President Putin's Russia is proving an attractive environment for hotel investment, with some international brands planning to tap in to the country's secondary cities in the next few years.
With the Russian economy gaining strength, buoyed by a stable political situation, consultants and hotel groups believe there is a growing need for midmarket hotels for Russia's domestic market as well as potential growth in tourism.
At last week's International Hotel Investment Forum in Berlin, Rezidor SAS, which already has five hotels in Russia, announced plans to introduce its three-star Country Inn brand in St Petersburg and Moscow before expanding across the country.
"We expect to have four to eight additional hotels in the first three years and up to 50 in 10 years. The potential is enormous; there are 50 cities with over 500,000 inhabitants in each. The future hotel market in Russia is large, and we have to be there," said Avrid Hovland, vice-president, business development, of Rezidor.
Hyatt opened its first 219-bedroom hotel in Moscow, the Park Hyatt, in October 2002, and the 436-bedroom Hilton in Red Square is to open in 2006.
It is understood that Ritz-Carlton and Four Seasons are also seeking properties in Moscow.
However, property deals can be lengthy and complex for outsiders. "Traditionally, the problem was funding the hotels. This has changed - now the big problem is land issues," commented David Simons, partner at Universal Property & Development Company.
Negotiations to develop a property typically take about six months, and additional costs, such as higher insurance from lenders and "corruption tax", also have to be accounted for.
"It is a multiple bribe-taker environment, and any administration problem can be overcome by bribes," said Dr Edgar Rosemary, director of property, tourism and shipping for the European Bank for Reconstruction and Development.
However, Rosemary added that government initiatives to tackle corruption were beginning to make a difference. He claimed that the average business paid about 1.4% of turnover in "bribe tax".
"This is a decrease compared to around 1.7% a year before, but there is a long way to go," he said.
By Christina Golding
Source: Caterer & Hotelkeeper magazine, 20 - 26 March 2003