By Rocky Swift

TOKYO (Reuters). Japan has broken off banking and trade ties to Russia in response to Moscow’s invasion. But a tobacco company that Japan owns a third is still active there, producing Winston and Camel brands cigarettes. Its lack of action on Japan Tobacco (OTC 🙂 Inc places the administration in an awkward place as it intensifies sanctions.

These are the stakes:

WHY IS RUSSIA SO MIMPORTANT FOR JAPAN TOBACCO?

Japan Tobacco (JT), with its declining population, is focusing on overseas revenue.

Russia is the fourth largest market for tobacco in the world. JT generates an estimated 20% operating profit and 12% group revenue. JT holds the Russian market’s largest share at nearly 40%. There are 4,000 workers in four factories that produce brands such as Winston, Camel and Mevius.

HOW HAS JT REACTED to RUSSIA’S INVASION OF UKRAINE

JT announced shortly after the invasion that production had been halted at Kremenchuk’s factory. The company claimed its 900 employees are safe.

The company announced last month that its Russian subsidiary will cease investment and marketing. It also stopped the launch of a new heated tobacco product. However, it stated that the manufacturing process would not cease despite “unprecedented” difficulties.

Another Japanese company is also taking a waiting-and-see strategy. Trading houses Mitsui & Co and Mitsubishi Corp are holding on to stakes in a liquefied (LNG) project in Russia, from which Shell (LON:) Plc has announced plans to exit.

This HOT POOTTO IS POLITICALLY IMPORTANT FOR THE GOVERNMENT.

Japan joined the Group of Seven countries in an escalation of sanctions meant to pressurize Russia into ending hostilities.

Its position on Ukraine has drawn criticism. While it states it is standing by Ukraine, it also controls major Russian companies and receives large portions of their profits.

According to the website, JT, Russia’s largest individual tax payer, accounts for 1.4% in total revenue from the country’s 2020 budget.

WHAT IS IT MEANT FOR INVESTORS

JT shares fell more than 5% after Russia invaded. Moscow called it a military special operation. This is as a result of the darkening business prospects for the area. The benchmark index has increased 5%.

Although the company shares are not as popular as the wider market over the past five years, they remain well-respected by investors due to their large dividends. JT receives approximately 75%, as opposed to the average 30% of Japanese companies. According to Reuters’ estimates for the last three years, that amounts out to approximately 100 billion yen (or $815 million) per year.

WHAT IS NEXT

JT is third in global tobacco sales and analysts think it may have to leave Russia as major brands withdraw. British American Tobacco, Philip Morris International Inc (NYSE :), and Imperial Brands (OTC 🙂 announced that they will be leaving the country.

This decision is not without risks. Russia may decide to take its assets. The company might suffer huge losses. Therefore, it is safer to try to sell the assets of its Russian partners.

Trade sanctions can cause JT to lose its ability to import tobacco leaves, even if JT is still around.

WHY IS JAPAN IN TOBACCO BUSINESS FIRST PLACE IN JAPAN?

JT is a legacy company from Japan’s history of government-controlled monopolies in tobacco and salt. Tokyo is home to a museum that focuses on the history and use of these commodities.

JT, in its current form, was created in 1985. The government may reduce its holding over time. However, the Ministry of Finance has to own at least one-third of any shares of businesses that are important for the economy and fiscal revenue.