Letter from Russia

Howard Gethin reports on why things may be starting to look up for the travelling businessman in Russia

For those who have travelled in Russia's provinces, memories of the hotel are not usually among their fondest recollections. Most towns only have one or two overpriced places to stay, leading to the high occupancy rates prevalent in Russia, exacerbated by the growing demand for accommodation from Russian businessmen moving within the country. Perhaps not surprising then that a growing number of businesses have started to develop chains of budget-priced hotels in the regions of Russia, with the first likely to open in just a couple of years.

A number of consortia began to explore the possibilities within the market around three years ago, and a few are now close to starting construction. Moscow-based GVA Sawyer is believed to be the front-runner in the race to build, with a projected eight-hotel chain under development.

The firm's boss, Cameron Sawyer, an old hand in the Russia real estate market, is teamed up with Kesco, a Russian corporation with interests in oil and the port city of Novorossiysk on the Black Sea. Novorossiysk is typical of many Russian cities which are at the centre of booming regional economies - helped by the fact that it is the seventh biggest port in Europe and Russia's largest, with around 30% of the nation's crude exports going through it.

Kesco had trouble finding suitable accommodation for its staff who were visiting the city on business, and decided to solve the problem in partnership with GVA Sawyer.

'We started discussing this three years ago, and visited the city in the autumn of 2001,' says Sawyer.

'When we ordered a feasibility study from the English hotel consulting firm HVS, they said that this was just off the scale in terms of potential. There is a lot of money in the city - even the dock workers there earn $1,500 a month and apartments cost about the same as in Moscow.'

Kesco is the project owner, with GVA Sawyer as a minority investor and developer. The operator for the hotel is ACCOR, the largest hotel operator in the world. ACCOR is also a possible investor. The institutional investor is yet to be decided, although there are several potential candidates.

Other consortia also have plans for similar hotel chain projects in Russia, but none are at such an advanced stage as the GVA Sawyer/ Kesco project.

In February 2003, Delta Capital Management announced plans to open up to 50 Country Inns and other branded hotels across the country by 2012, in co-operation with two European investment funds and Rezidor SAS Hospitality.

Kempinski Hotels & Resorts, which operates the Baltschug in Moscow and the Grand Hotel Europe in St Petersburg, has also announced plans to set up a chain of three- or four-star hotels in the regions.

Another project in progress is Intersetotel, a proposed $500m chain of two- or three-star economy hotels all over Russia which was initiated by the Russian Gold holding last year and is being developed by IMES Consulting.

The latest entrant in the market is Russia's Base Element group, which announced plans in June to build hotels, with business centres and offices in cities with a population of over half a million, in areas such as the south, the Volga region, and Urals. Group managing director David Giovannis claims the move is part of a strategic diversification of Base Element, which is dominated by metals. The group has, as yet, no sites for its planned hotels.

The potential for competition in the sector does not worry Cameron Sawyer. 'Every one of these cities needs several of these hotels,' he says, 'so I don't think it's fatal if after our Novotel opens in Novorossiysk, there are Marriots or Radissons appearing.'

Howard Gethin is a business journalist based in Moscow.