The full-scale Russian invasion of Ukraine has created unprecedented challenges throughout the Ukrainian business environment. What have been the biggest issues encountered by JTI?
The full-scale war in Ukraine has had an impact on the entire business community in terms of reduced production, logistical problems, labor shortages, rising energy and raw material costs, and complex export conditions. However, for the Ukrainian tobacco market in particular, the situation has been further complicated by the unprecedented growth of the illegal tobacco market. In 2023, tobacco product manufacturing decreased in Ukraine by 46% compared to 2021 figures. A significant share of this reduction was due to declining exports.
What impact has the invasion had on your business performance and contributions to the Ukrainian budget?
Prior to the full-scale invasion, we focused on both the domestic Ukrainian market and on manufacturing products for export to 22 countries including Japan, Mexico, and Saudi Arabia. Exports alone brought us about USD 120 million in foreign exchange earnings per year.
We are currently working to restore elements of the export business that were lost following the full-scale invasion. This process is moving quite slowly due to logistical difficulties. It is also challenging to secure new orders due to the unclear tax horizon and the constantly changing regulatory environment in Ukraine. Despite all the difficulties we have faced in recent years, JTI Ukraine remains one of the top taxpayers in Ukraine. In 2023, we paid about UAH 25 billion to the Ukrainian budget.
In addition to the many practical challenges created by the ongoing war, what are the key regulatory and legislative obstacles to proceeding with your planned investments?
The unpredictability of fiscal policy is one factor, with the excise calendar now under review. The government’s draft law is fine, but there are a lot of concerning amendments. Potential increases in VAT and payroll taxes are adding to this sense of uncertainty. Legitimate businesses understand the overall necessity to support the state budget and are ready to continue doing so, but we do think it is reasonable to call on the authorities to ensure a level playing field with regard to gray zone or illegal businesses that do not pay anything. This is particularly relevant in our industry, where the amount of illegal trade is high and costs the budget USD 700 million on an annual basis.
It may seem counter-intuitive, but the number of regulations adopted during wartime has actually increased. Two fundamental laws governing the work of the tobacco industry have been comprehensively reviewed, requiring changes in packaging and marketing activities. As Ukraine pursues harmonization with EU regulations, it seems that the tobacco industry has been chosen to play a pioneering role in implementing everything upfront, sometimes even beyond what is currently in place inside the EU itself.
It is concerning to note that due to the adopt of vague regulations, our industry is now faced with the issue of regulator discretion. This may lead to different interpretations of adopted norms, creating long-running legal procedures that can serve as an unnecessary diversion of resources for both the state and businesses.
Another major issue is illegal trade in tobacco products. While we recognize the work of the Ukrainian government and law enforcement agencies to tackle this illegal trade, current efforts lack consistency. Failure to address the root cause of the problem and shut down well-known illegal manufacturers cannot be justified by claiming an absence of the necessary legislative tools. Our position is clear: all the required legislation to tackle this issue is in place. All that is required is the political will to ensure proper enforcement.
These issues create additional artificial obstacles for businesses looking to operate in what are already extremely challenging wartime conditions. This does little to improve the business climate and only makes it harder to defend investment initiatives in Ukraine.
You have ambitious plans to invest $60 million in Ukraine in the period up to 2026. What will be the main focus on this investment?
We build our business by carefully analyzing customer demands and satisfying them. Many consumers are currently looking for alternatives to traditional smoking, with Ukraine ranked sixth in the world in terms of sales of heated tobacco. Ukrainians like these products because they are technologically advanced and do not produce smoke. In response to this demand, we are expanding our product line in order to give our consumers greater choice. Over the next two years, JTI plans to invest about USD 60 million in Ukraine into the Ploom X Advanced product, a new brand in the heated tobacco category. We are not the first in this category, but we see this as a competitive advantage. JTI has had enough time to perfect the product based on consumer needs. We have created an ergonomic device for heating tobacco. It has a powerful battery, advanced heating technology, and is easy to use.
In light of the current wartime conditions, what has convinced JTI to invest in the Ukrainian market?
JTI’s investment strategy remains far-sighted. This year, we celebrate the 25th anniversary of the company’s presence in Ukraine. During that time, JTI has invested more than USD 400 million in the Ukrainian economy. The company continues to do so, even in the current challenging period.
Why does JTI still invest despite the war? It’s simple. Firstly, we understand that investments during wartime are a contribution to Ukraine’s economy, and supporting the economy is one of the most important tasks of any responsible business. Secondly, we sincerely believe in the success of our new product.
How is JTI engaging with local Ukrainian communities and helping people cope with today’s wartime realities?
We have always supported local communities and sought to make them more inclusive. We continue to support the elderly, internally displaced persons, people with disabilities, and those in need of rehabilitation services as a result of hostilities. We allocate hundreds of millions of hryvnias for such projects, with special attention to veteran reintegration projects.
What is your message to other international companies that may be exploring investment opportunities in Ukraine?
Any crisis brings not only challenges but also opportunities. Ukrainian businesses cannot afford to grow tired as we strengthen the economic front of the war effort. On the contrary, we must remain reliable partners for the state in these dark times. So my message is to be brave in your decisions and persistent in your efforts to convince colleagues and company headquarters when it comes to investments in Ukraine.