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The development strategy of international enterprises in the conditions of crisis (case study: the tobacco industry)
Crisis in Russia and international tobacco enterprises. International tobacco companies in the Russian market. Рroper suggestions with the purpose to adapt them to the Russian tobacco market in the new circumstances to maintain the level of profit.
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The development strategy of international enterprises in the conditions of crisis (case study: the tobacco industry)
1. Crisis in Russia and international tobacco enterprises
1.1 General characteristics of the crisis
1.2 International tobacco companies in the Russian market
2. Recommendations for the international tobacco business development
Today international business environment is unstable and changeable. It depends on the great changes in modern global economy and politics. The reason for this change is the economic crisis that erupted in connection with the entered Western countries ' sanctions against Russia on the background of the Russian-Ukrainian conflict. Western sanctions and the response of Russia have led to an economic loss on both sides, and create additional difficulties for international business conducting. The tobacco industry is also influenced by the situation. It is useful to consider the example of the tobacco industry in regard to the fact that more then 92% of the tobacco companies in Russia belong to international business and operate entirely on foreign raw materials.
The main objective of the present essay is to make some proper suggestions with the purpose to adapt them to the Russian tobacco market in the new circumstances to maintain the level of profit and to prevent losses. We are going:
- to analyse the current situation: the features of the modern crisis in terms of the impact on the international companies activities, including the sanctions and the exchange rate regimes;
- to consider the situation in the Russian tobacco market in order to identify the main problems and risks and to give the recommendations.
1. Crisis in Russia and international tobacco enterprises
1.1 General characteristics of t he crisis
From the point of view of Western countries, in early 2014, Russia violated international law by annexing Crimea and allegedly fomenting separatist uprisings in the eastern Ukrainian region of Donbass. Under this pretext, with the aim to influence public opinion of the Russian population the European Union, the United States and several other Western countries adopted sanctions targeting the Russian energy, defence and financial sectors and several individuals. (Russell M., 2016, p.1) At the moment, the economic sanctions are extended until July 2016, they are imposed by the USA, European Union, Australia, Canada and Japan. (Western Sanctions Against Russia, 2015)
In turn, Russia imposed retaliatory sanctions against primarily the EU, which is aimed at limiting the supply of agricultural products, automobiles, and other goods. The damage to EU and Russia from sanctions is roughly comparable. The Russian Federation lost from them 75 billion Euro or 4,5 % of GDP in 2015 and presumably will lose 25 billion Euro or 1,5 % of GDP in 2016. The EU lost 50 billion Euro or 0,4 % of GDP in 2015 and presumably will lose 40 billion Euro or 0,3 % of GDP in 2016. Thus, the EU will lose 90 billion Euro in two years and the RF - 100 billion Euro. (Russell M., 2016, p.18)
The exchange rate regime is one of the main factors influencing the economic situation in the country. In the international business such components of great importance as buying capacity and pricing policy depend on it.
The exchange rates of the countries whose tobacco companies work in the Russian Federation are rather stable and are subject to minor fluctuations only. But in Russia the situation is much more difficult. In connection with the crisis the Russian ruble has lost its stability. Since the beginning of 2014 there were several drops in the exchange rate of the ruble. In January 2014 one US dollar was equal to 32,66 rubles and one Euro - to 45,06 rubles. And 16 December 2014 one US dollar cost more then 80 rubles and one Euro - 100 rubles. (Dynamics of the ruble against the dollar and the Euro in 2014-2015) Now the exchange rate is still unstable. At 12 May 2016 the picture is the following:
So the national currency significantly lowed in value on the world money market. This has led to higher prices and the reduced purchasing power of Russian consumers. Because of these events the international companies face a risk of decrease in profit due to the reduction of sales volume.
1.2 International tobacco companies in the Russian market
The tobacco industry of the Russian Federation provides the budget more than 250 billion rubles every year. In 2015 annual sales of tobacco products amounted to 355 billion pieces with the total value of 750 billion rubles.
More then 92% of the tobacco companies belong to international business and operate entirely on foreign raw materials. There are four transnational companies, which work successfully at the Russian tobacco market: Philip Morris International, British American Tobacco, Japan Tobacco International and Imperia Tobacco.
The leading position belongs to Japan Tobacco International, which has two factories in Russia: “Petro” in St. Petersburg and “Ligget-Dukat” in Moscow. The company specializes in the production of cigarettes of low segment. The second place on volume of manufacture of cigarettes is Philip Morris International, which produces more than 50 types of cigarette brands. (Drobyshevskaya L.N. 2015)
Russian tobacco market attracts multinational companies with a large consumer demand. On the one hand the demand depends on the high level of stress among the population and on the other hand it depends on the loyal public and government opinion. In recent years the attempts to form a more negative attitude to smoking were made. But the population still shows a high smoking tolerance. These conditions form an enabling environment for trade in tobacco products.
Because of the sanctions last years the Russian government actively promotes the idea of strengthening national production and the weakening of foreign business in the country. In this aspect the situation in the tobacco market is relatively stable, but hard predictable. The crisis also provoke a sharp increase in the rate of excise duties on tobacco products. In 2016 the excise cost 713 rubles for 1000 pieces, and in 2016 - 1600 rubles for 1000 pieces. Of course it greatly raised the prices of tobacco products. (Main directions of tax policy of the Russian Federation for 2015 and on planning period 2016 and 2017)
Since only a small portion of the Russian tobacco market is the national one, Russian Federation is actively promoting a policy of a healthy lifestyle, which also undermines the activities of international companies. There are new restrictions and prohibitions for smokers, which make people to reduce the number of cigarettes smoked per day.
2. Recommendations for the international tobacco business development
Operating in Russia international companies have to adapt to changing circumstances to maintain their positions. They should consider external and internal political risks, as well as such economic factors as the purchasing power of the population. As for the international tobacco companies, we can highlight three main factors that should be taken into account:
- the reduction in purchasing power due to the drops in the exchange rate of the ruble and reduction of incomes;
- the increase in production costs due to the increase in the cost of the excise tax;
- the reducing of tobacco products consumption in connection with tobacco control policies.
In accordance with these factors can lead to the following recommendations for the development of international tobacco companies in Russia.
According to the latest researches Russian people still buy cigarettes in large quantities. But most of them try to buy a tobacco product as cheap as possible. In 2015 it is turned out that the consumers begin to buy more of the adulterated tobacco product and less of the branded ones. Thus, to minimize the losses the international tobacco companies should implement measures to reduce prices. This year they should focus on the production of economy class and cut production of the de luxe brands. May be they should develop a new type of goods with minimum price. For example, it can be mini and maxi packs with different numbers of cigarettes, which they will position as more favorable for the buyers. But at the same time the companies should continue to produce goods in different price categories to keep customers with different tastes and incomes.
The companies should include in the number of their goods electronic cigarettes. They are safe for surrounding people and will fit in with the anti-smoking policy. In Russia these cigarettes are not included in the list of tobacco products. So they may be used in public places. Also in this part of the sales the companies will avoid the problems of expensive excise tax.
In this essay there were outlined the main problems which an international company faces to working at the Russian tobacco market. With the aim to allow these companies to function more effectively in the new economic and political conditions, we made the following suggestions.
To minimize the losses the enterprises should implement measures to reduce prices. This year they should focus on the production of economy class and cut production of the de luxe brands.
To deal with the anti-smoking policy they should include in the number of our goods electronic cigarettes. They may be used in public places and in this part of the sales they will avoid the problems of expensive excise tax.
1. Dynamics of the ruble against the dollar and the Euro in 2014-2015. Retrieved May 12, 2016 from Internet site: http://tass.ru/info/1889272.
2. Drobyshevskaya L.N. (2015) Ways to improve the activity of the enterprises of the tobacco industry. Journal of Science and education. (pp.32-54).
3. Main directions of tax policy of the Russian Federation for 2015 and on planning period 2016 and 2017. Retrieved May 06, 2016 from Internet site: http://yandex.ru/clck/jsredir?from=yandex.ru.
4. Russell M. (2016). Sanctions over Ukraine Impact on Russian. Retrieved May 12, 2016 from Internet site: http://www.europarl.europa.eu/RegData/etudes/BRIE/2016/579084/EPRS_BRI(2016)579084_EN.pdf.
5. Western Sanctions Against Russia (2015). Retrieved May 12, 2016 from Internet site: http://sputniknews.com/politics/20150622/1023679889.html.
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