Moscow’s tourism turns cold

Before the dissolution of the Soviet Union, Russia’s one and only travel agency – state-controlled Intourist – kept an ever-watchful eye on the few individuals that came and went; even going so far as to manipulate their actions by keeping them to a state-approved itinerary. Skip forward to the present day, however, and the same tour operator is majority-owned by a more familiar face: Thomas Cook. The company now interacts with more than 200,000 tourists every year. How times have changed.

The privatisation of companies like Intourist marked a defining stage for Russia as it opened up its borders to hesitant foreign tourists. Having welcomed a host of international names in recent years, the country’s reputation has certainly changed for the better – so much so that some sources had previously tipped Moscow as a big-ticket contender to become a leading business travel destination in the near future. But, while experts have long been discussing the merits of Russia and its seemingly limitless potential, it has fallen short of its initial promise.

While experts have long been discussing the merits of Russia and its seemingly limitless potential, it has fallen short of its initial promise

This is a country that has spent much of the last year in the spotlight – albeit for the wrong reasons. What once was seen as an unflappable global superpower is now teetering dangerously on the brink. “The current situation in the global political arena, as well as local currency fluctuations, have resulted in decreasing interest toward Russia, and in particular Moscow, as a destination to visit”, says Marija Milasevic, Research Analyst for Euromonitor. “Potential visitors feel unconfident concerning Russia in terms of payments, service, safety and other important factors for travellers.”

At the turn of 2014, the Russian Government faced widespread criticism for the $50bn it spent on the Sochi Winter Olympic Games – a sum that eclipsed the cost of the 21 previous Winter Olympics combined – and answered to allegations of corruption at near enough every turn. Later would come the furore surrounding flight MH17, along with, from the summer onwards, a seemingly non-stop procession of crises. Turmoil in Ukraine, Western sanctions, record low oil prices and the collapse of the national currency all cooked up a perfect storm, and any signs that the country’s major cities might soon become booming corporate travel destinations have since dissipated.

Great expectations
Only as far back as 1987, Moscow was an isolated city with just 87 licensed restaurants to its name. However, the steps taken since the Soviet split have meant that the city now more closely resembles a Western metropolis than ever before, with dozens of international brand hotels and hundreds of McDonaldses to its name. A quarter of a century on from the fall of the Berlin Wall, Moscow is home to over 12 million people (although untracked migrant activity means the actual figure is likely far higher) and the greatest number of dollar billionaires in the world. This is a city that has undergone a rigorous two-decade-long transformation and, in the process of doing so, led industry experts to believe that it would soon become a leading tourist destination, as well as a melting pot for corporate travel.

One report, jointly compiled by STR Global and HVS in 2009, showed that the number of arrivals into the city increased by 13 percent through 2006 to 2008. And yet, it took until 2013 for Moscow to beat neighbouring St Petersburg as the most popular Russian city, and for the number of annual visitors to finally tip the five million mark. No longer the colourless landscape of old, many of the city’s major Soviet landmarks have since been torn down, and in their place stands a vibrant metropolis bursting with adventure and entrepreneurialism.

2013 was also the year that Europe’s largest city started to show some real promise, particularly as the hotel industry really rushed to cash in on a market rife with opportunities. With a growing middle class, a hospitable business climate and rising corporate profits, there were reasons to believe that Moscow was fast becoming one of the continent’s choice destinations for business – even if it wasn’t necessarily the easiest one
to break into.

Still, real estate and construction permits were – and still are – hard to come by, and the local tourism market is yet to come to terms with the economic downturn. What’s more, the expense associated with land acquisition and hotel construction means that budget and even mid-tier accommodation can prove particularly challenging to get off the ground. As a result, the hotel business in Moscow is dominated by five-star establishments.

While demand for high-end stopovers is adequate enough to keep the industry afloat, a dearth of cheaper alternatives means that those with more modest budgets (mostly leisure tourists) are unlikely to stay. The composition of Moscow’s hotel business means that it has succeeded in attracting multinationals seeking an entryway into the Russian market – though the presence of Intercontinental, Hyatt, Hilton, Marriott and Starwood mustn’t detract from the broader challenges facing the travel and tourism market.

This focus on luxury offerings ahead of budget accommodation means that the city is perceived primarily as a business hub rather than a leisure destination, and as such many hotels struggle to keep occupancy rates up at the weekends. As it stands, corporate travel constitutes approximately three quarters of all occupied rooms in the city, and the segment is by far the largest in the business. However, without the co-existence of more affordable hotels or a willingness to ease restrictions on foreign entry, the megacity’s tourism industry still has limited appeal.

Reasons against
A recent report, written by the Travel and Tourism Intelligence Centre, underlined the importance of the Sochi Games and 2018 FIFA World Cup in supporting the planned construction of a further 254 international brand hotels – or 55,722 rooms – before 2018. However, the report goes on to state that many of these planned developments have been, or will be, put on hold as a consequence of Russia’s changed economic situation.

Travel and Tourism Intelligence Centre experts also estimated at the tail end of 2014 that inbound trips to Russia would fall at a rate of 13.3 percent year-on-year, and outbound trips would take an almost 21 percent dive from 54.1 million in 2013 to only 42.8 million in 2014. Expensive hotel prices, less-than-ideal weather conditions and strict visa requirements are the three most-cited reasons why tourists choose not to visit the city – or at least they were. Nowadays we can add into the mix widespread civil unrest and dire financial straits – and so it is perhaps clear why the country and its capital have lost some of their appeal.

A key area of focus for Russia in past years has been improving its image on the world stage, particularly among Western tourists. As host to 2013’s World University games, 2014’s Winter Olympics and the 2018 FIFA World Cup, the country has had ample chances to prove to a global audience that it is rid of its unfavourable reputation. The setbacks of the past year, however, have affirmed the worst to millions of prospective tourists, and only by addressing known weaknesses will the industry pick up the slack. In failing to clean up its reputation, the country has been hit by a wave of hotel cancellations, with foreigners put off by the country’s run-in with Ukraine and the sanctions that have been imposed as a result.

Travel agency tragedy
If ever proof were needed that Russia’s travel and tourism industry has suffered in 2014, doubters needn’t look any further than the cases of bankruptcy that have gripped some of the country’s leading tour operators. It took until July for the country’s oldest tour operator, Neva, to declare insolvency. In the months that followed, close to 20 operators would shut up shop.

“The Russian tourism market is experiencing a profound systemic crisis triggered by political and economic factors. The year 2014 was much worse for the travel industry even than the crisis year 2009, in which outbound tourism dropped 15-20 percent. [In 2014] the demand for tours dipped 30-50 percent and sales practically came to a halt after the first four or five bankruptcies”, says Irina Tyurina, press secretary of the Russian Union of Travel Industry to Russia Beyond the Headlines.

Citing a “negative political and economic situation” as reasoning for its collapse, tour firm Labirint declared bankruptcy at the beginning of August and, in doing so, left over 25,000 tourists to fare for themselves overseas. In terms of damage, the episode was the worst of 14 bankruptcies through July to September, as currency losses forced Russian firms to pay foreign partners in currencies aside from their own.

With a stream of tour operators having filed for bankruptcy since mid-2014, calls for the government to introduce far-reaching reforms have grown louder – not least in Moscow, where politicians have since unveiled a series of proposals to stabilise the situation. And their answer is not simply to reassure unconvinced tourists that Moscow is for them, as one might expect – but instead, it is to make it so that visitors, in particular those on business, cannot help but avoid the city.

Focus on business
“Despite all the efforts the Russian Government has made during the last three to five years to improve Russia’s image as a destination for both leisure and corporate visitors, the tense political atmosphere has negatively affected Russia as a whole, and Moscow in particular, in terms of visitors flows”, says Milasevic.

Exhausted by Western sanctions and an ever-worsening economic climate, officials announced in the dying weeks of 2014 that the solution to Moscow’s tourism woes would be for it to reinvent itself as a global financial centre. The local government then united at the World Trade Centre to present a development programme, focusing on improvements to infrastructure and barriers to foreign investment in bringing a greater number of tourists to the planet’s northern-most megacity.

Policymakers in Moscow have taken pains to build new office space and lay the foundations needed for financial services to flourish in the near future – though without the talent to accompany it, the city is doomed to slide down Z/Yen Group’s Global Financial Centres Index (GFCI). Undoubtedly Moscow looks the part, though buildings such as the Mercury City Tower – Europe’s tallest building – are purely cosmetic until the country can convince foreign businesses that there are rich rewards to be had in the city.

“Moscow is considered to be the business centre of the country. The majority of business events are organised in Moscow or St Petersburg. The biggest part of companies’ representatives are concentrated in Moscow”, says Milasevic. “The economic slowdown and tense atmosphere in the country has negatively affected corporate travel development in the Russian capital. Moreover, the outflow of international financial investments was noted in Russia in 2014. Moscow will remain the centre of corporate events – however, the city already experienced a decline in visitors. According to Euromonitor International, GDP is expected to decline by four percent in 2015, and this will contribute negatively to corporate travel development in the country.”

Moscow’s business travel industry undoubtedly has the potential to pull away from the nation’s dismal economic climate. However, without first breaking down the barriers to foreign entry and welcoming investors with open arms, it’s difficult to see the city realising its full potential any time soon. What’s important in the meantime is that city officials take heed of the country’s recent failings and implement some much-needed reforms. It’s unlikely that we’ll be talking about Moscow next year as the world’s foremost financial centre, but perhaps it can regain some of its earlier promise.