The world financial crisis is starting to impact on the Russian economy, mainly due to the reduction in the price of oil and other natural resources which in turn has reduced the level of interest of foreign investors in the Russian market. 

Until August 2008, Russia was considered to be a safe haven, unaffected by the global down turn. Russian bank were not involved in the sub-prime lending and Russia's has a huge reserve fund, (the second largest in the world) the aim of which was to create a cushion for the Russian economy in difficult times. 

Nevertheless, there are other issues affecting the Russian economy connected with the intervention in Georgia which together with the global slow-down has created a lack of liquidity in the banking sector and a lack of trust and confidence between banks. At present, this is mainly impacting the stock exchange, the banking sector, and the real estate sector.

Foreign investors confidence was first influenced by the events in Georgia in the summer, but the Russian government has been pro-active in trying dealing with the crisis of confidence, first, by making large sums of money available to maintain market liquidity and secondly by regulating trade on the Russian stock exchange. Concerning the injection of liquidity, the majority of this money is being distributed by state supported or state friendly banks such as VTB bank, Sberbank and Gazprombank, which seems to indicate that not all companies will have equal access to the funds.

In the wake of tumbling oil prices, the government is also supporting the oil companies, which account for up to one third of Russia's exports by lowering the government tariffs on oil exports. The tariff reductions will result in another 140 billion rubles for oil producers and hopefully encourage them to invest in the industry.

The majority of the Russian population do not have investments or any connection to the Russian stock exchange, nor any bank credits, although the Moscow Middle class have been actively taking out mortgages on real estate, which may now be worth less than they have paid for them.

At present, the Russian government is trying to put the bulk of the blame for the present economic situation squarely on the shoulders of American banks and accuses them of destabilization the world financial system. However at the same time, the Russia's financial policy has shown a lack of control over their own banking activities, and are largely directly responsible for the mortgage problems.

In recent years, Russia has suffered from high inflation, with rates averaging above 12% and partly as a result of this, a huge increase in professional salaries, although this is also due to insufficient qualified labour supply.

Inflation

Russia suffers much higher inflation rates than other countries in Europe, at present inflation has reached almost 15 %. Economists are worried about the impact of government's liquidity injection, and if this will further accelerate this and undermine salaries. For that last 2 years, Moscow has been the most expensive place to hire an office and one of the top 3 most expensive places to live for an expat.

The role of Russia's internal weaknesses on the Russian economy

Much of the losses on the Russian stock exchange were sustained prior to the international instability, suggested that the causes maybe strongly related to internal problems not international ones. However, according to analysts, there has been no reduction in the income of the population in August and there has been no impact on retail spending yet, but this may be partly due an increase in credits to individuals, which were up by 4 % in the summer of 2008. 

Many fear that this is likely to signal the end of the current credit boom and the affect of the global financial crisis, capital outflow and the slump on the stock markets has only served to provoke and further aggravated the internal economic changes.

The Affect of the Economy on the growth of the Russian outbound travel industry

MICE: Decrease in bookings in 2009

According to Alexey Krylov, the Director of UTS Travel one of the top 20 Tour operators with a strong specialization in Business travel, "the MICE sector in Russia will be affected by the financial crisis, at least in the short run". He says that until now his company has not experienced any decline of outbound business traffic, but he expects to see a small decline from the beginning of 2009, as companies try to cut down on all expenses, including travel.

Other MICE agencies interviewed noted that certain sectors will be particularly affected and will be likely to cut down on their activities, those sectors are: the banking & insurance sector, and the oil & gas sector. The banking sector has already started cutting jobs and expenses, which might start to eat into incentives & events budgets in 2009. Other sectors however will not be affected so directly and are therefore unlikely to change their plans.

Other companies have noted that clients are still willing to carry out MICE activities but on tighter budgets, this is resulting in a move from Europe back to more traditional and value for money destinations such as Turkey and the Middle East.

Luxury market remains optimistic

Tours to all destinations have become more expensive, most companies believe that the FIT sector (especially the high end) is not at risk, as it is a very well-off segment. These people are likely to travel as they used to. According to the statistics, the main category of FIT tourists are people with an annual income of over 100 000 EUR (1.5- 2 million people) and those who earn over half a million Euros per year (just under 1 million people). "Over the last few years, the FIT segment has grown by 20-30%,but the economic crisis will probably reduce the level of growth, but agents report that it is business as usual in this sector.

The General Director of Capital Tour, one of the leading Russian tour operators on mass destinations, Inna Beltyukova, believes that the VIP and luxury sector will not be affected, "as these people are still too rich to change their travel habits". She says that niche tourism – traditionally popular in winter sightseeing and ski tours to Europe are also unlikely to be affected, as these types of tours tend be book in advance.

Mass tourism: winter season forecasts

Many Russian travel agencies and tour operators expect or already report a decrease in demand for Christmas and New Year tours for the mass market. *Other experts say that their clients are still booking their Christmas holidays, as the crisis still has not affected average person yet, but as Russian tourists are notoriously high spenders, and their "live for today" philosophy means that they will probably will not cut down on their spending until the situation is critical.

Many industry players believe that mass destinations market may suffer the most. *Some of them predict that the most popular winter destination, Egypt, may see a 10-15% decline. Popular winter long-haul destinations may also suffer, as flights are now more expensive, and many of those who have just started to travel to more long haul destinations, like South-East Asia or the Caribbean may "come back" to more traditional locations like Hurgada and Sharm-el-Sheikh. Those who will still go to Asia or an exotic islands, may book 4-star hotels instead of 5*.

Capital Tour's General Director, Irina Beltyukova says it's the first time in 17 years that none of very large Tour operators have not reported any huge success during the summer season.* "We‘ve been feeling that some sort of problems is coming since the third quarter. In May, there was an increase but then from July there was only stagnation", she said. The market is still keeping up due to the confidence of tourists who are still plan to go skiing or a warm winter destination and spend their New Year abroad".

Boris Burikin, general director of Ascent Travel, reports a decline for "sea and sun" destinations like Thailand and the Canary islands. "Vietnam and Cambodia are new destinations for us, he says, but we are not happy with the results at all".  Other operators also say they are experiencing a decrease in sales to Thailand and New Year programs but have more stability with ski tours to Europe. H

owever Rosa Vetrov, another large Russian TO, and Solvex Travel, reported around decline in demand for skiing. Companies selling beach destinations like Bali, Malaysia, India, Cuba, and the Dominican Republic are worried – these kind of products are usually the most "risky", as their customers are usually the first ones to cancel their trips in the case of financial difficulties. Some companies have taken a large amount of allotments for long-haul destinations, and are worrying that might not be able to sell them all before the New Year.

Something positive

According to operators, not all destinations are falling down. Ascent Travel says sightseeing tours to Europe are still selling well, Youzhny Krest, one of the main TO for Asia, reports stability for China and Jordan, and Solvex is very satisfied with the demand for Israel. The President of Megapolus Tours, Andrey Kouznetsov, says their results now are even 30% higher than for the same period of 2007. "Expensive FIT and very cheap mass products are doing well so far".

TMI is a boutique marketing and public relations company providing a full spectrum of integrated services in Russia and the CIS. Headquartered in London, TMI has its main representative office in Moscow which opened in 1999.

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