Unlock Editor’s Digest for free
Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
Japan Tobacco’s chief executive said the company will maintain its lucrative Russian business to please investors after it reshapes its supply chains to comply with sanctions.
The cigarette maker does some business through Turkey and has moved key staff to Hong Kong as relations with Russia have come under strain following Ukraine’s invasion of Ukraine, Masamichi Terabatake told the Financial Times.
The company, 33 percent owned by the Japanese state, had initially said it would consider selling its Russian business after the outbreak of war in 2022. It decided to continue all investment and marketing activities in Russia, but suspended them. The land accounted for about 20 percent of the company’s total profit, Terabatake said.
Investors are worried about a possible decline in profits, he said, adding that he would be breaching his fiduciary duty if he were to close a company that he could continue to run at a profit.
“For example, if I say we are going out of business, investors may face losses. In an emergency, there is even a risk of a shareholder lawsuit if we give up a business that we can continue,” he said.
With more than 4,000 employees and four factories, JT remains one of the largest foreign companies in Russia to date. The company’s total profit was 482 billion yen ($3 billion) in 2023.
The EU, Japan, the USA and other Western countries have imposed far-reaching sanctions against Russia to curb the flow of money and goods. Terabatake said at JT headquarters in Tokyo that the company had introduced a new compliance structure in its Russian unit and supply chain, including positioning employees in Hong Kong to monitor procurement routes and inventory levels.
“When it comes to sanctions, we have to pay attention to several things – what kind of people are allowed to be involved in decision-making or not, and excluding people from unfriendly countries for the Russian administration.” . to impose sanctions on people who have nothing to do with things in places like Hong Kong,” Terabatake said. “But other than that everything goes as usual.”
Japan Tobacco entered Russia – the world’s fourth largest tobacco market – in 1999 and has been the “undisputed leader in the Russian tobacco market” since 2007, according to the company’s website. It sells cigarettes from international brands such as Winston and Camel, as well as domestic cigarettes such as Russian Style and Kiss.
“We are making various efforts to ensure some kind of protective fence, for example by sending goods from Turkey, since there are countries that cannot trade with Russia,” he said, adding that the changes will take about a year to introduce took.
Many companies and investors have left Russia since the sanctions were imposed – often posting large losses and transferring their assets to investors with close ties to the Kremlin – but Japan Tobacco is not the only one maintaining its operations in the country.
In addition to other companies and major European banks such as Austria’s Raiffeisen and Italy’s UniCredit, rival Philip Morris has also maintained its business in Russia. The Financial Times recently reported that Raiffeisen had placed dozens of advertisements for Russian-based positions, suggesting ambitious expansion plans.
Japan has kept pace with Western nations in imposing sanctions on Russia, but has not backed away from major energy projects due to its dependence on Russian energy.
Japan Tobacco had faced scrutiny from investors over the potential impact on the company’s reputation of continuing to trade in Russia, but Terabatake said those concerns had eased.
“Admittedly there was initially a reputational issue in terms of continuing our business, but recently that has become less of an issue,” he said. “It’s rarer for people to want to know why JT continues in business [in Russia].”
Investors have yet to hear back from the company about how it plans to get those profits out of the country and back to shareholders. So far, the Russian company has not paid any dividend from its 2022 and 2023 financial results.
Although he insisted that it was “business as usual” in Russia, Terabatake said he remained prepared to spin off or sell the unit “in the worst case scenario.” But he did not believe this would be necessary under the current sanctions regime.