Azerbaijan reorients tobacco production to foreign market Analysis by Caliber.Az

After a long period of reliance on cigarettes and other tobacco products imports, Azerbaijan has undergone a true industrial revolution over the past five years, multiplying cigarette production and exports. The year 2022 became a landmark in this regard: according to the latest data, last year the export of cigarettes increased 2.7 times, while imports, on the contrary, decreased more than three times. For this reason, Azerbaijan is approaching the model of the developed countries of the world in terms of the structure of the tobacco market: consistent anti-nicotine propaganda is being conducted, excise taxes are increasing, imports are being minimised, and local enterprises for the cultivation of tobacco raw materials and the production of cigarettes are gradually reorienting to external supplies.

The most massive campaign against tobacco smoking in history began at the beginning of the new century at the instigation of the UN, and on February 27, 2005, the World Health Organization (WHO) corresponding framework convention, adopted by 192 countries of the world, entered into force. The provisions of this convention were vigorously implemented in North America, the European Union, Japan, and a few other countries around the world. Smoking bans were implemented in public places, industry excise taxes on production and trade were sharply increased, and prices for cigarettes and other tobacco products increased many times. The design of cigarette packages has changed everywhere, with approximately half of the area now occupied by warnings about the dangers of smoking. Advertising of tobacco products in printed, electronic, and audiovisual sources of information, as well as on street banners, has been banned or severely restricted in many countries.

All of these measures have had a significant impact on the tobacco market of the developed world countries, where smoking has decreased noticeably: the best indicators are in the United States, Canada, Northern Europe, and New Zealand occupies the first position, with less than 8 per cent of adults smoking today. From 2023, it introduces a complete ban on the purchase of cigarettes and other tobacco products for citizens born in 2008. In 2023, the European Commission intends to double (to 3.6 euros) the minimum excise tax on a pack of cigarettes in the EU, which is primarily aimed at increasing the cost of smoking in Eastern and Southern Europe and, importantly, will bring the EU an additional 9.3 billion euros of excise duties. Overall, 60 countries are on track to achieve the WHO global goal of reducing tobacco consumption by 30 per cent between 2010 and 2025. The worst smoking situation still persists in China and Southeast Asia, the Pacific region, Pakistan and India, as well as Southern Europe and a number of CIS countries.

Notably, all these measures had a downward effect on the global tobacco market, significantly reducing production volumes. At the same time, anti-nicotine propaganda has resulted in a qualitative diversification of production and supply chains, in particular, the process of monopolisation of the global market by multinational companies has intensified even more, and the declining sales of tobacco products in rich countries are now compensated by increasing supplies to the markets of developing countries. Over the past three decades, the global tobacco market has been under the undivided control of such global companies as British American Tobacco, Philip Morris International (PMI), Imperial Tobacco, Japan Tobacco and CNTC, which account for about 70 per cent of global production. These and a number of other leading manufacturers not only control global production and sales but also very strictly regulate the export activities of subcontractor factories, cutting off third-party manufacturers to maintain the necessary sales figures and high profitability of the industry.

In particular, traditional producers in the Balkan countries and post-Soviet states, who found themselves under the powerful pressure of multinational companies in the 90s, mostly went bankrupt and today act as suppliers of raw materials and subcontractors of tobacco giants. Similar processes have been observed in Azerbaijan, where the tobacco and cigarette production sector has experienced a long period of stagnation in previous decades. The local production, which has narrowed to a minimum, was mainly represented by the tobacco factory of Eygoreap Tobacco-Baku joint-stock company located in Baku, mainly focused on the licensed production of cigarettes in the budget segment. Due to the insignificance of domestic demand and a sharp decline in exports in Azerbaijan, the areas allocated for the cultivation of tobacco leaves decreased correspondingly every year. In fact, there was a paradoxical situation when, having ideal climatic conditions for growing tobacco raw materials, our country was forced to spend tens of millions of dollars annually on the import of cigarettes and other tobacco products. So, just six years ago, the share of imported tobacco products in the domestic market of the republic was almost 90 per cent.

The situation began to change in 2017 when Azerbaijan adopted a state program for the development of tobacco farming and started work on increasing tobacco plantations and growing new varieties. The number of districts of the republic where tobacco was grown increased from 3 to 13, where tobacco drying points were created and hundreds of new drying chambers were installed. At the same time, the country has increased the area for more expensive and demanded tobacco varieties on the world market, including the famous American variety Virginia. Foreign investments, in particular from Japan, began to flow into the domestic tobacco industry. As a result, in recent years, Azerbaijani tobacco Virginia has been exported to Russia, Bulgaria, Belarus, and supplies to Kazakhstan, Poland, and China are being established.

The rise of the raw material base has helped the dynamic growth of cigarette production in the republic, including at the Tabaterra tobacco factory commissioned in November 2019 in the Sumgayit Chemical Industrial Park. Built using British, German and Italian technologies, the factory at its peak capacity is designed for the annual production of 11 billion pieces of filtered cigarettes and other tobacco products of a dozen world brands.

On the other hand, in order to combat smoking and protect local producers, starting in 2018, customs excise taxes on tobacco imports were consistently increased in the country, and this process continued in the subsequent period. Thus, under Azerbaijani President Ilham Aliyev's decree issued in February 2023 "On strengthening state control in the field of import and production of tobacco products and alcoholic beverages", a licensing system for the production and import of tobacco products will be applied, and the tobacco industry will mainly focus on the use of local raw materials, measures against law violators (smuggling and counterfeit products), as well as a gradual increase in excise rates is planned.