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. Last Updated: 07/27/2016

Tobacco Giant BAT Bets on 'New' Yava

At the Yava Tabak Factory near Leningradsky Prospekt, $50 million from British-American Tobacco has gutted, restored, repainted and furnished part of the decades-old brick structure with a Western-style office and new factory-floor machinery and equipment.

It also likely helped pay for the champagne-toasted and balloon-strewn party Thursday where officials from both companies launched the "new" Yava brand of cigarettes.

And there's still $50 million worth of work left to be done. At Yava, old production lines still run alongside new ones, while British-American Tobacco has set itself the ambitious goal of doubling production during the next three years at both its Moscow plant and one in Saratov, in southern Russia, to a total of 30 billion cigarettes annually.

BAT Industries says Russia's cigarette market, estimated at 225 billion to 250 billion cigarettes a year, is the fourth largest in the world. BAT has placed a long-term bet on direct, domestic investment in Russia, having already spent about $200 million of a planned $450 million in the Commonwealth of Independent States, part of its total $800 million East European capital-investment project.

BAT also imports international brand cigarettes including Lucky Strike and Kent into the CIS, but the company's long-range plans call for domestic production and export of international brands.

BAT Industries officials concede, however, that the company's CIS tobacco factories likely won't turn a profit for years.

"The cigarette business right now here is not very profitable, but we're here for the long term, and in the years to come we'll make the necessary profits," said BAT's managing director, Ulrich Herter, at a news conference for the Yava launch.

Weighed down by capital and reinvestment costs, "The bottom line is that it will be 10 years before the CIS begins to mean something to BAT [profits]," group finance director David Allvey said.

BAT's strategy is to ally with a local partner, then resuscitate and re-launch well-known brands at an affordable price. Currently BAT holds about a 10 percent share of the Russian market, Herter said.

In 1994, BAT bought stakes in the Saratov and Yava tobacco factories through Russia's privatization program and became a major investor in the local industry.

By the end of 1997, it will have spent about $100 million modernizing Yava and $50 million on Saratov. BAT is also pouring large sums into Uzbekistan to produce 25 billion Saraton, Khan and other brand-name cigarettes there annually in the next five years. It also has launched a similar investment program in Ukraine under the Otoman and Kozak brands.

The company uses tobacco from Uzbekistan, Moldova and Kyrgyzstan, "and that accounts for about 35 percent to 40 percent of our tobacco blend," said Leonid Sinelnikov, general director of the Yava Tabak joint-stock company. The rest comes from India, Bulgaria and Greece, he said.

"That may sound like most of the leaf is imported. If it was available, we'd use Russian tobacco, but it's simply just not grown yet," Herter said, adding that BAT hopes to increase the number of its Russian suppliers.

Yava is a Russian brand name introduced in the 1920s, and the Yava factory also made popular Oktyabrskaya cigarettes in the 1940s and 1950s, Sputnik in the 1960s, as well as other brands.

Available this week at kiosks around the city, repackaged Yava cigarettes are being marketed as an "affordable" brand at 900 rubles (18 cents) for a soft pack and 1,000 rubles for a hard pack, up slightly from the old prices of 750 and 900 rubles, respectively.

BAT's big push into the CIS likely was influenced by the same pressures facing most global tobacco producers, particularly flagging demand in increasingly health-conscious Western nations. Demand in Europe, for instance, is slipping 2 percent to 3 percent a year, Herter said.

But BAT is not just a tobacco company. In 1995, the diversified multinational posted ?2.38 billion (about $3.7 billion) in pre-tax profits, with ?1.1 billion generated by its insurance business. BAT said it is monitoring the Russian market and may make consumer financial services investments here at some point in the future.

Until 1991, Yava enjoyed a long period as one of the most prestigious and affordable cigarette brands in Russia, especially after the Soviet government in 1996 decided to upgrade the factory to produce filter cigarettes with imported British equipment.

But with the onset of economic reforms, the Russian market was flooded with heavily advertised international imports, and the Yava name was swamped by foreign brands.