Russia's recession is so bad it's changing people's smoking habits

Russia's economy has been hit hard in the past year.

The drop in oil prices and sanctions imposed by the west have put the nation into an economic tailspin. GDP growth is negative and trade is on the decline.

It's even gotten so bad that it's started to impact one of Russians' favorite activities: smoking.

According to the Wall Street Journal, some 44 million Russians were smokers in 2013, around 40% of the population. For Phillip Morris International, Russia was the second-largest cigarette market outside of China, accounting for 9% of the tobaccomaker's profits.

"The decline in cigarette industry volume accelerated to 4.2% in the quarter resulting in a June year-to-date decrease of 6.5%. We now expect a full year decline towards the lower end of our 8% to 10% forecast range," said Jacek Olczak, CFO of Phillip Morris, in an earnings call last week.

Moscow, with support from President Vladimir Putin, decided to attempt to curb the activity in 2014 by passing stringent anti-smoking laws. Citizens can no longer smoke in public places or buy cigarettes from street stalls. This combination of tighter regulation leading to higher prices and a weaker economy is seriously hurting the cigarette markets, with a double digit drop in smoking last year and another serious decline coming.

While the total volume may signify the tighter regulatory situation, there is another sign that the economy is impacting the tobacco market. Russians are buying cheaper cigarettes.

"The economic environment remains fragile and we are witnessing some signs of down-tradings to the low price segment," said Olczak. Down-trading is the practice of deciding to switch from an expensive cigarette to a cheaper one. In Phillip Morris' quarterly report they noted a the biggest brand growth in Russia is in their low-price cigarette, Bond Street. 

"I mean, the super low-price segments are losing, the low-price is gaining, and the premium is slightly losing. So yes you have a down-trading," said Olczak, citing "micro headwinds" multiple times as the reasons for the down-trading. There was an uptick in sales of the premium Parliament brand, but that was offset by a drop in sales of their mid-level Marlboro brand.

Filings from other large tobacco sellers, such as the UK-based companies Imperial Tobacco and British American Tobacco, also noted the difficult conditions in Russia.

It seems that the economic downturn in Russia has made its impact felt all the way from the oilfields of Siberia to the cigarette cartons in Moscow.

Join the conversation about this story »