Lighting Up The Balkans

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Tobacco giants may be in trouble over litigation and advertising bans around the world, but there are still some places where Marlboro Man can hang his hat. In September 2003, Philip Morris International, the Swiss-based offspring of U.S. giant Altria, makers of Marlboro, shelled out more than half a billion euros for a majority share of Duvanska Industrija Nis, Serbia's largest tobacco factory, located in the southern city of Nis. At the same time, another giant, British American Tobacco (BAT), bought a smaller factory in the nearby town of Vranje for €87 million, bringing the total direct investment to a hefty €605 million. Both companies had been state-owned, and made cheap brands from locally grown tobacco. Now they will be upgraded. "We want to start manufacturing brands such as Lucky Strike and Pall Mall in Vranje," says Simon Willis, BAT's general manager for southeast Europe. "Exports are clearly on our mind." Philip Morris has similar plans for manufacturing Marlboro in Nis.

The Serbian government is delighted. The acquisitions are among the few substantial foreign investments in Serbia since the fall of Slobodan Milosevic three years ago. Serbia's switch toward democracy and free markets came later than in neighboring Hungary and Croatia, and left most Western investors unimpressed. Now the tide, the government believes, is turning. "Just having Philip Morris and BAT here is worth more than a thousand years of preaching how business-friendly Serbia is," Aleksandar Vlahovic, the Serbian Minister of Economy and Privatization, tells TIME. "If there are no bigwigs around, no one believes you." That's why the government went out of its way to make the deal transparent. "Every single cent will be accounted for," Vlahovic pledges. The bulk of the money will go to fill the gaping hole in the Serbian budget.

	Just having Philip Morris and BAT here is worth more than a thousand years of preaching how business-friendly Serbia is — ALEKSANDAR VLAHOVIC, Minister of Economy and Privatization

Why is Big Tobacco spending this much money in Serbia? Partly, they want to lower production costs, but it may also help them crack down on rampant cigarette smuggling. According to Serbian government statistics, about 90% of all foreign cigarettes sold in Serbia in 2000 were contraband, and although that rate is somewhat lower today, the Balkans are still the major transit point for tobacco smuggled into the European Union. Recently, Italian prosecutors claimed that Montenegrin Prime Minister Milo Djukanovic was actively involved in bringing vast quantities of contraband cigarettes to Italian markets. Djukanovic denied the charges.

The E.U. has charged that the tobacco giants were tacitly involved. In 2000, the European Commission — the E.U.'s executive arm — filed a lawsuit against tobacco giants R.J. Reynolds and Philip Morris for allegedly using Montenegro as a springboard for smuggling millions of cigarettes across the Adriatic Sea for distribution inside the E.U. The companies denied the charges; the case is still pending before a New York court. But everyone agrees that trafficking will slow down once the tobacco firms start doing business in Serbia.

Serbia's quest for foreign investment was not helped by the assassination of Prime Minister Zoran Djindjic by mobsters in March 2003. "It's quite concerning that only three companies bid at the auction," says Milan Kovacevic, a consulting expert (after Philip Morris and BAT, the third bidder was a Croatian tobacco firm). "That shows we're still being seen as a high-risk country." But the tobacco companies' arrival might change that perception by providing perks such as money for local schools and hospitals, and a 10% pay raise for workers, with guarantees that no one will be sacked for five years. A substantial sum will go into social programs in Nis and Vranje. Both towns are dirt-poor monuments to a communist-run economy. Despite a successful deal with tobacco giants, and an equally successful sale of the Beopetrol gas-station chain to Russian Lukoil for some €200 million, Serbia is still in deep trouble. The trade deficit is almost $2.2 billion (up 38%) and industrial production has dropped 5.3% since January. And after the tobacco factories and gas stations, there just aren't many valuable companies left to sell.