The main tendencies in Russia's hotel industry can be traced using the examples of Moscow and St. Petersburg. The market's high end is represented by five-star hotels and is oriented toward foreign businesses. Therefore, it is concentrated mainly in these two cities. The inflow of business travelers to Russia suffered a major decline in the wake of the August 1998 economic crisis, and only now has it climbed back to the pre-crisis level. The inflow of touring businessmen is relatively stable and does not tend to increase, which creates very tough competition on the market for five-star international-class hotels, especially in Moscow.

A specifically Russian phenomenon is the hotel market's poor exposure to international events. Guests of international conferences account for not more than 3 percent of the turnovers of Russian hotels, while elsewhere in the world, especially in poorly developed countries, international-event hosting represents a considerable source of income for hotels. Third World countries seek to get included in international-event calendars, and it is precisely the hosting of high-profile international events that accounts for most of the income in the high-end segment of their hotel markets. In Russia, this scheme does not work. After the crisis, Russian hotels were forced to wage price wars against each other. The war was started by the Marriott chain: Its post-crisis dumping won it the leading position on the market and pushed prices down by 15 percent on Moscow's hotel market during the year 2000.

International hotel chains manage nearly all of these hotels, and they prefer not to invest too much in property. Practically all the major international hotel chains are represented on Moscow's market, except for Hilton, which was expected to come in last year but still has not.

There is a problem with hotel certification in Moscow. Business experts prefer to use the terms "high end," "middle end" and "low end" when describing the hotel industry here. The high end is fully saturated, while the middle end and low end display an obvious shortage of hotels offering sufficiently comfortable conditions and a satisfactory value for money. This is primarily because a five-star hotel and a three-star hotel cost nearly the same to build, but profit margins of running them are very different.

"Elsewhere in the world, the cost of building a five-star hotel is very different from that of building a three-star one, while in Moscow these costs get leveled," said Marina Smirnova, the head of the Analytical Department at the University of Hotel, Travel and Restaurant Businesses association. "Profit margins vary from hotel to hotel, but on the average a hotel operating in the high-end segment pays back in six to eight years. This is why this segment is so attractive for investors."

The structure of ownership in Moscow's hotel industry is as follows: state-owned facilities (12.2 percent); joint-stock companies, including those in which the Moscow government holds stakes (24.4 percent); joint ventures with foreign share of ownership (6.7 percent); and hotels owned by companies, ministries, departments, etc. (56 percent). Disclosure is poor. Between 2002-04, an auction of the stakes owned by the city is planned. The process has already started, but has aroused little enthusiasm in investors: The stakes offered for sale (in a total of 12 hotels) are not only unprofitable, but are under 25 percent each, i.e. do not make the owner entitled to a right of veto. It is indicative that the only hotel, Renaissance, in which the city government is selling a controlling stake, has emerged on the "black list" of the Committee on Bankruptcies, even though the hotel is under the management of Marriott.

In January, the Moscow government considered a program called "The Golden Ring of Moscow" that should attract a total of $2.4 billion of investments to the city to build a minimum of 17 high-end class hotels to a total floor space of 2 million sq. meters in the city's downtown. Earlier developments in this direction included a modernization project at the Hotel Moskva and the demolition of the Intourist Hotel to vacate space for a future Hilton. However, industry insiders are rather skeptical about the prospects of "The Golden Ring of Moscow" project.

"Without a doubt, the project is huge, but the problem is that it has not been brought even to the stage of a thoroughly calculated business plan," Smirnova said.

"I must say that the city authorities tend to overestimate Moscow's potential for tourist attraction. What the city really needs is more hotels in the market's middle-end segment providing services on the international-quality level. Only one three-star hotel has been built in Moscow in the last several years, Ozerkovskaya. It comprises 27 suites and was built by a travel agency. Instead of contemplating unrealistic privatization plans in the sector, it would be better to transfer these stakes to somebody's trust management," she added.

"Russia's tourist attraction is hampered by several objective factors, such as the visa regime, distant location, etc., but the shortage of three-star hotels also represents a major obstacle," said Alexander Lesnik, president of the University of Hotel, Travel and Restaurant Businesses association.

There are some projects aimed at increasing the number of middle-end hotels in Moscow. According to our sources, a number of companies specializing in professional building construction have developed a strong interest in the middle-end hotel segment. Also, the Moscow government's Department of Investment Policies has developed a more-or-less realistic project in this segment of the market.

"Our immediate plans call for building a chain of 14 three-star hotels," Deputy Head of the Moscow government's Department of Investment Policies Yevgeny Leonov said. "At this moment, the project is on the stage of a verified business plan. The first hotel in the chain is planned to be erected on Bolshaya Polyanka Ul., and the payback period is estimated at four to four-and-a-half years. Eventually, the chain will be transferred to the management of a Western hotel company. The three-star segment is fairly promising, especially given that those hotels currently representing this segment are those inherited from the Soviet era and, hence, are of poor quality. Besides, our project has aroused strong interest from many travel agencies," he added.

St. Petersburg is expected to see a considerable influx of investments this year. According to information available to Department for Hotel Accommodation and Service Development at the St. Petersburg administration's Committee on Foreign Relations, there are currently 135 hotels in the city designed to accommodate 33,474 people (hostels and dormitories included). The total capacity of the city's five high-end hotels is 2,334 beds. According to forecasts made by international experts (which are taken as guidelines by the St. Petersburg mayor's office), the city's demand for hotel accommodation will be increasing at an annual rate of 10 percent until the year 2008. Based on these forecasts, they have drafted a project of reconstruction and modernization of the city's hotels Pulkovskaya, Pribaltiiskaya, Moskva and Oktyabrskaya to upgrade them to the four-star class.

In 2002, some $200 million is expected to be invested into St. Petersburg's hotel sector.

"The federal program coinciding with the city's 300th anniversary provides for the allocation of 40 billion rubles. Unlike Moscow, St. Petersburg does not have enough hotels in the high-end segment; therefore we have reason to expect considerable development in St. Petersburg's hotel market," Smirnova said.

(The author is a Moscow-based freelancer who specializes in economic issues.)