BAT pushes up the Volga with second factory stake

BAT INDUSTRIES is pushing further into the former Eastern bloc and central Asia with the acquisition of a majority shareholding in the Saratov tobacco factory in Russia.

The factory, on the Volga river 700 kilometres south-east of Moscow, produces about 5 billion cigarettes a year. BAT will invest dollars 40m ( pounds 26m) over three years allowing it to double output to 10 billion and improve quality.

Earlier this week BAT, announced it was taking a majority stake in the state-owned tobacco industry of Uzbekistan and investing dollars 200m over five years.

The Saratov deal is BAT's first in Russia, but negotiations with the Java factory in Moscow are at an advanced stage. The two factories would provide production capacity for Russia of 30 billion cigarettes.

Consumption of manufactured cigarettes in Russia is 230 billion a year - compared with 450 billion in the US - but is constrained by supply shortages. Locally produced cigarettes are cheap, but of poor quality, BAT said.

There is strong demand for Western brands. BAT's exports to eastern Europe and countries of the former USSR rose 30 per cent in the first quarter. It exports HB out of Germany, Lucky Strike and Pall Mall out of the US and Hollywood out of Brazil.

Import tariffs and currency volatility make it preferable to have local production, a BAT spokesman said. As quality of local production improves, BAT will consider producing international brands in Russia and raising its prices.

BAT expects to announce more deals in eastern Europe and central Asia soon. It already has cigarette businesses in Hungary and Ukraine.