A smoker chooses a Mevius Lights cigarette from Japan Tobacco (JT) Inc. in Tokyo, Japan May 12, 2017. REUTERS/Issei Kato

TOKYO, April 7 (Reuters) – The Japanese government cut banking and trade ties with Russia following Moscow’s invasion of Ukraine, but a tobacco company in which it has a one-third stake still operates there and produces Winston and Camel brand cigarettes.

The government’s inaction on Japan Tobacco Inc (2914.T) puts the administration in an awkward position as it escalates sanctions.

Here’s what’s at stake:

WHY IS RUSSIA SO IMPORTANT TO JAPAN TOBACCO?

Japan’s population is shrinking and national smoking rates are falling, making overseas revenue increasingly important for Japan Tobacco (JT).

Russia, the world’s fourth-largest tobacco market, is JT’s largest foreign market, generating around 12% of group revenue and 20% of operating profit. JT has the largest market share in Russia at almost 40%, with 4,000 employees in four factories, producing brands such as Winston, Camel and Mevius, formerly known as Mild Seven.

HOW DID JT REACT TO RUSSIA’S INVASION OF UKRAINE?

JT said shortly after the invasion it had halted production at its factory in the central Ukrainian city of Kremenchuk, saying at the time that its 900 employees were safe.

Last month, the company announced that its Russian subsidiary would suspend investment, marketing and launch of a heated tobacco product. But he said manufacturing would continue, although those activities may be suspended due to “unprecedented” challenges. Read more

Other Japanese companies are also taking a “wait-and-see” approach. Trading houses Mitsui & Co (8031.T) and Mitsubishi Corp (8058.T) retain stakes in a liquefied natural gas (LNG) project in Russia, which Shell Plc (SHEL.L) has announced its intention to acquire. remove. Read more

WHY IS THIS A POLITICAL HOT POTATO FOR THE GOVERNMENT?

Japan has joined the Group of Seven economies in a steady escalation of sanctions to try to pressure Russia to end hostilities.

But his position has come under criticism; on the one hand he says he supports Ukraine, but on the other hand he controls a large company doing business in Russia and reaps a large part of the profits from this company.

JT is one of Russia’s largest individual taxpayers, accounting for 1.4% of the country’s total budget revenue in 2020, the company’s website says.

WHAT DOES THIS MEAN FOR INVESTORS?

Shares of JT have fallen more than 5% since the Russian invasion, which Moscow calls a special military operation, as business prospects in the region darken. The benchmark Nikkei gained 5%.

The company’s shares have lagged broader market performance over the past five years, but remain popular among investors for their bountiful dividends. JT pays around 75% of profits, compared to an average of 30% for other Japanese companies. This provides about 100 billion yen ($815 million) to the Japanese government each year, based on Reuters estimates over the past three years.

AND AFTER ?

JT is the world’s third-largest tobacco seller and some analysts believe it will eventually have to leave Russia as other big brands pull out. Rivals British American Tobacco (BATS.L), Philip Morris International Inc (PM.N) and Imperial Brands (IMB.L) have announced plans to leave the country. Read more

Such a decision does not come without risk, however. The company could face huge losses if Russia decides to seize its assets, so a less risky option would be to sell its assets to a Russian partner.

Even if JT stays, trade sanctions could interrupt its operations, especially if it is unable to import tobacco leaf.

WHY IS JAPAN INTO THE TOBACCO BUSINESS IN THE FIRST PLACE?

JT is a company with a legacy of Japan’s history of government-controlled tobacco and salt monopolies. The company operates a museum in Tokyo dedicated to the history of these products in Japan.

JT in its current form was founded in 1985, and although the government has reduced its stake over time, the Ministry of Finance is mandated to hold at least a third of its shares in a company that the government considers important for tax revenues and the economy at large.

Reporting by Rocky Swift: Editing by Neil Fullick

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