By James Rupert and Glenn Frankel
Third of Four Parts
Third of Four Parts
To the rescue rode Philip Morris and R.J. Reynolds.
In return for cash and barter goods, the American tobacco giants agreed to deliver 34 billion cigarettes -- the single biggest export order in their history. The crisis abated, and Gorbachev and the old order helped buy themselves an extra year in power. And the companies achieved an important foothold in a vast market that for decades had kept them tightly restricted or had shut them out altogether.
Since then, the American companies and their European counterparts have swept across Eastern Europe and the republics of the shattered Soviet Union, buying up failing state-owned enterprises and ancient factories, launching mass advertising campaigns and asserting broad influence over new governments and political leaders. In the process, they have laid the foundation for a Western-owned tobacco industry in a vast market that may someday surpass the shrinking markets of the United States and Western Europe.
Big Tobacco's entry into Ukraine, one of the largest former communist markets, is in many ways typical. While other Western industries hung back, scared off by Ukraine's formidable bureaucracy, chaotic laws and unstable currency, Philip Morris Inc., R.J. Reynolds Tobacco Co. and Reemtsma, the giant German tobacco conglomerate, moved in quickly, buying up shares in the new nation's five largest cigarette factories and capturing 75 percent of its manufacturing capacity.
Their billboards became a regular feature of Kiev's urban landscape, and they launched advertising campaigns that provided much of the revenue that kept the state-run broadcast industry afloat. And when the country's small but active anti-smoking movement persuaded parliament to pass a ban on tobacco ads, the industry responded with a well-financed lobbying campaign that recently overturned the ban.
The results are visible throughout Ukraine: Billboards for the Marlboro Man and the rugged Lucky Strike motorcyclist are back; ads for American brands again dominate the country's coffee shops and trolley cars, and the brands' brightly painted logos adorn posters, T-shirts and shopping bags. And while the companies have yet to see the kind of profits that would justify their vast investment in Ukraine, they have great hopes for the future. "It's risky . . . but the potential is huge," said Ronnie Lindquist, general director of Reynolds in Ukraine.
When the tobacco companies went to the thriving but closed markets of East Asia in the 1980s, they went as invaders, using the full weight of the U.S. government and the threat of trade sanctions as a weapon to force their way in. But as their 1990 Soviet rescue mission illustrates, they went to the ruined economies of the former Soviet empire as self-styled liberators and capitalist pioneers, bringing hundreds of millions of investment dollars, advanced technology and a dynamic, take-charge enthusiasm to societies that are as starved for optimism as they are for cash.
"We have enormous opportunities to use the tobacco industry as a powerful force for improving the economic and social well-being of this part of the world," said James W. Johnston, then chairman of Reynolds, in a Moscow speech last year that captured the spirit the industry is trying to project.
Opponents see it very differently. Public health officials contend the industry is preying upon a set of supine and vulnerable societies still recovering from the collapse of the Soviet empire, selling a product that kills more people than any other in the world. These critics argue that the companies are using their advertising and marketing skills to addict a new generation of young people while riding roughshod over the fledgling tobacco control movements that are struggling to take root throughout the region.
"They are very clever, very powerful, very intelligent and very experienced, and we are a very small group without any money," said Witold Zatonski, a Polish cancer specialist who has emerged as the unofficial leader of Eastern Europe's anti-smoking movement.
The American tobacco industry operates abroad in many different forms. In Asia, its point men were lawyers wielding legal briefs to force open restricted markets. In Eastern Europe, fast-talking entrepreneurs spearheaded a mass buying spree in the early 1990s. And in Kiev, the industry's newest agent is a young Ukrainian American advertising executive from Chicago who engineered its victory over the tobacco ad ban. While the companies hailed their campaign as a triumph for freedom of speech, its success illustrates the power that the industry and its allied advertising agencies and financial consultants wield in new economies eager for their money and susceptible to their influence.
World's Greatest Smokers
No one smokes more cigarettes per capita than East European men -- and no one has higher rates of tobacco-related ailments, such as lung cancer and respiratory disease. Ukraine and the other states of the former Soviet Bloc constitute the second largest tobacco market in the world after China -- 40 percent larger than the U.S. market.
For more than three decades, American companies sought a foothold in the region's cigarette trade through cooperative agreements and other arrangements, but Communist governments kept them small, constricted and under tight state control. When the Berlin Wall came down in 1989, however, the companies were free at last to make their move.
Philip Morris led the way, committing more than $1 billion to acquire plants in the region.
The industry as a whole -- including Philip Morris, Reynolds, Reemtsma and British-American Tobacco, the British parent of American cigarette maker Brown & Williamson -- made commitments exceeding $2 billion. That sum made the tobacco industry by far the largest investor in the former Soviet Bloc. Five years ago, Reynolds sold no cigarettes in the former Soviet republics; today, it sells 50 billion a year.
When Philip Morris hired former British prime minister Margaret Thatcher as a part-time consultant on a three-year contract reportedly worth $2 million, one of her first tasks was to travel to Kazakstan to help persuade its leaders to sell a major stake in its state tobacco company to Philip Morris. Analysts project that within the next decade Western companies will gain control of the entire East European cigarette market.
Ukraine's cash-strapped cigarette industry had virtually no experience in dealing with Western firms. Still, local factories and the U.S. companies seemed to jump into each others' arms. "The Ukrainian tobacco industry has a higher share of privatized entities and foreign investment than any other sector of the [Ukrainian] economy," the U.S. consulting firm Deloitte & Touche noted in a 1995 study. Foreign firms "are expected to invest more than $520 million" by 1999, the study said.
When the foreign companies arrived, they were dismayed to find a ragged collection of ancient brick factories with wheezing machinery that churned out harsh, poor-quality cigarettes. The plants were "a real mess. . . . Nobody had done any housekeeping" for years, Reynolds' Lindquist said. In many cases, "it would have been more rational to put a bulldozer to [the existing plant] and build a new, streamlined factory from the ground up."
Ukraine's legal code is in a similar state of disarray. Every aspect of business is overshadowed by the murky legal environment of a country still writing its most basic laws. Ukraine adopted a constitution only in July, and it is still working on a new tax code.
"As a big company, we have to be law-abiding," said Lindquist, but as the company makes business decisions, "nobody can tell us whether what we are doing is legal or not."
American tobacco companies contend they are selling much more than a product. Long before the collapse of Communist rule, millions of people in Eastern Europe and the Soviet Union had grown weary of an existence that seemed grayer and meaner than life in the West. As these societies join the world economy, it has become possible to sell almost anything there that is perceived as representing Western wealth and sophistication -- especially if it is American.
"People assume that whatever comes from the West is better," said Miroslav Matseikiv, a psychology professor in Kiev. Consumer goods produced domestically, he added, "are associated with the failure of the Soviet system."
Advertising companies -- such as the Leo Burnett agency, which handles much of Philip Morris's overseas advertising -- recognized the American advantage early on. Marlboro's colorful billboards featuring dramatic sunsets and Old West vistas soon dominated the gray, Soviet-era cityscapes and kiosks of Kiev and other urban centers. Foreign cigarette brands became the leading advertisers on Russian television and radio. Tobacco ad revenues maintained municipal transit systems from St. Petersburg to Sofia, Bulgaria. In Bucharest, Reynolds provided a year's supply of bulbs for traffic lights -- in exchange for permission to add the Camel logo to each yellow light.
From the beginning, tobacco companies faced opposition from East European public health officials. Poland -- and Zatonski, the cancer specialist -- have led the way, with a comprehensive tobacco control program that includes strong health warnings on cigarette packaging, bans on smoking in public places and tough restrictions on advertising. But the companies are resisting Zatonski's proposed next step -- heavy tax increases to cut cigarette consumption and fund anti-tobacco education. "They are fighting us in every possible way," he said in a telephone interview.
The most recent battle has been fought over advertising. The tobacco companies argue that advertising is one of the most effective ways to present their products in markets that state-owned monopolies dominated for decades. But Zatonski and his supporters contend that the sophisticated advertising campaigns also are designed to induce young people and women to smoke.
The ads introduced in Ukraine in the early 1990s "were artistically beautiful, professionally photographed, like movies," recalled Vitaliy Movchanyuk, director of the Ukrainian Health Ministry's public education institute. "The Soviet Union never had such advertising. People are used to it in the West. They have learned to sift through it for truth and lies. . . . But our consumers are more psychologically vulnerable to being manipulated by slick advertising."
Public health advocates campaigned successfully for advertising bans in Russia, Poland and Bulgaria, but the bans often were ineffective. After the Russian parliament banned ads from television, radio and billboards in 1993, Russian media firms, desperate for cash, kept selling ads in defiance of the law. The companies skirted a Polish ban by advertising brand names and logos without mentioning cigarettes.
Still, Movchanyuk and his allies set out to push an advertising ban through Ukraine's new government -- and the tobacco industry began mobilizing a campaign to stop them.
In Legal Limbo
When Kalyna Hrushetsky arrived in Kiev in the spring of 1995, cigarette billboards already were beginning to disappear from the city, due to a temporary decree by President Leonid Kuchma. Her first mission was to find a way to get them back up.
Hrushetsky was just 26 when the Burnett agency sent her to open a Kiev office, largely to manage the Philip Morris ad account. Her parents had fled Ukraine after World War II, and she spoke fluent Ukrainian. "I was pretty young to be a candidate to run an [overseas] office," Hrushetsky recalled. But her language skills and high energy level helped her win the job.
Hrushetsky's parents would have preferred that she return to their homeland as a missionary for the Ukrainian Orthodox Church, but she had no problem defending her work. "Advertising does not encourage people to smoke," she said, echoing the industry's long-standing position. "It encourages them to try a specific brand. . . . Ukrainians smoked heavily before we got here -- and those were non-filters. We're moving them to a better product."
When she arrived, Hrushetsky was surprised to find that the young Ukrainians who formed an embryonic local advertising industry had given no thought to the advertising ban. "I tried to explain that this was a big problem," she recalled, "but I didn't get much response."
Kuchma's decree had left tobacco firms and their advertisers in legal limbo. The ban did not define advertising, so tobacco firms avoided ads that referred directly to cigarettes. Instead, they focused on trademark advertising, emblazoning cigarette logos on T-shirts, cafe umbrellas -- even trolley cars.
Martin Nunn, a British business consultant working in Kiev for Reynolds, sponsored gala parties organized by a Kiev fashion magazine called Looks International. Reynolds made videotapes showing affluent, fashion-conscious young sophisticates dancing, drinking champagne and smoking in a nightclub adorned with Camel posters, featuring a skimpily clad Camel girls' dance group. The state TV network, too poor to produce its own programs, gladly filled evening broadcast hours with reruns of the parties -- with the Camel logo prominently displayed.
To head off a legal ban, five foreign tobacco companies signed a voluntary code of advertising conduct and offered it as the basis for an advertising law, which the legislature -- called the Supreme Rada -- had begun considering. Among other things, the code barred the broadcasting of tobacco commercials on television before 10 p.m. and in movie theaters before 7 p.m., and outlawed billboard ads less than 100 yards from schools.
They almost succeeded. After lobbying by the companies, the Rada gave preliminary approval to a law that was "practically a translation of the [voluntary] code," said Konstantin Kuznetsov, co-owner of Dialla Communications, a leading Kiev ad firm.
But the Rada's action triggered a sharp response from tobacco opponents. The Health Ministry contacted doctors, the Ukrainian Red Cross, the Afghan veterans' committee and other groups concerned with health issues, encouraging them to push for a tougher measure. Faced with powerful opposition, the legislature enacted a stronger, mandatory ban in March.
As a result, Hrushetsky had no trouble persuading her Ukrainian colleagues to go to work. They formed a coalition to lobby against the new law, and several times a week she held standing-room-only meetings in her tiny office. "Hrushetsky," Kuznetsov recalled, "was like a tornado."
She got Dialla and other firms to contribute billboard space and TV and radio time to the campaign. The group contacted newspapers, which, fearful of losing ad revenues, published articles criticizing the bill. The group prepared flyers that Hrushetsky personally carted into the lobby of the Rada chambers to distribute to legislators. They also lobbied aides to Kuchma, who soon sent the bill back to the Rada.
One of the most effective lobbying tools was a slick information packet produced by Philip Morris. A cover photo displayed the figure $400 million laid out in 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," it warned.
The estimate came from Deloitte & Touche, which had opened an office in Kiev to advise Western firms trying to enter Ukraine's markets and produced a 40-page report projecting the ban's economic cost to Ukraine.
The Philip Morris folder did not identify its sponsor. One of the documents inside said it had been "prepared for the members of the Supreme Rada . . . by the Association of Independent Advisors on the Question of Reviving the Ukrainian Tobacco Sector." There was, in fact, no such association. Michael Parsons, a spokesman for Philip Morris International in Lausanne, Switzerland, later acknowledged the company's authorship.
The secretiveness of Philip Morris's lobbying was essential, said tobacco industry and Rada officials. Many Ukrainian legislators, especially in the large Communist and Socialist factions, retain Soviet-era suspicions of foreign involvement in the country. Had they known of the company's role, they might have sided with the anti-smoking forces, industry officials said.
In the end, the industry's opponents were outspent and outmaneuvered. The Health Ministry distributed its own materials to lawmakers -- gray pages of typewritten statistics -- but neither its data nor its presentation came close to matching the work of Philip Morris, Deloitte & Touche and Hrushetsky's advertising coalition, said Zoya Sharykova, a consultant to the Rada's committee on mass media.
The $400 million estimate "played a great role in forming the advertising law," said Volodymyr Rudiy, staff director of the Rada's health committee and a proponent of the ban. "The legislators could see a concrete figure of what it would cost" to ban tobacco advertising, he said, while proponents lacked the funds to do their own counter-study, which might have demonstrated the health costs associated with tobacco use.
On July 3, the Rada reversed its vote, scrapping the ad ban except for television and radio. Within weeks, cigarette ads began sprouting again on signs and billboards. "Now that we have this law -- boom!" said a triumphant Hrushetsky, who was soon installed in a bigger office in downtown Kiev. "You're going to see a lot of changes in this city."
The repeal of the ad ban may yet be seen as the high-water mark in the tobacco industry's conquest of Eastern Europe. Even industry officials say they expect anti-smoking advocates to press a strong counterattack that, inevitably, will impose the kinds of restrictions on smoking that are now commonplace in the West. Still, company officials say they are confident that they have made enormous, irreversible inroads into the East European market.
There remains one more market, however, that the industry is determined to crack open. China is the elusive grand prize in the tobacco companies' world campaign -- and in the anti-smoking movement's attempt to stop them. It is the last -- and biggest -- battlefield.
Frankel reported from Washington and New York, Rupert from Kiev, Ukraine.
© Copyright 1996 The Washington Post Company