Business travel in Russia and Ukraine has suffered in recent years but are there finally some reasons to be more positive?
You might have noticed that Russia has been in the headlines a lot recently – unfortunately most of the coverage involves alleged Russian interference in the US presidential election and Russia’s alleged ties with President Donald Trump.
With the appointment of an independent special prosecutor in the US to look into these allegations, this is a story that will only run and run – despite Trump’s assertion that it’s all “fake news” and Russian premier Vladimir Putin calling it “hysteria”.
But what all this headline news is obscuring is that the Russian economy is starting to show signs of recovery after two years of recession in 2015 and 2016, which was largely brought about by the worldwide collapse in energy prices, plus sanctions imposed in 2014 by the US and European Union in the wake of the ongoing conflict in eastern Ukraine.
Russia’s central bank is predicting GDP growth of 1 to 1.5 per cent during 2017. While this is hardly a stellar rate of growth, the world’s largest country in terms of landmass is at least pulling out of recession. Although the World Bank admits, however, that “important downside risks persist”, particularly as the country remains reliant on oil and gas prices, and has limited access to international capital due to the sanctions.
Slow growth in business travel
This economic landscape has also had profound effects on the business travel environment in Russia, with major consolidation going on both within the TMC (travel management company) sector and airline industry over the last couple of years.
Philipp Lookianenko, managing director of HRG Russia, says: “The main trend in 2017 is that business travel has stopped decreasing. In other words there is no reduction, but we see very small organic growth of transient business and MICE [meetings, incentives, conferences and exhibitions].
“Moreover, MICE seems to be growing compared to last year for the Russian market, so we may see a certain level of recovery thanks to this business segment.”
Tomas Tachovsky is general manager for north and east Europe at FCM Travel Solutions. He says the recession in Russia has led to changes in the way major global TMCs are operating within the country. “Quite a few TMCs went out of business, plus there have been several takeovers and acquisitions,” he says. “This has enabled FCM to bring considerable new business on board, as we have seen the redistribution of the Russian business travel market volume between the global TMC players.”
But he adds that there continue to be “challenges” in the market, including the comparatively high 9 per cent bank interest rate, as well as “instability” within the Russian banking sector.
One of the most recent moves within the TMC market has seen Carlson Wagonlit Travel sell its wholly-owned Russian subsidiary to local company Vipservice earlier this year, with Vipservice becoming a member of CWT’s global partnership network as part of the deal.
Dmitry Gorin, Vipservice’s general director, says: “This is certainly a historic event for both sides. The partnership deal with the leading global agency is yet a further step in the implementation of our five-year strategy to build the number one TMC in the Russian travel market.”
Hotel prices remain high
Despite continuing economic headwinds, travel prices in Russia remain high – Moscow continues to have the world’s highest hotel prices with an average room rate of £265.96 per day in 2016, despite the rouble’s fall in value over the last few years.
Tatiana Veller is head of JLL Hotels & Hospitality Group in Russia and CIS (Commonwealth of Independent States). She says: “The market in the Russian capital is still riding high, gaining volume of rooms sold in most [hotel] segments, and rates in some.”
With Russia hosting next year’s football World Cup tournament from June 14 to July 15, it’s unlikely prices are going to go down any time soon – even though Moscow has a strong pipeline of new hotels being built.
According to hotel data company STR, the Russian capital currently has 3,500 rooms under construction across 16 projects, and ranks only behind London and Istanbul in Europe for the number of new hotel developments.
Airfares to Russia are also staying relatively high – helped by consolidation, such as Aeroflot taking over collapsed rival Transaero, and reduced competition as some carriers have cut routes – Easyjet suspended its flights from Gatwick to Moscow in 2016 due to “a significant and sustained reduction in demand for travel”.
As a result of these moves, flight prices are expected to rise by 4 per cent this year, according to CWT and GBTA (Global Business Travel Association).
Aeroflot has capitalised on diminishing competition with an 11 per cent rise in passenger traffic last year as capacity on flights to 52 European destinations rose by 5.7 per cent.
The airline has added daily flights between Gatwick and Moscow Sheremetyevo as well as more capacity from Heathrow – increasing its weekly schedule from London to 32 flights. This growth is continuing with a Moscow-Lisbon service due to start this month (July).
“Aeroflot remains on track to deliver on our 2025 strategy goals, envisaging Aeroflot in Europe’s top five carriers by revenue and passenger traffic,” says Alexander Lukashin, the airline’s head of international media relations.
One of the reasons for Russia’s financial problems has been the sanctions imposed by Western nations because of the conflict in eastern Ukraine. This has also had a dire economic effect on Ukraine itself, although there are green shoots of recovery as well.
After two years of recession, Ukraine finally returned to growth with GDP up by 2.3 per cent in 2016, helped by a “bumper” agriculture harvest, according to the International Monetary Fund (IMF), which is predicting further growth of around 2 per cent in 2017, which should increase further in the following two years. However, the IMF warns that this recovery could be threatened by “an escalation of the conflict” in the country’s eastern regions.
One reason for optimism is a resurgence in the aviation sector, particularly with low-cost carriers such as Ryanair and Wizz Air making major moves in the Ukrainian market this year.
Ryanair is introducing flights from both the capital Kiev and Lviv in western Ukraine for winter 2017/18. The Irish carrier will serve four routes from Kiev including Stansted and Manchester, while Stansted is also among the seven European destinations from Lviv.
Ukraine’s infrastructure minister Volodymyr Omelyan says: “The arrival of Ryanair in Ukraine is, without exaggeration, a remarkable event for Ukraine. Negotiations lasted for several years and I am proud that our team was able to successfully hold them. I am convinced Ryanair will be another bridge that connects the infrastructure of Ukraine with Europe and it will be a good signal for the world’s major investors.”
Meanwhile, Budapest-based Wizz Air has also increased its operations in Ukraine with the opening of its second base in the country at Lviv for this summer and deciding to base a second aircraft at Kiev from August.
In another positive move, local carrier Ukraine International has increased capacity on routes from Kiev to key European cities such as Amsterdam, Madrid, Paris, Milan and Rome this summer. It has also added a service from Kiev to Budapest.
This expansion has encouraged airline data firm OAG to declare Kiev as one of three destinations in eastern Europe to watch for potential major traffic growth during the next few years – alongside the Bulgarian capital Sofia and Warsaw in Poland.
“Ukraine’s proud capital city plays a key part in the symbolism of the nation, offering an outdoor haven of lush greenery. It’s easy to see why this destination may appeal,” says OAG of Kiev’s potential. The data firm also looks forward to the arrival of Ryanair in October, saying it “will be a major stimulus to the market”.
Visa rules loosened
The country’s business travel market should also benefit from a deal with the European Union to liberalise visa rules, allowing Ukrainian visitors to enter EU countries for up to 90 days without needing a visa. These new rules will not apply to entering the UK and Ireland.
But despite these positive developments, business travel in Ukraine still has a long way to go to recover from where it was before the conflict started three years ago.
FCM’s Tachovsky says: “The market hasn’t returned to pre-2013 levels before the revolution and due to the war, Ukraine hasn’t seen any new foreign investors. But, in general, the banking and financial sector has started to pick up and we are seeing new booking requests from local clients.
“While the economy is improving for the whole country, this hasn’t fully impacted yet on the business travel industry, but we expect an upturn to come soon,” Tachovsky adds.
Less positively, Tachovsky says that a “freeze” on credit within Ukraine is also a major cashflow issue for local TMCs as delayed payments can create a “serious problem” for agencies to manage when borrowing rates are at 30 per cent.
As the IMF predicts, growth in Ukraine is likely to be “modest” in the next few years, due to “significant external and internal headwinds”, including the ongoing conflict in the east, but at least there are some reasons for cautious optimism.