Death & Taxes

Part 2: How to win brand loyalists and influence the finance ministry.

In October 2003, Philip Morris acquired Serbia’s “industrial treasure”. DIN is the country’s largest tobacco factory, and its facilities are in Nis, one of the oldest cities in the Balkans.

The acquisition made Philip Morris one of the most powerful foreign entities in Serbia. Everybody wanted to work there: They paid a bit better than the average local business, and they had a prestigious, globally-recognized name. While other symbols of American power with a presence in Serbia like the embassy, philanthropic organizations, USAID, and the military, have at times been regarded as suspicious or hostile meddlers in the country’s internal affairs, Philip Morris was welcomed with open arms and few questions.

When the company’s executives set up shop in Serbia, they had at least two major goals: To keep the excise tax rate as low as possible, and to recruit new smokers, preferably youth.

In an effort to exert some control over excise taxes, which are imposed on products deemed harmful to human health, they set about establishing cozy relationships with the relevant political elite. An internal Philip Morris document from the Tobacco Legacy Documents Library describes this strategy in explicit terms: “PM’s strategy has been to work via top-level political contacts in Eastern European markets, notably in the Finance Ministries. PM is also making use of US diplomatic missions in the Eastern Countries to convey our point of view…”

Interestingly, a tax policy adviser to the Minister of Finance, Milica Bisic, previously served as the director for regulatory affairs at Philip Morris. Before that, Bisic was Deputy Minister of Finance and head of tax administration for Republika Srpska. She even earned an “integrity award” from Transparency International for “combating tax evasion and corruption”. During the same period, Philip Morris was settling a billion-euro lawsuit alleging it had engaged in organized crime and cigarette smuggling in the region.

With or without friends in the finance ministry, Philip Morris has been quite good at leveraging its power with both politicians and the public to keep excise taxes low. And the company has often adopted a belligerent style to get its way:

Paul Riley, the former Managing Director of Philip Morris for Serbia, Montenegro and Central Europe South, was fond of making veiled threats. In addition to constantly reminding the public that his company’s contributions accounted for six percent of Serbia’s budget revenue, he warned that raising excise taxes would “threaten further business development” and “jeopardize all the progress we’ve made” and that “jobs held by thousands of people will be at risk.”

Unfortunately, Riley’s statements had their intended effect. People were anxious. Newspapers ran panicked headlines like “Philip Morris leaving Serbia!” Even politicians were intimidated. Deputy Prime Minister Aleksandar Vucic was so deferential to the Virginia-based tobacco company about excise taxes that it almost seemed like he was apologizing. “Given the company’s contribution to the budget, Serbia should show greater responsibility towards such investors in the future,” he said. Nobody could discuss taxes on Philip Morris without a backlash. It was a form of corporate hostage holding.

What Riley didn’t mention is that Serbia’s excise tax rate is still far below what the WHO recommends. Worse, it’s far below what the EU directive requires. (In order to maximize political pressure in Europe, Philip Morris opened its Brussels office just 50 meters from the European Commission building.)

When it came time for Serbia to join the Central European Free Trade Association (CEFTA) in 2007, Philip Morris — with the help of the American embassy — attempted to intervene. Becoming party to the trade agreement meant Serbia would have to harmonize its excise taxes with those of other countries, which also represented a step towards EU integration. This clearly incensed the executives at Philip Morris. Michael Polt, who was the American ambassador at the time, issued a statement demanding that the Serbian government “do something” about the CEFTA problem, even though the agreement promoted regional cooperation and economic liberalization — precisely the kind of thing Washington usually likes. But protecting its business interests abroad has always been an important part of American foreign policy, and Philip Morris has given nearly $8 million in campaign contributions to Ambassador Polt’s political party over the course of the last decade.

Meanwhile, despite the alarmism from Philip Morris and the embassy, the trade agreement has served Serbia quite well. During the first six months of this year alone, the country posted a $737.5 million surplus with CEFTA, and exported $1.42 billion worth of goods to other countries in the region.

Philip Morris had an even crueler means of stoking fear about the solvency of fragile economies in Kiev during the mid-1990s. A group of public health officials organized a campaign to ban tobacco advertising, which they feared would be “irresistible” to young Ukrainians who hadn’t grown up with glossy ads depicting consumer euphoria. And it turns out their concerns may not have been irrational. Between 1990 and 1995, the smoking rate increased by 5.6 percent.

When they heard about the health officials’ proposed ban, Philip Morris went on the offensive, putting together a sharp, well-designed 40-page information booklet, with a cover image of $400 million in cash spread out and represented as crushed tobacco leaves. “That’s the amount that Ukraine’s economy will lose in the next five years as the result of a ban on tobacco advertising,” the caption read. It was extremely effective for people living with the economic uncertainty of the post-Soviet era. Even more insidiously, the company told the government that an independent organization called the “Association of Independent Advisors on the Question of Reviving the Ukrainian Tobacco Sector” had created it. Later, a representative from Philip Morris International’s headquarters in Lausanne admitted that the company had been behind the brochure, and that the “Association of Independent Advisors” never existed. Of course, this was only acknowledged after the Ukrainian public health officials, with their poorly printed campaign materials stapled or paper clipped together, had been defeated.

Big Tobacco

With so much attention given to Philip Morris’s unparalleled contribution to Serbia’s state budget, one would expect tobacco exports to be pretty high. But the numbers from MIT’s lovely Observatory of Economic Complexity app tell a different story.

In 2010 (the last year for which there is data available), Serbia exported and imported the following amounts (in U.S. dollars) of tobacco products:

Serbia: Tobacco Sector Exports
Serbia: Tobacco Sector Imports
Cigars Raw Tobacco Cigarettes Cigarette Paper
$26 million $37 million $2.8 million $14,365
Cigars Raw Tobacco Cigarettes Cigarette Paper
$64 million $25 million $7.9 million $5.9 million
Total exports:                          $65,814,365
Total imports:                          $102,800,000

Though producers of top brands like Marlboro, Lucky Strike, Camel, and Sobranie have all made substantial investments in Serbia’s tobacco industry, the country still has to spend more than $100,000,000 each year to import tobacco products.

A.B. Gilmore, who researches privatization’s impact on the tobacco industry, found that the same was true across the former Soviet Union, anywhere transnational tobacco companies (TTCs) had acquired old state-owned monopolies: Cigarette imports still outweighed exports, even after a decade.

The World’s Biggest Smokers

“It is not the factory in Nis and the land it is on that are on sale here, but the Serbian market,” explained Slavoljub Dragicevic, the former General Manager of Duvanska Industrija, in 2003.

By then, Philip Morris and other industry giants had already been investing in state-owned tobacco enterprises across Eastern Europe for more than a decade, and they’d seen the results: Between 1991 and 2000, cigarette consumption per capita had risen 53 percent in the Soviet successor states where TTCs had made acquisitions, and decreased by three percent in those countries where they hadn’t stepped foot.

As soon as TTCs established themselves in a new country, they set about aggressively marketing their brands (which weren’t necessarily new to anyone, as the TTCs had in many cases been smuggling them in). When Philip Morris first arrived in Serbia, there was an all-out marketing assault. Largely unchecked by legislation, the advertising was both overt and covert, and it was everywhere. There were the notorious industry-sponsored club nights, with names like Red Rush Marlboro, Urban Wave Camel, Marlboro Mxtronic, and, as one Belgrade event was called, Philip Morris Party. Socialist, state-owned tobacco companies simply never had the same incentive to perfect the “art of advertising” in this way, and it seemed to work (at least on the young and uncritical).

In Serbia and other Eastern European countries, tobacco companies aggressively targeted women and youth with branding concepts like “peaches n’ cream ultimate flavor” cigarettes and packaging designed to resemble designer lipstick or perfume. They partnered with Volvo and sponsored “glamor cigarette” fashion shows in Moscow.

These new demographics kept buying because prices were kept low: the presence of TTCs and their various brands drove prices down through competition, while companies did whatever they could to keep excise taxes minimal. As a result, cigarettes are still very cheap in Eastern Europe. For instance, a pack of cigarettes in Serbia costs an average of about $2.30, while a pack of cigarettes in Russia costs about $1.70.

Of course, all of this has influenced Serbs’ smoking habits over the course of the last decade. In 1999, Yugoslavia (Serbia and Montenegro), had one of the most flourishing illicit tobacco trades in the world, but still had a lower cigarette consumption rate per capita (2,097.96) than several countries in the Balkans, including Greece (2,856), Macedonia (2,658.22), Bosnia and Herzegovina (2,562.52), and Bulgaria (2,314.08). Back in 1999, the country’s rate of consumption was nearly identical to Croatia’s (2,086.4).

Not so anymore. Gilmore noted in her work in the former Soviet Union that “large increases in consumption have been concentrated in countries receiving tobacco industry investment.” Today, after ten years of Philip Morris and 665 million euros of investment, Serbs are the biggest smokers in the world. The country’s annual cigarette consumption per capita is now 2,861.

The rest of the region isn’t far behind. In fact, the “top ten” are all Eastern European countries that TTCs set out to conquer in 1990. After Serbia, the list of countries with the highest annual consumption rates per capita are: Bulgaria, Greece, Russia, Moldova, Ukraine, Slovenia, Bosnia and Herzegovina, Belarus, and Montenegro.

Michael Erikson, a tobacco researcher who published the aforementioned consumption statistics in his Tobacco Atlas, offered his opinion as to why Serbia and other countries have so many smokers. “As a rule, Eastern European countries have been weak on tobacco control programs, particularly low excise taxes, to a large extent due to the undue influence of the tobacco industry on Eastern European governments,” he said.

And government officials are occasionally entangled with organized crime groups, just like the tobacco companies. In Serbia and elsewhere in Eastern Europe, we’ve seen that these kinds of networks can be extremely powerful.

That cigarettes are a cheap source of pleasure for many is not surprising, but the tobacco industry’s readiness to shamelessly break the law, lie, and engage in exploitative practices is. A model named David Goerlitz who used to appear in cigarette ads recalled what one Big Tobacco executive told him: “We don’t smoke the shit, we just sell it. We reserve the right to smoke for the young, the poor, the black, and the stupid.”


Read part one, “Buying Eastern Europe: The Tobacco Industry Takeover

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Lily Lynch

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