Signs point to Russia coming in from the cold

(St. Petersburg in Russia)

Despite the current fractious relationship between the U.S and Russia, it's conceivable that a Donald Trump presidency could go a long way toward a thaw between Washington and Moscow, just the thing investors are hoping and betting on. Though today's killing of Russia's ambassador to Turkey shows how charged relations with the country are.

As The Financial Times writes, investors are already plowing in cash, a sure sign that Russia—and its oil—are becoming more attractive by the day.

The hotel industry is taking notice, as well.

Meininger Hotels has announced plans to make its Russian debut in St. Petersburg, with a hotel due to open in the second quarter of 2018.

The news came as politicians, including potential French presidential candidate, François Fillon, have warmed to Vladimir Putin, despite the Russian president’s recent territorial advances, suggesting that Russia and the CIS could be back on the development map.

Meininger is to open its first property under its hostel/hybrid model after signing a management agreement with private equity group VIYM, as part of VIYM’s Nikolskiye Ryady development in St. Petersburg. The overall cost of the project, including both hotel properties—the Meininger Hotel and a Holiday Inn Express—is expected to be around USD$50 million.

VIYM’s co-founder, Andrey Yakunin, is confident about the city's prospects. “We see that St. Petersburg has again been voted the No. 1 destination in Europe. However, we are also witnessing a significant shift in the structure of the demand, with low-budget accommodation steadily growing and out-performing other segments.

“Growth in international independent travellers, the international operated airport in St. Petersburg and the increasingly active development of domestic tourism are just a few of the factors underlying this trend, while the approaching FIFA 2018 World Cup should also not be ignored.”

Hannes Spanring, CEO of Meininger Hotels, was as sanguine. “St. Petersburg is the second-largest city in Russia, and this diverse and interesting metropolis is continuously evolving. It is the second-largest economic and financial centre in the country, one of Russia’s largest scientific and educational centres, as well as an international centre for culture and tourism.”

The Stats

The private equity group reported that inbound tourists to St. Petersburg was up 15 percent on the year to reach 6.5 million in 2015. It described Russia as the largest market of the CIS, with 159 internationally branded hotels in operation and around 140 hotels in the pipeline. Moscow, St. Petersburg and Sochi remain the most developed markets, accounting for 70 percent of all internationally branded hotels in Russia.

Seventy-six percent of the room stock nationally is distributed among the top-five market players: Rezidor Hotel Group, AccorHotels, Marriott International, InterContinental Hotels Group and Hilton Worldwide. Further, it is expected that by 2020, the total number of hotels managed by international operators in Russia will increase by 118 (amounting to 23,450 rooms). Today, international hotel operators are present across 38 different cities in Russia—a figure that is predicted to rise to 54 by 2020.

Rezidor Strong

As VIYM noted, one company well-versed in operating within Russia is Rezidor, which also announced a new Park Inn for Moscow.

Elie Younes, EVP & CDO, Carlson Rezidor Hotel Group, said: “We are committed to maintaining and strengthening our market-leading position in Russia together with our partners. We are looking forward to opening the new Park Inn by Radisson Izmailovo in early 2017. Our fourth Park Inn by Radisson hotel in Moscow will showcase the best of our mid-market brand and its hospitality.”

Despite describing the market environment in Russia as “still tense,” Rezidor has maintained its leading position in Russia/CIS & Baltics. With a total of 77 hotels and 18,450 rooms, the group remained the largest international hotel operator in the region. Its operating room count is twice as high as the room count of its nearest competitor.

The downturn in Russia has meant that the country is more attractive again to foreign travellers and has seen a rise in domestic tourism as Russians are less able to spend on overseas travel. While the sanctions on Russia, as the result after the annexation of Crimea from Ukraine, have made overseas investors cautious—although not targeting them directly—domestic investors have instead started to look to the hotel sector and an established player such as Rezidor represents a safe pair of hands.

The search for safety and reassurance is increasingly extending to the global brands as a whole, according to a study from EY on the region. The company said: “Many local owners and developers prefer global chain affiliation. It is true not only for tomorrow’s owners, but also for existing hotel owners who admit they have ‘squeezed the maximum’ from their properties as independent hotels are now looking for global chains to assist in boosting performance even further.”

Franco-Russian Relationship

Into this comes Fillon and, to a lesser extent, U.S. President-elect Donald Trump. Fillon, a member of France’s centre-right Republican party, is expected to go up against the right-wing National Front’s Marine Le Pen in the presidential election next year.

Fillon is an old acquaintance of Putin’s, who has spoken out against the need for sanctions. Last month saw Putin describe his “very good relationship” with Fillon, adding that he would “do everything” to facilitate closer bonds between the two countries. Fillon is eager to end the shunning of Russia, blaming the invasion of the Ukraine on NATO expanding too close to Russia’s borders and wants Western countries to join a coalition with Russia to combat Islamic State in Syria.

Barring a shock, France looks set to be much closer to Russia by the end of next year, with Le Pen also being pro-Putin, her party having accepted a €9-million loan from a Russian-backed bank in 2014. She, too, would like to see sanctions lifted.

The case of Trump is a little more complex, with the CIA pointing to assistance in the Republican campaign from Russia hackers. Trump has repeatedly praised the Russian leader’s “strength” and, like Fillon, sees Russia as a potential ally against ISIS.

Trump's choice of Rex Tillerson, chairman and CEO of Exxon Mobil, as secretary of state is a further signal of Trump's willingness to engage amiably with Russia. Tillerson has a relationship with Putin as a result of negotiating oil deals in the region, something which caused consternation amongst left-wing commentators.

At home in Russia, sanctions and the fall in global oil prices have meant that, according to the World Bank, GDP fell by 40 percent between 2013 and 2015. Many observers have attributed Putin’s sabre-rattling to the need to distract his disgruntled citizens.

All of which could destabilise hotel development in the short term. However, for all their enthusiasm, the global players have been cautious. As Rezidor has said: “We have no financial exposure, no investments, no key money, no loans, we are pure asset light.”

With no skin in the game, the risks are less and, should Putin find himself back in favour, Rezidor and its rivals are set to benefit.

Katherine Doggrell is an editor at Hotel Analyst, the U.K.-based news analysis service for hotel investors.