Andrew Osborn








Night in Moscow: It'll Cost You

The Wall Street Journal, 6th August 2008 11:48

By Andrew Osborn

Moscow -- When Robert Jenkin, CEO of a multimillion-dollar property firm, travels, he stays in four- and five-star hotels in Tokyo, New York and most other major cities. In Moscow, he rents apartments, braving shabby stairwells, Soviet-era furnishings and sketchy management agencies.

The calculus is simple: A week's business here can come with a $5,000 hotel bill, while Mr. Jenkin, who lives in Sofia, Bulgaria, pays just $1,500 for an apartment. "It wouldn't make sense to rent in other parts of the world," he says. "But this is Moscow."

And in Moscow, hotel rooms are among the most expensive -- and hardest to find -- in the world. According to Hogg Robinson Group, a corporate-services firm, the average room rate in Moscow has risen by 93% since 2004. The average price for a business-class room in Moscow last year was $540, a survey by Hogg Robinson showed. That compared with $384 in New York.

Phone around Moscow's central hotels, though, and even $540 seems cheap. Many rooms are near or over $1,000 a night. The Baltschug Kempinski, some of whose rooms enjoy a Kremlin view, was charging a minimum of $1,600 on a recent weekday night, while the Ararat Park Hyatt, a favored spot for Western celebrities, was asking $1,300.

It's all about demand racing ahead of supply. As Russia's oil-fired economy has boomed, real-estate prices in the Russian capital have soared, inflation has ticked upward, and the rich have become richer. Hulking Soviet-era hotels have been torn down, taking thousands of moderately priced beds out of play. In a handful of cases, four- or five- star hotels have risen in their place. But frequently, construction has lagged behind deconstruction, creating a chronic shortage of rooms. Meanwhile, foreign businessmen continue to flock to the city as investment soars.

Adding to the problem, two- and three-star hotels have become an endangered species in central Moscow as high real-estate costs have made them less attractive to developers. Gennady Lamshin of the Russian Hotel Association says people who don't book two or three months ahead for the peak spring and fall period can't get a room at any price. That, he says, forces people to hunt in the outskirts of the city or even in small towns outside Moscow.

Tour operators say they are being forced to turn away groups of foreign tourists because there's nowhere to put them. Irina Tyurina, spokeswoman for the Russian Tourism Union, says that up to half of all bookings made less than one year in advance are rejected for that reason. "There are just not enough hotels," she says.

After hotel prices spiked in 2007, Ms. Tyurina says, one Russian tour company invited its British partners to Moscow to prove they weren't lying about price increases. "They just couldn't understand why one hotel was suddenly 30% more expensive when nothing about it had changed." The dearth of affordable accommodation was highlighted again in May when Moscow hosted a major international soccer match. Many visiting British fans stayed out all night, or slept on friends' sofas, to save money. One enterprising firm rented hundreds of berths in cruise ships moored on the Moscow River.

City Hall says it is aware of the problem. It has a plan for the number of hotels to more than double from 219 to 556 by 2010. However, the Russian Tourism Union says it will take 79 years to hit that target at the current rate of construction.

Short-term apartment-rental agencies and a small number of budget hostels have scrambled to fill the void. Apartments start at $150 per night for the most basic accommodations, while minihotels charge as little as $25 per night for shared accommodation and $70 for individual rooms. "Shared" conditions can be Spartan, often meaning a student-like dormitory with as many as eight to a room. Apartments can be hit or miss. Mr. Jenkin recalls how he was once woken in the early morning to find someone from the rental agency wandering around.

Business travelers loath to sacrifice their dignity at the altar of economy negotiate corporate rates, rent apartments or choose hotels outside the city's center. Another popular option is to stay at one of Holiday Inn's Moscow outlets. Even these are much more expensive than their equivalents elsewhere in the world -- the cheapest room in the chain's most centrally located hotel on a recent night was $280. Other Holiday Inns can be situated far from downtown, so it pays to be vigilant when booking.

For now, the high hotel prices are largely confined to Moscow. St. Petersburg, Russia's main tourist draw, has a more-diversified market for short-stay accommodations. But there are signs that Moscow's prices are being exported. When a major economic forum was held in St. Petersburg in June, many hotels demanded minimum four-day stays and boosted charges. Antimonopoly authorities are investigating.

In Moscow, the outlook remains very tight as demand from business travelers continues to rise. With Russia's economy expanding between 6% and 8% a year, the city has become a magnet for foreign investors. Some are involved in the oil and gas industry, others are hoping to snag lucrative contracts to upgrade Soviet-era infrastructure, while others want to piggyback on a consumer boom that has attracted big-name retailers such as Sweden's Ikea Group.

"There are business delegations coming in all the time from all kinds of companies from all over the world," says Frank Schauff, CEO of the Association of European Businesses. He reels off a list of investors he has met in the past week from the telecommunications, steel, pharmaceuticals and chemicals sectors. Many of these visitors are traveling on corporate accounts and are therefore not "price sensitive" when it comes to hotels, analysts say.

They also want to give the right impression. "If you're sealing a multimillion-dollar deal, being in a shabby hotel is not going to help your cause," says Stephane Meyrat, vice president of Jones Lang Lasalle Hotels, a company that advises hoteliers and hotel investors.

Simon Cooper, president of Ritz-Carlton Hotel Co., whose sole Moscow hotel was charging a minimum of $1,300 on a recent weekday night, says Russians' growing personal wealth is helping to push up prices. With an estimated 74 billionaires, as measured in U.S. dollars, Moscow has more super-rich residents than New York. "It's what people are paying that is driving this," Mr. Cooper says, adding that many of the Ritz's Moscow customers are businessmen from elsewhere in Russia.

The lack of supply has been exacerbated by a major demolition program of Communist-era hotels. Some, such as the reviled Hotel Intourist -- which morphed into the Ritz-Carlton -- were reincarnated as five-star temples of luxury. But many have still not been replaced. Among those taken out of service: the giant Soviet-era Rossiya hotel near Red Square, which had around 3,000 rooms and was the largest hotel in Europe. Nothing has so far risen in its place. The Hotel Moskva, which appears on the labels of Stolichnaya vodka, was also razed; a replica is being rebuilt with a different interior. Due to open next year, it will be run by Four Seasons Hotels & Resorts.

In other cases, hotels have been closed for lengthy renovations. When they reopen, their prices are inevitably higher. The 1,000-room Hotel Ukraina, a Stalin-era skyscraper, is shut for a make-over into a five-star Western hotel. Few expect its sub-$200 rooms that used to be advertised as being "tastefully decorated in Soviet style" to survive.