 141 billion cigarettes were produced in Russia; by 2006 that amount had nearly tripled to 414 billion. Today, Russia ranks third in cigarette manufacturing, after China and the United States, according to WHO figures. Transnational tobacco companies control 94 percent of that market.

The largest Russian-owned company is Donskoy Tabak, once controlled by Ivan Savvidi, an influential member of Russia’s State Duma. After entering public office in 2003, Savvidi quit his commercial activities, as required by Russian law. Today his wife, Kiryaki, owns 87.1 percent of the company’s stock. According to the federal register of state contracts, the company since 2007 has won 13 tobacco contracts worth 60 million rubles (more than $2 million) from the Russian military. Moscow-based GR Research & Consulting Center, whose Lobbying.ru site monitors the tobacco industry, claims that Donskoy Tabak each year distributes one billion cigarettes to soldiers, free of charge.

Donskoy Tabak officials declined to comment for this story.

Tobacco-control activists and business analysts say the industry’s strong position in Russia is the result of years of aggressive, strategic lobbying. The big multinational tobacco companies, in fact, have proven to be expert lobbyists in Russia, according to Pavel Tolstykh, owner of GR Research. “They are very effective,” he says, because they bring “a long history of promotion and diversified strategies in lobbying.” And, he adds, they understand where to target the key decision-makers: in the Agriculture Ministry, which oversees the industry; the Finance Ministry, which decides questions of taxation; and the main legislative body, the State Duma.

Consumer advocate Yanin says the industry has a history of success in blunting attempts at effective smoking and advertising controls in Russia. “In the new history of Russia there were adopted just two halfway serious restrictions for the industry…the ban on advertising on TV and on billboards,” Yanin said. “All other anti-tobacco initiatives remained just as intentions… or were adopted in very soft variations without any harm to the industry.”

Multinational tobacco companies have lobbied Russia hard since at least 1998, according to internal company documents released during litigation against the industry. Back then, alarmed by a far-reaching anti-tobacco law introduced into the State Duma and the WHO’s growing tobacco-control work, industry lobbyists launched a counterattack. One set of efforts targeted the Duma legislation, introduced by Committee on Health Protection Chairman Nikolay Gerasimenko, while another worked to push decision makers to water down the WHO standards.

On July 7, 1998, a BAT-Russia executive, Vladimir Aksionov, described in a memo his meeting with Olga Beklemishcheva, deputy chair of Gerasimenko’s committee: “She still believes that the draft can be ‘killed’ at the earliest stage and confirmed that she will do everything for this. She also said that coordinated PR campaign should start as early as possible and should be on on-going basis even during vacation period. She believes that one of the main ideas of this campaign should be the negative impact of this law for local producers.”

A similar position on Gerasimenko’s bill was stated in a BAT-Russia report: “Gerasimenko Law needs to be killed,” the document states flatly. “Lobbying industry-wide underway.”

A redacted – and weaker – version of Gerasimenko’s bill was adopted in 2001. A BAT memo, dated February 2000, tallied the success in gutting the bill: in the end, it included no higher excise tax, no ad bans and no non-smoking rules.

Meanwhile, the industry took aim at the WHO-sponsored talks in Geneva. In a 2000 letter, First Deputy Health Minister Gennady Onishchenko alerted the deputy prime minister – Vladimir Shcherbak – that a top tobacco executive had been sent to the talks: “As per your earlier instruction,” Onishenko wrote, “L.Ya. Sinelnikov, member of the Board of Directors of Tabakprom association, was included in the working group that will be participating in drafting the second session of the Convention in Geneva.”

Sinelnikov, it turned out, was also the head of BAT-Russia, and was taking part in the WHO-sponsored working group as an expert of Russia’s Agriculture Ministry. Later unmasked by tobacco control activists, he was excluded from the group.

Powerful friends

The industry didn’t stop there. In 2004 Philip Morris, JTI Yelets (owned by Japan Tobacco International), and the home-grown Baltic Tobacco Factory formed a lobbying group: The Council for the Development of Tobacco Industry, now one of the most powerful industry associations in Moscow. The council is headed by Nadezhda Shkolkina, who takes the idea of a revolving door between business and government to a new level. In 2006, while heading the council, Shkolkina simultaneously became leader of the Agriculture Ministry’s Public Council, which oversees the tobacco industry. Yanin, of the Confederation of Consumer Associations, says that for years he has tried to persuade Russian authorities to prevent someone heading the nation’s most powerful tobacco organization from simultaneously regulating tobacco markets. Tobacco control activists have protested Shkolkina’s work, and in July of this year she left the Agriculture Ministry post, even though, on its website, she is still listed as the ministry’s Public Council chief.

Another powerful industry promoter is the Association of Tobacco Producers, Tabakprom, whose members include Imperial Tobacco-owned Balkan Star, BAT, and Donskoy Tabak. Tabakprom grew out of the old Association of Tobacco Producers, within the Soviet Agriculture Ministry’s Department of Tobacco and Food. Despite common aims, Tabakprom and the Council for the Development of the Tobacco Industry at times work in different arenas. The council unites tobacco companies that back a so-called “specified excise tax,” levied on every 1,000 cigarettes. This helps producers of more expensive tobacco products because the tax is fixed and doesn’t depend on the retail price. Members of Tabakprom, meanwhile, produce cheaper cigarettes, and thus support what’s called an ad valorem tax, based on the retail price. To satisfy both groups, Russian legislators for years maintained a complex combination of these taxes on cigarettes.

The industry can count on an array of powerful friends inside the government. Consider the background of Gennady Kulik, who headed the Agriculture Ministry from 1990 to 1991 and has since held other high-ranking posts in Russian politics. Before 1999, Kulik was a deputy prime minister with responsibility for agriculture and then became a deputy in the State Duma, taking turns as chairman of the Committee on Agriculture and deputy chairman of the Committee on Budget and Taxes. Near the end of 2002, Kulik stepped in to help the industry: According to federal laws adopted in 2001, cigarette packs must feature health warnings. But back then, distributors and producers were in no hurry to comply with the new rules. By the end of 2002, a huge surplus of non-compliant packs had piled up in warehouses. Kulik backed a successful industry request to allow the sale of the mislabeled packs.

In 2006 Kulik – along with Duma member Ivan Savvidi and brewing industry executive Airat Hairullin – initiated legislative discussion on the main tobacco bill, Technical Regulations on Tobacco Products. According to the official website of Tabakprom, the tobacco lobby’s own officials wrote the legislation. The Kulik-Tabakprom bill reflected terms considered acceptable to the industry, and, according to experts, was intended to cause a collision with WHO rules in Russia’s courts and legislature.

Russia signed onto the WHO tobacco control convention in April 2008, obliging it to adopt measures such as strong health warnings on packs and bans on industry ads, promotions, and sponsorships. But seven months later, the weaker Kulik-Tabakprom bill was adopted. The Duma then gave the industry 18 months to bring its businesses in line with the new legislation.

The new law calls for a warning, “Smoking Kills,” over a third of the front of cigarette packs, with another warning over half of the back. But unlike most countries that have adopted the WHO rules, the packs don’t include the more graphic pictograms warning smokers of the dangers.

Another important mismatch between the WHO and Duma rules: Russian law allows producers to use terms such as “light” on packs, which are prohibited by the WHO guidelines. (Scientists have found no evidence that “light” cigarettes offer any health benefits to smokers.)

The industry is exercising its influence beyond Russia. Moscow-based tobacco lobbyists are trying to spread Russian tobacco policies across the Eurasian Economic Community, established in 2001 to unite the Russian Federation, Kazakhstan, Belarus, Kyrgyzstan, Tajikistan, and Uzbekistan. Rules of the community oblige parties to adopt common standards for various products, including tobacco. The multinational group gave Russia the lead in writing tobacco regulations, but the process has allegedly been hijacked by the industry, according to some members. On April 6, 2010, Dmitry Yanin and Natalya Kostenko from Russia, and Jamilya Sadykhova from Kazakhstan complained that most of the working group was in fact filled with tobacco lobbyists. According to the working group’s roster, Sergey Fillipov of Tabakprom and Eduard Vorontsov of the Council for Development of the Tobacco Industry were listed as Russian Agriculture Ministry experts; two other “experts” – Ekaterina Kuznetsova, and Vladimir Vasiliev – were actually executives of Philip Morris in Russia. A Philip Morris in Russia spokesman, Sergey Chernenko, acknowledged that company officials took part in the working group. “It is a natural democratic approach to legislation,” Chernenko explained.

Consumer advocate Yanin says that in the last meeting of the working group, in early August 2010, Moscow-based Imperial Tobacco executive Alexander Alexandrov also was present. He was listed as a representative of the Kyrgyzstan delegation.

“I asked him, ‘Who is the president of Kyrgyzstan?’” Yanin recalled. “He couldn’t answer.”

The protests appear to have had an impact: Kazakhstan, Belarus, and Tajikistan are pushing back against some of the Russian rules. It’s unclear who will prevail. “We’ll understand only in 2011,” says Yanin, “when presidents of the republics are going to sign a final agreement.”

Lobbying the finance ministry

Tobacco control experts worldwide broadly agree that raising excise taxes on tobacco products has proven effective in reducing the number of smokers. In Russia, however, that measure has faced a difficult challenge.

Russia’s excise tax on tobacco is among the lowest in the world. In 2009 the amount of excise tax on a pack of non-filter tip cigarettes was 1.86 rubles, and 3.54 rubles for filter-tipped brands. In 2010, Russia’s Finance Ministry called for a 36 percent hike in the tax, but the amount is still minuscule compared to nearby Europe. In the EU, the minimum excise tax is 1.28 euros, or about 53 rubles – 15 times that of Russia’s filter cigarettes.

Raising the excise tax in Russia to European levels could add 300 billion rubles a year to the country’s treasury, according to a year 2009 study by the watchdog Public Chamber.

The Public Chamber report also found that during the last 10 years cigarettes had actually become more affordable, when prices are adjusted for inflation. Between 1998 and 2008, the median price on Russian filter cigarettes went from 6.18 rubles to 11.87 rubles. But in real buying power, the actual price on cigarettes fell about 40 percent from 2000 through 2007.

Tobacco lobbyists in Moscow have for years taken aim at the Russian Finance Ministry. According to R.J. Reynolds internal documents, in 1997 the company financed a trip to Duke University in the United States for high-ranking officials from former Soviet republics for a conference on tax reform. One of the guests was Sergey Shatalov, then (and today) Russia’s deputy finance minister responsible for excise-tax policy.

Under Shatalov, the Finance Ministry has in most cases resisted higher taxes on the industry, according to Duma member Vladimir Medinsky. “We tried to adopt a law with a three-fold rise in the excise tax, but the Ministry of Finance was against it,” he said. “They wrote that such a measure, according to their information, would not reduce the number of smokers. I don’t understand, are they a social agency or the Ministry of Health? They have only one aim – to fund the budget – and nobody wants to hear their political commentaries.”

Shatalov defended Russia’s low excise taxes on tobacco. “You must remember that purchasing capacity of population in Russia and in Western countries is different,” he told ICIJ. “Moreover, a sharp boost of prices will lead to fast growth in smuggling.” This is why the Finance Ministry, he added, has chosen soft and gradual hikes in excise taxes, instead of tax “shock therapy.”

Tobacco companies are working behind-the-scenes to influence the economic debate over tobacco control. Consider the case of The Institute for the Economy in Transition (IET), long headed by the late former prime minister Yegor Gaidar. For many years BAT and Philip Morris sponsored IET research projects, mostly studies on tobacco regulation and tax policy, according to the institute’s website. Elena Lopatina, an IET spokeswoman, confirmed the institute has worked with the tobacco industry for many years, but stressed that tobacco companies decide for themselves how to use figures and conclusions made by IET.

Ilya Trounin, a senior IET researcher, participated in several tobacco-funded projects. Trounin coordinated a 2003 BAT-funded project called Analysis of Current State Excise Taxation of Tobacco Products and the Prospects for its Reform, according to the IET website. Later, under Trounin, IET published Governmental Policy in Market Regulation of Tobacco Products and Excise Taxation. And in 2006, he served as an executive in a Philip Morris-sponsored analysis of the impact of excise taxes on tobacco retail prices. That same year, Trounin was appointed head of the Finance Ministry’s Department on Taxes, Excises and Customs Tariffs. That department regulates excise taxes, and in 2007 wrote the rules on maximum retail prices on cigarettes.

Philip Morris's Chernenko, told ICIJ that the institute’s research helps the company better understand the investment climate and the role of excise taxes in the general tax policy of the government. Representatives of BAT-Russia called their use of IET research “a usual practice for any business” and that they used its work to help in company planning.

Advertising: Finding loopholes

An important obligation for countries that adopt WHO tobacco standards are bans on industry advertising, promotions, and sponsorships. Here, too, the industry has found Russia good for business. Russian tobacco companies spend anywhere from 10 to 12 percent of their profits on promotional campaigns, according to GR Research. In 2004, tobacco industry advertising totaled some $60 million in Russia, the Public Chamber found.

Tobacco advertising is regulated by a 2006 Russian law, which prohibits ads on TV and radio, in print publications that children might read, on the front and last pages of newspapers and magazines, and on billboards and public transportation vehicles. But the restrictions don’t mention walls and tunnels of subway systems, airports and transportation terminals. Today Moscow’s subway system, with its seven million daily passengers, is filled with tobacco ads.

Despite the loophole, the 2006 law is considered by experts as the only serious restriction on the industry adopted by Russian legislators in the last 10 years. Duma member Medinsky, an author of the law, said that before its adoption he met challenges from lobbyists, but they employed a soft-sell approach. “You must understand that lobbyists don’t come to deputies with bags full of money,” he explained. “Everything is done on the level of PR and news agencies, when somebody says or writes something. In our case everything was more or less civilized, without mud.”

Even Medinsky, who is seen as an ally by tobacco control advocates, has ties to the industry. Before entering public office – and until 2008 – he headed the Russian Association on Public Relations (RAPR). Among its members are BAT, Philip Morris, and Donskoy Tabak, according to the group’s website. In 2006, RAPR received $22,500 from Philip Morris, according to the company’s list of charitable donations. And consumer advocate Yanin alleges that Medinsky’s own PR company – Corporation Ya – undertook campaigns for the “West” tobacco brand.

Medinsky said he is unaware of any donations from Philip Morris, and that while RAPR president he had no involvement in association finances. He noted that such a contribution from Philip Morris would not be unusual: every member of the association pays a fee to participate. “Maybe it was a donation on a special project,” he said. As for the involvement of his Corporation Ya with the industry, Medinsky says that it was limited to promoting a Formula-1 car-racing team. “Of course it didn’t affect my work in the State Duma and my anti-tobacco initiatives.”

Strategic Donations

Another important channel for tobacco industry influence is corporate sponsorship and participation in social activities. In 2006, for example, Philip Morris donated $52,000 to cultural programs run by a foundation called “Northern Crown.” The president of that fund is Irina Tintyakovka, wife of Russian finance minister Alexey Kudrin, the official who ultimately decides the fate of excise taxes on tobacco. Asked to comment, a spokesperson for the foundation referred ICIJ to a link listing programs sponsored by Philip Morris.

According to the site, tobacco money was spent on computers, social centers, and activities such as hair-styling classes for school children. The spokesperson referred questions about the donation to the tobacco company. Sergey Chernenko from Philip Morris responded that it is socially important to support such groups and that the “company doesn’t think about any benefits.”

The donations, the lobbying, the revolving door between tobacco companies and agencies that oversee them – all this has given the tobacco industry a formidable hold in one of its biggest markets. Summing up the power of Russian tobacco lobbyists, Duma member Medinsky held up a list of 14 drafts of anti-tobacco bills which, for various reasons, have not been considered by legislators. “The last example (just) happened,” said Medinsky, a member of the pro-government United Russia party. “I tried to initiate a political discussion of the ban on smoking in public places. The reaction of the party was negative.”

Medinsky said some legislators called him afterward and said they’d spoken with tobacco lobbyists. There was a deal with the central government, they told him, that no tobacco control measures would be adopted before 2012. “If you want,” Medinsky said, “you can take it as a conspiracy theory, but …”

On September 23 this year, on the Russian government’s official website, a statement signed by Prime Minister Vladimir Putin outlined the state policy on reducing smoking levels: tobacco advertising will be totally prohibited in 2012; by 2015, excise taxes can be raised up to 10 times the current levels.

Given the industry’s influence over Moscow, however, tobacco control advocates remain skeptical. “If the United Russia party, despite its financial interest, listens to its leader Prime Minister Putin and enacts the necessary laws, then something may change,” said consumer activist Yanin. “But until now everything has been the opposite. To be honest, I remain a pessimist.”

Roman Anin is an investigative reporter for Novaya Gazeta in Moscow. Roman Shleynov contributed to this report.