Russia – Ukraine crisis: Aftershocks in travel and hospitality

Russia – Ukraine crisis: Aftershocks in travel and hospitality

[Credit: Nikita Karimov on Unsplash]

Russia / Ukraine: Eloise Hanson, editor of Boutique Hotel News, and Paul Stevens, editor of Short Term Rentalz, examine the aftershocks of the war in Ukraine and what it means for the travel and hospitality industries.

Russia’s invasion of Ukraine has sent shockwaves throughout the world. The devastating upheaval of lives and resulting measures imposed on Russia has sent the global economy reeling.

Travel and hospitality businesses, despite recovering from the harsh blows of the pandemic, were quick to respond. A growing list of companies offering support to victims of the humanitarian crisis can be found here – a testament to the industry’s resilience and tenacity.

The disruption arising from the Russia-Ukraine conflict is varied. Further stress will be placed on global supply chains and raw materials, and inflation will impact construction costs, labour, utilities and more.

The impact on energy prices and operating costs [EH]

In the UK, the cost of living has soared. Media sources have recently reported that inflation in the country has reached a 30-year high of 5.5 per cent. Over in the USA, inflation is at a 40-year high, with further rises now expected following Russia’s invasion of Ukraine.

Russia is one of the largest international providers of gas, and western sanctions could lead to a constriction of supply which would further hike prices. When the energy price cap is next adjusted in October this year, the wholesale price of energy has been estimated to top £3000 annually for households in England, Wales and Scotland.

Whilst the UK relies on Russia for around five per cent of its gas supply, the European Union imports around 40 per cent of its natural gas from Russia. Should Putin respond to the sanctions by reducing its volume of supply, or even suspending it, the knock on effect this could have on the travel and hospitality industries could be huge. He has already imposed an export ban on more than 200 products until the end of 2022, affecting about 48 countries.

To begin with, the hospitality sector has been grappling with escalated overheads since lockdown restrictions began to lift last April. The testing combination of shortages in labour and the unavailability of goods has led to increases in payroll and food and beverage costs, which has now coincided with rises in energy bills.

“The surge in energy prices is already being felt with unleaded petrol prices reaching record highs at around 150p per litre, as oil prices rise to $115 per barrel due to increasing fears over supply,” says Chris Tate, head of hotels and accommodation at RSM. “As huge consumers of energy, this spike in energy costs will put extra pressure on the bottom line for many UK hotels at a time when staff costs are due to increase and pandemic support measures come to an end.”

Energy is the second largest spending category for hotels, second to labour. The wider hospitality sector (hotels and other types of accommodation) accounts for two per cent of the five per cent global CO2 emitted by the tourism sector. It’s an incredibly energy-intensive industry and steps have been taken over the past few years to transition to a circular, more sustainable, net zero carbon strategy.

How to manage rising cost pressures is explored in the latest feature from Boutique Hotel News. Advice includes forward purchasing energy where prices are still acceptable, as well as implementing effective monitoring solutions to track consumption and inform behavioural changes.

As operational costs climb, hospitality businesses may have no choice but to pass prices on to the customer. A survey by UKHospitality reveals that 93 per cent of 340 operators (representing 8,200 venues) intend to increase prices by an average of 11 per cent this year.

Whilst the hospitality sector faces some serious headwinds, the long-term travel tailwinds are strong. Operating costs might be high but revenue forecasts are healthy – even in spite of OTAs such as Expedia ceasing trips to and from Russia. Consumer sentiment to travel is understood to be delicate, though cautiously optimistic. Historical analysis from STR about rising gas prices show little impact on US hotel demand. In its latest market recovery report (published 4 March), STR writes “we don’t believe [inflation] will be a deterrent for travel… as individuals rush to enjoy a sense of normalcy”.

Tim Hentschel, CEO and c0-founder of HotelPlanner, says: “Our hearts go out to everyone affected by the Russia-Ukraine conflict. Fortunately, I think most of the unease and uncertainty is isolated to eastern Europe. The vast majority of Europeans still have plans to travel this year after two years of restrictions that are now finally easing.

“We don’t anticipate the Ukraine conflict to affect the US travel recovery. For example, prior to the bans on Russian travel, only about 200,000 Russians were expected to visit the US this year, which is a pretty small market compared to the millions of visitors the US receives every month.

“We believe this is the year of the travel comeback, despite the geo-political challenges in eastern Europe. For instance, the World Travel & Tourism Council (WTTC) anticipates that US travel and tourism will exceed pre-pandemic revenue levels by about six per cent this year, hopefully by this summer. This equates to about $2 trillion in US GDP. Florida has already rebounded, surpassing its pre-pandemic travel and tourism revenue.

“I think there will be a domino effect across all 50 states in the coming months. Likewise, I’m sure the EU and the UK are anticipating a similar recovery in the coming months.”

Hentschel adds: “Inflation may affect some people’s decision as to where to travel and how much to spend. However, the two years of pent-up travel demand coupled with consumers saving more disposable income is likely to outweigh any inflation concerns. For example, the trend we’re seeing is to ‘go big’ – one survey shows that Americans plan to spend on average $2300 USD on their next trip and 90 per cent of Americans have said they will travel this year, with two-thirds of this group travelling in the next six months.

“Given the record high inflation and geo-political uncertainty in eastern Europe, along with the labour and supply shortages that the entire service industry is experiencing, we recommend that travellers plan and book their trips for the entire year now, to lock in lower rates. It’s a smart move to hedge against further price increases.”

It’s unclear whether the rising cost of living is directly affecting hotel occupancy rates, however data from RSM Hotels Tracker reveals a drop in UK performance at the start of the year. Attributed to an Omicron hangover and the inflationary market, hotel occupancy declined from 56 per cent in December to 47 per cent in January. ADR remains only £12 behind pre-pandemic levels at £72, though RevPAR fell from £53 to £34.

The travel sanctions imposed on Russian companies could possibly make matters worse. Chris Tate, head of hotels and accommodation at RSM, explains: “It’s too early to see the effects of sanctions on consumer travel spend and hotel occupancy rates; however, the uncertainty could impact consumer confidence. Consumers are already feeling the pinch due to the cost of living crunch, which could worsen if soaring energy prices push inflation rates higher.

“Consumer confidence is closely linked to consumer spending, so a drop in confidence is likely to lead to lower spending. As consumers look to tighten their spending, luxuries such as travel could be stalled, which in turn would see hotel occupancy rates decrease,” he adds.

Recovery and the effect on the luxury travel market [EH]

From a financial standpoint, rising operational costs could make the underwriting process for hotel deals more difficult. The economy is in a state of flux and projected valuations will be complex. There is a lot of capital waiting to be deployed into the sector, and mounting pressure on cashflows could increase the potential for distress and funding-led sales taking place.

A recent report from Knight Frank reveals that in 2021, 58 per cent of overseas capital injected into UK hotels came from North America, and a further 27 per cent from Asia. This would suggest there is little direct Russian investment into UK hotel real estate, which should further bolster investor confidence.

What’s more, the year began with great potential for hotel recovery. The conflict may heighten the operational headwinds which the sector was already facing, however sentiment is opportunistic.

In the latest newsletter from AHV Associates, the company notes: “In February, the trend of rising inflation persisted and has led to a moderate increase in interest rates which are expected to keep rising over the next two years. That has resulted in downward pressure on the stock market, while at the same time, the increased geopolitical tension in Europe’s backyard has resulted in a new spiralling of rising energy costs that again has a direct impact on the real economy and the markets.

“In the hospitality sector, however, we saw a strong start to the month (March) with many hotel groups announcing impressive full-year results, highlighting the strong momentum the market has as it rides out the pandemic,” it added.

Regarding inbound travel, Visit Britain recorded 199,000 visits in 2019 by Russian nationals to the UK, generating some 1.7 million overnight stays and £182 million of spend. London was the leading destination for a Russian visiting the country, although the South East, the South West and Scotland remained popular destinations.

Despite the sanctions imposed on Russia, London’s recovery is not expected to be significantly disrupted by the loss of the Russian market. Renewed marketing efforts post-Covid will likely focus on long-haul overseas markets such as the USA, Asia and Middle East. Plus, with travel restrictions now lifted combined with the benefit of flexible cancellation policies, the short-term should bring continued hotel bookings from overseas visitors, supported by the strength of the staycation market.

As more accommodation providers open their doors to Ukrainian refugees, it also positions hospitality as a force for good. The altruistic nature of the industry will unlikely be forgotten any time soon, paying long-term dividends.

Turning to the luxury travel market, Chris Tate, head of hotels and accommodation at RSM, suggests: “Currently, it’s not clear how the luxury hotel market will be impacted by the Russia-Ukraine conflict. However, in 2014, UK hotels and shops saw income from Russian consumers fall 17 per cent as a result of the political unrest in Ukraine. This could act as an indicator of the potential severity of implications which may arise from the current crisis.”

Throughout the pandemic however, luxury hotels have performed well in comparison to other segments of the industry. In fact, luxury took the lead in regional UK performance (2020-2022) according to data from STR.

Over in the States there’s a similar trend. Tim Hentschel, co-founder and CEO of HotelPlanner, says: “The luxury market has been surging over the past year. With consumers saving more disposable income, they’re more inclined to book a luxury, bespoke, all-inclusive holiday and spend two-to-three times more than they usually would. Any short-term dip in the luxury market due to Russians no longer travelling will quickly be absorbed by other luxury travellers, which means a fast-growing consumer segment.”

As new sanctions are imposed on Russian elites, governments are upping their responsibilities towards holding Russia accountable for its war crimes. The collective efforts to thwart the cause whilst simultaneously lend a helping hand has not gone unnoticed.

The effect on the luxury villa / rental market of losing Russian business [PS]

Analysing the luxury rental segment, the indefinite absence of inbound tourists from Russia and Ukraine is likely to directly impact certain destination markets in Europe, although the sanctions placed on Russia will also have knock-on consequences on the invading country’s travel and hospitality industry.

Across the continent, Russian tycoons and magnates have been able to settle in residential areas and seaside resorts by accessing so-called “golden visas”, which enable foreign citizens to reside and work in another country for six months a year. This is on the proviso that they fulfil requirements including not having a criminal record in the last five years, having public / private health insurance, and demonstrating their financial capabilities to buy properties or acquire shares.

One of the beneficiaries of Russian investment in Europe is Spain. As explains, over the last decade, the Spanish real estate sector has become something of a haven for dachas – luxury stately homes of Russian high society who have built their fortunes on combining leading business empires with positioning their support for the Putin regime. According to data provided by Property Registrars, more than 2000 homes valued at more than half a million euros each were purchased between 2012 and 2021 by citizens of Russian origin, compared to 215 by those of Ukrainian origin.

There is a similar situation in countries such as Greece – where money-rich Russians bought up luxury villas on the cheap as investments or second homes in the wake of the country’s recession – and France – where luxury ski resorts have been a sought-after destination for oligarchs, as well as Turkey.

Among the concerns for these tourism sectors, the loss of a high and growing volume of tourists from Russia due to war and imposed sanctions will hit both leisure and business travel in European markets, as well as potential investments in the future, leaving the strong possibility that more properties will be left abandoned.

Beyond Europe, the likes of the Maldives, the Dominican Republic, Goa and Tanzania have emerged as increasingly popular destinations for high-spending Russian tourists, and will be similarly affected.

Even the more secretive offshore tax havens (Switzerland, Monaco, Cayman Islands) and Italy – Russia’s second most important commercial partner in the EU – have eventually cooperated in the sanctions, with police in the latter reportedly seizing villas and yachts worth up to 143 million euros ($156 million).

Meanwhile in Russia, the war itself may not have a direct impact on the short-term rental industry itself – Russian short-term rentals rely heavily on domestic tourism and accounted for almost three per cent of total European demand in 2021 according to AirDNA. But the international response and sanctions such as taking Russia out of the SWIFT payments system will restrict any immediate business.

With cross-border travel being disrupted, more and more traditional Russian holiday hotspots will look to attract high-network individuals from the Middle East, consuming the business they would otherwise have received from Russians.

However, in the other direction, Russian travellers have stuck resiliently to their holiday plans during the winter season as the pandemic eased and found unlikely solace in the United Arab Emirates. According to The New York Times, Dubai has allowed Russian businesspeople – many with alleged close relations to Putin himself – to continue renting out villas or stay in hotels, following the UAE’s abstention in a recent vote at the UN Security Council. Data compiled by the Center for Advanced Defense Studies indicates that at least 38 businessmen or officials linked to Putin own properties in Dubai collectively valued at over $314 million.

The UAE’s position not only exposes tensions between Russia and EU and NATO members, but it also demonstrates how closely travel is now intertwined with geo-politics in a volatile world and increasingly fragile tourism ecosystem.

What now for Russian-owned assets? [EH]

Whilst the full extent of the sanctions is yet to be determined, the financial measures imposed on Russia will likely slow any real estate transactions. The US, UK and EU have all restricted Russia’s access to £470 billion of its dollar reserves – disrupting international transferral of monies – and targeted wealthy individuals by freezing their assets and banning travel.

In the USA, the Office of Foreign Assets Control (OFAC) has blocked “three Russian elites, two of their spouses, three of their adult children, six of their companies, one of Russia’s largest privately-owned aircraft, and one of the world’s largest superyachts” at the time of writing. Assets now controlled by the OFAC cannot be sold because there’s limitations on who can engage with transactions. To make the asset liquid, the OFAC would need to give permission. And should the assets be seized later down the line, expect a lengthy court process.

The threat of sanctions may even push Russian oligarchs to sell their assets whilst they still can. In the UK, Roman Abramovich publicly announced the sale of Chelsea Football Club, and British MP Chris Bryant claims Abramovich has already sold properties within his £200 million London portfolio. He has since been sanctioned by the UK – one of seven oligarchs to be hit with new restrictions, including asset freezes and travel bans.

Russian ownership of commercial real estate abroad is murky territory. A report last summer by non-profit group Global Financial Integrity revealed that more than $2.3 billion USD has been laundered through American real estate. It also stated that 82 per cent of US cases involved the use of a legal entity to mask ownership.

The invasion and consequent sanctions on Russia has even prompted countries such as the UK to amend its law under the Economic Crime Bill. Some of the proposed revisions require companies to declare their true owners within six months – contracting from 18 months. Maximum fines for non-compliance are set to increase from £500 to £2,500 per day. With the bill currently being fast-tracked through Parliament, global law firm Withers is encouraging action now and has published guidance on registering overseas entities holding UK land.

For assets located in Russia, hotel chains have come under scrutiny as the list of hospitality businesses supporting victims of the war increases. To our knowledge, Hilton is the first to announce a dedicated package of support in Ukraine, donating up to one million room nights for refugees and handing profits from business operations in Russia to the relief efforts in Ukraine.

Hilton has also suspended all new development activity in Russia – as have Hyatt, IHG, and Accor. Marriott and Radisson (which have 30 and 38 hotels in Russia respectively, according to company websites) have not released statements on business interruptions, although Marriott has said the group is “working with charitable organisations on the ground”.

Regarding franchise and management agreements, international hospitality lawyer Scott Antel, who lived and worked in Russia for over 25 years, says: “Because hotel brands haven’t immediately pulled their flags, this tells me a) they are not sanctioned, and b) their particular contracts don’t allow a termination.

“After Crimea, sanction extensions necessitated certain Russian individuals/groups with branded hotel holdings to restructure their ownership to avoid sanctions. This “clean up” around restricted persons happened a few years ago, which tells me that if certain names were on a restricted persons list now, brands would’ve pulled their flags already.”

Graeme Payne, global head of retail and consumer and international co-head of franchising and distribution at Bird & Bird, explains: “Typically, any transfer provisions or changes in ownership – for example transferring an asset from a sanctioned individual to a non-sanctioned individual – will always be subject to a brand’s approval. In theory those provisions could exist but they probably won’t be automatic. There will be conditions and layers of control that a brand will want to see before permitting any sort of transfer –  including in the event that sanctions apply.

“Generally speaking and long before the current situation arose, those hotel companies which entered into a franchise or management agreement with a Russian hotel owner and/or operator would have or should have conducted some level of due diligence. It’s a well-trodden path with lawyers, accountants and advisors to check if the company or related individuals is on a restricted persons list. Russia is not the only market where this comment applies.”

Payne adds: “Repeating due diligence now is a critical piece of advice. Any brand, if they are not currently, should be checking their due diligence on their Russian business partners. On one hand it could enable a brand to withdraw from Russia, saving reputation and avoiding a contractual claim. On the other hand it could reaffirm that they are dealing with a business which is disconnected from the Putin regime and therefore innocent.

“If the Russian franchisee/licensee/individual/organisation isn’t subject to sanctions – so they are effectively an equally innocent party like the brand – then from a contractual perspective there is no breach or ground for a hotel brand to terminate that arrangement. If they did, the hotel brand could potentially be liable for significant damages.

“Hotel companies could theoretically be facing a damages claim in the millions, plus legal fees, and these claims could take months if not years to be resolved. There’s a lot of hurdles to jump over before that decision to terminate takes place. Which is why many hospitality and retail brands are suspending arrangements whilst the situation in Ukraine develops.  

“If the structure of the franchisee’s shareholders or directors are personally subject to sanctions, then most likely that would give ground for brands to terminate the agreement.”

It must be emphasised that today, Russia is not sanctioned as a country which would prevent brands from conducting business. Antel therefore believes that the reasons for various brands pulling out of Russia are:

• Moral considerations

• The optics of maintaining a wider global customer base

• The high cost and reputational risk of compliance monitoring, to ensure that all transactions and transfers through banks do not run afoul of sanctions

• The concern for Russian employees 

Antel says: “When there is a de-branding and the operator leaves for any reason, there’s a pretty rapid handover. Brand de-identification of the property happens in a number of days, although in instances of war or other strife, this can prove difficult if not all parties cooperate.”

Looking ahead, he adds: “The Russian hotel industry will continue with or without brands and whether or not sanctions require brands to depart. Obviously the devalued Ruble and a weakened economy will make hotels more price competitive, but Russian hotels are today pretty domestic-proof – with probably 70-80 per cent domestic custom even in the major international cities.

“Russia has relied on domestic tourism for a number of years, which the government has been encouraging for various reasons, good and bad. Now factor in the difficulty for Russians to obtain foreign travel visas, restricted in/outbound travel routes, the collapse of the Ruble, and Russia becomes the ‘holiday destination of only resort’ for many.”

This is a working article. BHN will continue to report on the news as the situation develops.

View the list of travel and hospitality companies supporting victims of the war here.

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