Buying Eastern Europe: The Tobacco Industry Takeover

Part 1: How Big Tobacco bought Eastern Europe with sex, smuggling, and cheap cigarettes.

Eastern Europe’s most exclusive teen dance parties are shrouded in an air of almost Masonic secrecy. Or so I learn when I call up the national headquarters of the company that organizes and sponsors the bizarre events that at least one partygoer described as “life-changing”.

As I dial the number to the national office, I can’t help but feel a little excited. I’m about to talk with a real life representative of a company that some people compare to Satan.

A young woman answers the phone and says the company’s name. It sounds like the Dick Cheney of corporate personhood. I briefly explain why I’m calling and ask if I can be added to an event mailing list.

The anxious silence on the other end of the line tells me I’ve asked a taboo question. I try to ease her concerns by explaining that I’ve heard the company’s parties are “the best”. She blurts out, “Well our parties are the best”. Then she pauses. “Wait a minute,” she says.

She has her hand over the receiver so I can’t make out the words, but I can tell the young woman is arguing with a female colleague. I feel bad. When she returns, she’s prepared with an entirely different response. “We don’t do any events,” she says. Now I am the one who’s been caught off guard, and I ask her how this is even possible. I’ve seen it on the internet — party pictures, everything. Her answer is more ambiguous this time around: “There will be no more events.”

Strangely, the incoherent messages begin to make some sense. The dance parties are supposed to be semi-secret. They’re illegal in Serbia and most other countries in the region but enabled by the organizers’ economic bargaining power with many of Eastern Europe’s cash-strapped and corrupt governments.580z140_marlboro_570x140

What I do know about the parties I’ve learned from amateur footage on YouTube, a few slick promo videos recorded in local languages on Vimeo, and one infrequently updated blog that acts as a watchdog for the events. From what I can gather, party guests tend to be very young and from the region’s larger capitals, like Minsk, Belgrade and Kiev. The organizers are generally American, and from one of the most despised industries on the planet. A few critics may have raised their voices in concern, but the salacious parties have easily broken or narrowly circumvented laws, allowing them to continue unhindered for nearly a decade.

Those who’ve found their way inside say the invitation-only events can draw up to 10,000 people in a single night. Few guests, it would appear, are over the age of 22. A typical party features several immoderate elements: laser light shows, world famous DJs helicoptered in from Ibiza, models paid to interact with guests, and the crème de la crème of erotic dancers. Depending on the evening, there might be a generous prize giveaway. At one event, prizes included three new cars (valued at between $25,995 – $43,995 each), five Italian motorcycles (valued $9,000 each), 50 iPads, 500 pieces of designer clothing, and 500 designer bags.

Of course, there is one major catch. Guests must surrender all of their personal information. Costumed models dispense blank forms and pens. All of this data is then entered into the sponsoring company’s customer database. In exchange for their personal details, the model gives each guest a new “starter pack” of cigarettes courtesy of the evening’s host, Philip Morris International.

It’s been a decade now since Philip Morris acquired Serbia’s largest tobacco factory, Duvanska Industrija Nis (DIN), for nearly $600 million. While the takeover has been hailed a privatization success story, it’s also come with the same troubling consequences similar acquisitions have all over the world: Tobacco company-aided smuggling, a number of new and younger smokers, and skyrocketing rates of tobacco consumption (Serbia now has the highest annual per capita consumption of cigarettes of any country in the world).

But how was Big Tobacco — one of the most vilified industries in America — able to trample all over Serbia’s rule of law and nascent public health policies in the first place? That story begins a bit earlier, with the collapse of communism and the near-collapse of the American tobacco industry.

How to Start a Revolution in Eastern Europe

During the 1990s, Eastern Europe and Big Tobacco were both in major trouble. Everybody knows the kind of shape Eastern Europe was in at that time: Chaos and criminality in the Soviet successor states, rampant corruption and uneven lustration in the former Eastern Bloc, and a series of devastating wars in Yugoslavia.

While many people in Eastern Europe were struggling just to eat during the 1990s, tobacco companies, including Philip Morris, were experiencing the Fortune 500 version of a crisis. In the United States, individual states sued five major tobacco companies for costs associated with treating tobacco-related illnesses. As a result, the tobacco industry was ordered to pay the states a total of $246 billion over the next 20 years — the largest civil litigation settlement in U.S. history.

Then, just a few years later, the Justice Department filed a racketeering lawsuit against the industry. The charges were damning: Philip Morris and other major tobacco companies stood accused of intentionally lying to the public about the dangers of smoking and the addictiveness of nicotine, among other sins. The Food and Drug Administration (FDA) began its years-long lobbying effort to put tobacco regulation under its control. The industry ended up paying another $42 billion in damages.

At the same time, the American market for cigarettes was shrinking. In 1954, about 45 percent of American adults smoked. By the end of the 1990s, that number had dropped to just 24 percent. The giants of the tobacco industry realized they needed to shift their focus to “lower income” parts of the world, where the cash-rich companies would be greeted as saviors rather than unadulterated sleaze.

By 1990, the economic crisis in the Soviet Union had gotten so bad that it was affecting the availability of the single most important consumer staple in the country: cigarettes. Only six out of the 24 cigarette factories in the Soviet Union were operating. The shortage soon prompted mass protests in major cities — the so-called Tobacco Revolt. Public discontent was at an all-time high, and Gorbachev looked to be on the verge of resignation. There’s an important lesson to be learned here: If you want to start a revolution in Eastern Europe, cut off the cigarette supply lines.

But before the situation could escalate further, Philip Morris swooped in to save Gorbachev’s ass. The company airlifted no less than 34 billion cigarettes into the Soviet Union. This act of goodwill built trust and opened many doors for the tobacco industry across the region, meaning it now had access to a vast, new market of enthusiastic smokers, and precisely when it needed it most. Soon Philip Morris and other tobacco companies were buying up rusty, communist-built tobacco factories and state monopolies across much of Eurasia.

When these companies — transnational tobacco companies (or TTCs, for short) — entered the local market, it was in the midst of major political and economic turmoil. A.B. Gilmore, a professor at the London School of Hygiene and Medicine, points out that the tobacco industry actually used these chaotic conditions, in which “there were no effective tobacco control policies in place to act as a buffer against the industry”. The tobacco companies benefited from the fear and uncertainty of the post-Soviet years. In Serbia, Philip Morris purchased its majority share of DIN about five months after Prime Minister Zoran Djindjic was assassinated.

“They are very clever, very powerful, very intelligent and very experienced, and we are a very small group,” said Witold Zatonski, an oncologist and anti-smoking campaigner, back in 1996.

For post-communist economies witnessing the dissolution of an empire, placing restrictions on the tobacco industry’s behavior was not a matter of pressing concern. Besides, the sudden arrival of hundreds of millions of dollars in foreign direct investment deterred governments from going against the wishes of their new “benefactors”. This automatically made Philip Morris and other TTCs very powerful.

In January 1991, Sir Patrick Shoohy, chairman of British American Tobacco or BAT (which acquired a majority share of Serbia’s tobacco factory in Vranje in 2003) captured the sense of enthusiasm and opportunism of this era of expansion in an interview with Financial Times. “These are the most exciting times I’ve seen in the tobacco industry in the last 40 years,” he said.

The excitement, which oozed with tobacco industry greed, was unstoppable. In 1996, a Central and Eastern European analyst for Philip Morris gave a presentation to colleagues, hinting that the company had been eyeing the market for some time. “Inside knowledge of the region and its tobacco industry was to prove enormously helpful to Philip Morris and enabled us to quickly exploit the opportunities that arose when the communist system collapsed in 1990,” he said. Then he straightened his tie and declared the whole of Eastern Europe “open for business”.

All your profits are belong to us

Meanwhile, tobacco companies were doing more than simply buying up old factories during the 1990s: They were involved, both directly and indirectly, in extensive cigarette smuggling operations across Europe.

At the same time Philip Morris International was negotiating to buy the DIN factory in Serbia, the tobacco giant was in the middle of a smuggling lawsuit filed by the European Union. In the 188-page complaint, Philip Morris was accused of “involvement in organized crime in pursuit of a massive, ongoing smuggling scheme.”

One well-worn smuggling route was through wartime Yugoslavia. It’s estimated that more than 50 containers of Marlboro cigarettes were transferred to warehouses in the Montenegrin port cities of Zelenika, Bar, and Katar each month. The cigarette cases would then be transferred to speed boats and shipped across the Adriatic to Bari in Italy, about 100 miles away.

Millions of internal industry documents available online at the Legacy Tobacco Documents Library attest to the scale of the operations in the region, though smuggling is rarely referred to in explicit terms. Coded acronyms like DNP (“duty not paid”), DF (“duty free”), and GT (“general trade”) are used instead.

The archives reveal that Philip Morris has been involved in cigarette smuggling in the region since as early as 1975. One internal document from that year describes “transit” business from Bulgaria to Italy and Turkey, even though both countries had state-owned tobacco monopolies with closed markets at that time. The same document explains the company’s plans to “follow up closely development of transit in order to continue increasing our market share.”

The allegations in the EU lawsuit were damning: “Philip Morris knew that the source of funds used to purchase their cigarettes is drug trafficking, yet they continue to receive these funds and to sell cigarettes to these persons.” One of the major players in the Montenegrin smuggling operation was Gerardo Cuomo, a man with some heavyweight Mafia connections. An Italian parliamentary report from 1999 notes Cuomo’s meetings with known heroin smugglers. Authorities within Italy’s organized crime unit identified Cuomo as fiduciario, or trustee, of Philip Morris.

Why would a tobacco company smuggle billions of their own cigarettes? Documents seem to indicate that smuggling was used as what Gilmore refers to as a “market softening” tool.

Flooding the market with their cheap, smuggled and desirable Western cigarettes (like the highly coveted Marlboro), created brand loyalists before the companies could set up domestic production through the acquisition of state-owned enterprises like DIN. Smuggling was, essentially, “a key market entry strategy”.  The lower price of the smuggled cigarettes on European markets also destroyed domestic cigarette production, and smuggling cigarettes into the EU allowed tobacco companies to avoid paying billions of euros in taxes and duties. At the same time, company representatives could argue that this unsavory “black market” for tobacco products had arisen due to high taxes on cigarettes (which the industry naturally opposed) — even though tobacco industry executives themselves were actually facilitating the illicit tobacco trade.

In 2004, without formally admitting guilt, Philip Morris and co-defendant Japan Tobacco International (JTI) nonetheless agreed to pay the European Union a billion dollars to settle the smuggling lawsuit.

During the 1990s, profits from cigarette smuggling undoubtedly aided both individuals aligned with and opposed to the Milosevic regime in Montenegro and elsewhere in Yugoslavia. But it’s worth mentioning that Milosevic’s own son, Marko Milosevic, was said to control the illicit sales of cigarettes produced by Philip Morris.

Read part two, “Death & Taxes

Liked it? Take a second to support Balkanist on Patreon!
Lily Lynch

Lily is co-founder and editor-in-chief of Balkanist Magazine. She lives in Belgrade, Serbia.