Hotels, Hulks & Homicide

A pack of foreign hotel managers has entered Moscow's hotel business, a high-stakes maze of regulation and crime. Luckily, the profits are high.


Jeff Grocott reports.


More like lambs than lions, Western hoteliers are filing into the Russian hotel market.


After years of scoping out the capital, Sheraton, Marriott and Holiday Inn have recently joined the ranks of international operators in the capital. Hilton, Hyatt and Four Seasons are reportedly on the way.


Despite a recent flurry of openings, however, international-standard hotels are still a tiny minority, and their numbers are growing slowly.


In the shadow of the glitzy new hotels lies a swamp of mostly city-owned properties. Some, such as the Ukraina, the Peking and the Moskva, occupy landmark buildings, but the bulk of them are eyesores in remote districts, operating according to the time-worn Soviet tradition of dismal rooms and surly service. The city has spent years looking for buyers for its lineup of central, dowdy hotels such as the Intourist and Rossiya, but it has continued to come up empty.


The Western companies that have managed to get into the market are attracted by some of the highest returns in the world: Occupancy rates in Moscow's top hotels run at 70 to 85 percent, and rooms cost $300 per night and more.


But the foreign hoteliers agree that Moscow remains a hard market to enter. The Moscow city government still owns, through various bodies, majority stakes in most of the city's 200-odd hotels. Foreign companies that want equity generally settle for a minority stake and minority status. Furthermore, real estate in Moscow can be leased but not owned outright, giving foreign equity shareholders less security than they are used to on international markets.


And then there is the problem of crime: Two Moscow hotel directors have been shot dead since November, bringing to five the count of top players in the business assassinated here in less than two years.


"This is one of the most difficult markets to operate in," said one Moscow hotel industry participant, who asked not to be identified. "So it's good that it's also one of the most profitable. If it weren't, no one would be in Moscow."


"If you take a risk, you have a higher profit," said Leopold Bausbek, the president of ABV, the Austrian developer and part-owner of the Sheraton Palace on Tverskaya. "If there's no risk, then your profit is going to be lower."


One of the ways international hoteliers have decreased their risk is by managing hotels rather than buying into them. That gives the likes of Sheraton, Marriott and Holiday Inn the ability to spread their brand namesi n Russia and generate immediate business through their powerful international booking systems.


"Everyone wants their name in Moscow, but they want their name here as easily as possible," said Lars Gudbergsen, the audit manager of Arthur Andersen's Hospitality Industry Group. "The less risk and the less exposure, the better. If they can put a dot on their map in Moscow without taking a dollar out of the bucket, then that's a win-win situation for them."


BIG NAMES, BIG PROJECTS


Moscow's hotel business is saddled with a Soviet legacy of institutional-quality lodgings with glacial service.


"There are hotels in Moscow that are tough to work with professionally, quickly and with quality," said Nadya Grebenyak of IRO Travel, who books business travelers into Moscow and St. Petersburg hotels. "They work on the old Soviet system, and we can't put our guests there and guarantee that there won't be a problem."


As early as the late 1980s, though, Moscow's fossilized hotel scene had begun to break free.


Early projects with international cooperation included the Radisson-Slavjanskaya, the Olympic-Penta, and the centrally located Baltschug Kempinski and Metropol. The Palace Hotel opened on Tverskaya Ulitsa in 1993, and a renovated Hotel National followed in 1994.


By the early '90s, Gudbergsen said, it was evident that demand for international-level hotels far exceeded the capital's supply. "Moscow's hotel industry became known as one of the most profitable in the world," he said.


Although more than 10 four- and five-star hotels have opened in Moscow since 1992, supply continues to outstrip demand and guests still pay a premium for top lodging.


According to Arthur Andersen research, rates in international-standard hotels in the capital average $235 per night, far above levels in other European capitals (see table). Gudbergsen pointed out that 1997 was a strong year for Moscow hotels, with both room rates and occupancy rates rising. Gross operating profits, industry sources said, are among the highest in the business.


News like that has been too good for the internationals to pass up.


The 117-room Tverskaya Hotel, managed by the U.S.-based Interstate Hotels, opened in November 1995. The next month, the management of the Moscow Country Club's Park Hotel went to the Le Meridien/Forte chain, which had earlier in the year gained a foothold in the market at the National Hotel.


The next big player to test the waters was Marriott. In 1997, Washington-based Marriott International acquired the Renaissance chain of hotels, which included a management contract on the city-owned Olympic-Penta at Prospekt Mira, now the Renaissance Moscow hotel.


Within months, in August, Marriott opened a hotel under its own name with the 392-room Marriott Grand Hotel on Tverskaya Ulitsa. But although it bears the Marriott name, the hotel is managed by Interstate Hotels under an arrangement with Marriott International.


"I've looked at a lot of transactions over the years and I'm happy that effort has yielded a presence in the city," Marriott International Senior Vice President Nick Ward said by telephone from Washington.


The next splash came from U.S.-based ITT Sheraton, which last December took over management of the 218-room Palace Hotel on Tverskaya Ulitsa from Marco Polo, a company that had been set up by Bausbek's ABV to manage the hotels it had developed in St. Petersburg, Novgorod, Georgia, Kazakhstan and Moscow.


With international hoteliers clamoring to get in, why did Marco Polo move out?


Bausbek said by telephone from Vienna that when he began developing hotels in the Soviet Union, he couldn't find a management company willing to work here, so he set up Marco Polo to manage the properties.


Bausbek said his hotel management business in Russia had been profitable, but that economies of scale meant the huge ITT Sheraton could run his hotels more efficiently than the much smaller Marco Polo. More importantly, he said, Sheraton could boost bookings though its worldwide reservations network.


"You need an extra good reservation system. That was my main problem," Bausbek said.


SOMEWHERE OUT THERE


The market's newest entrants say they are eyeing more hotel proposals in Moscow and beyond. ABV's Bausbek and Sheraton said they are working together to identify more potential hotel projects here.


Marriott's Ward said the company is continuing to look at opportunities in Moscow. "We will entertain any reasonable business proposal that would include management of a hotel," he said.


Interstate Hotels, the company that manages the Tverskaya and the Marriott Grand Hotel, also said it had plans to expand in Moscow and is set to manage a five-star, 230-room hotel nearing completion on Stoleshnikov Pereulok.


And beyond these companies, international chains continue to line up to enter the market.


In the very northern reaches of Moscow, Holiday Inn is putting the finishing touches on its 180-room Holiday Inn Moscow Vinogradovo, which will open this spring.


"We felt the location, as well as the hotel itself, could be good opportunity for us to enter the market," said Alexis Delaroff, resident manager of Holiday Inn Moscow Vinogradovo. "This will be our base for future development."


Delaroff said the chain plans to have "80 to 100 hotels" in Eastern Europe and the former Soviet Union, which would include at least 10 in Russia.


Hilton, Hyatt and the luxury Four Seasons are also tipped to be negotiating deals.


Hilton came close to entering the market in 1994, but a deal to build a Hilton hotel in the central Kitai-Gorod neighborhood fell through. Then, in December 1997, MOST-Group, the parent company of MOST-Bank, announced plans to build a five-star, 370-room hotel on Novy Arbat, naming the city of Moscow and France's CB SGE as partners in the venture and Hilton as the managers.


Hilton's London office did not respond to requests for confirmation.


The international Four Seasons chain is also eyeing the capital: In December, Mayor Yury Luzhkov showed Saudi Prince Al Walid bin Talal, a part owner of the elite chain, sites near the Baltschug and Peking hotels and on Novy Arbat where a new hotel could be built.


The prince was reportedly also offered a fourth site, the city-owned Intourist hotel: Luzhkov has made no secret of his loathing for the building and his desire to have it reconstructed, or torn down and replaced.


The city has also sought suitors for its Moskva and Rossiya hotels, two high-profile, struggling Soviet constructions that take up prime, Kremlin-view real estate. Tenders for both properties have failed to attract serious buyers, and the city has gone as far as announcing that flamboyant U.S. developer Donald Trump was interested in one or both sites.


"That's way on the back, back, back burner," Norma Foerderer, Trump's personal assistant at the Trump Organization, said by telephone from New York. "We haven't thought about Moscow for some time. That's not to say, as far as I know, that he's discarded the idea."


While the market for four- and five-star hotels still has room for growth, there is little argument that what Moscow sorely needs is more international-standard three-star hotels.


The city government has been a vocal champion of building lodgings that can cater to lower-budget business travelers and the growing trickle of tourists into the Russian capital. According to Arthur Andersen's Gudbergsen, this market holds even more potential than the luxury end.


"The three-star market is much more profitable, but not as sexy as running four- and five-star hotels," he said. "They're cheaper to build, cheaper to run, and in this market, with the demand, you can fill every room every night. With the right reservation system, it'll be a cash machine for both the owner and operator."


Now, some of these projects may be moving ahead. Gudbergsen said he knew of two specific projects that, although he could not name them because they are not completely settled, were moving forward.


"I'd be quite surprised if you hadn't seen the first international-level three-star hotel open in Moscow by the end of the year," he said.


What are the city's plans for three-star hotels and other high-profile projects?


Apart from its official announcements, the city has played its cards close to the chest. Officials of the hotel division of the Moscow city government's communications department were contacted repeatedly but failed to make themselves available for comment. Similarly, officials from GAO Moskva, the city-run company that manages the city's stakes in a number of hotels, declined repeated requests to comment on the city's holdings and on projects discussed in this article.


DANCES WITH WOLVES


Nobody said that Moscow was an easy place to do business.


Take, for example, U.S. businessman Paul Tatum, whose company owned a 40 percent share in RadAmer, the joint venture that ran Moscow's Radisson Slavjanskaya Hotel. Tatum fought a long and high-profile battle for control over the hotel with his partners, which included the U.S.-based Radisson and Moscow's City Property Committee.


Tatum was shot dead on Nov. 3, 1996, a few hundred meters from his hotel.


Shortly after the assassination, GAO Moskva hotel department head Alexander Vakhovsky cited a Russian proverb in explaining the risks of doing business in the Russian capital.


"One who is afraid of wolves should not walk in the forest," he told The Moscow Times. "This is not the first time a horrible incident has taken place here."


Nor the last. Boris Gryaznov, the general director of the Sovincenter hotel and business complex, was killed as returned to his home on Nov. 13, 1997. Most recently, on Jan. 10, Rossiya Hotel general director Yevgeny Tsimbalistov was gunned down as he left his apartment. Like Tatum, they were apparently victims of contract hits. None of the cases has been solved.


Itar-Tass reported that the previous director of the Rossiya was murdered -- with an ax -- a few years earlier. The newspaper Segodnya added Andrei Ilyukhin, killed March 15, 1997, to the toll. Ilyukhin was the vice president of Mosintour, which operates in the same building as GAO Moskva and also managed stakes in city hotels.


Arthur Andersen's Gudbergsen said he doubted the high-profile killings of Tatum, Gryaznov and Tsimbalistov were linked to control over the hotels.


The Rossiya, Sovincenter and Radisson Slavjanskaya are all at least partly owned owned by the city. Given the city government's power, Gudbergsen said, it is unlikely that anyone could hope to gain control of a city property by knocking off the hotel's top man.


"They may have had to do with the hotel itself -- such as someone running a shop or something inside the walls and having their rents increase or contract canceled -- but not over the control of the hotel itself. I think that's highly unlikely," he said. "I'd strongly disagree that it's a dangerous industry.


"If you look at each of the hotels following these killings, control hasn't changed."


Another industry watcher, who asked not to be identified, took the opposite approach: The murders, he said, could have been used to help retain existing privileges.


"It seems like there is one common thread: Someone was trying to change the game. Tatum, the director of the Mezh, the director of the Rossiya all struck me, at one time or another, as people who were proposing or fostering change in an existing business," the industry source said. "If someone is already making money off of something that is already there, you've got to be careful."


One reason the business may be dangerous is its cash-heavy nature.


At $300 per room and a 70 percent occupancy rate, a hypothetical 200-room luxury hotel in the capital would bring in revenues of roughly $15 million a year on rooms alone.Add receipts for restaurants, telephones and other services, and revenues could top $25 million.


Unlike other money-spinning ventures -- office buildings, investment banking or oil exporting, for example -- much of that money comes through the front door, in cash. That makes the hotel business particularly tempting for criminal groups.


How, then, do the industry players protect themselves?


Even Frydenberg, ITT Sheraton's area manager for Russia and Georgia and the general manager of the Sheraton Palace, said the hotel has tight security provided by in-house employees as well as by an outside security company.


Beyond that, Frydenberg and other industry sources say, it is important to find the right site, and the right owners.


Bausbek of ABV said that his company owns a 38 percent stake in the Sheraton Palace, and the largest stake, 42 percent, is held by the Russian Academy of Sciences. Two smaller shareholders, Yakor (5 percent) and a group of companies called CUP Invest (15 percent) hold the rest.


"I have an excellent Russian partner. This is the result of my 20 years on the market: I know the Russian mentality, and we are very good partners," Bausbek said "If you come onto this market as a newcomer, you should take more than 50 percent ... to be on the safe side.


"One of the reasons for my success was my personal relations, which are on a clear, fair basis," he said.


TENTATIVE STEPS


Given the difficulties in the industry here, it is not surprising that hotel companies haven't jumped in with both feet.


In many world markets, top operators such as Marriott, Sheraton and Holiday Inn own the hotels they manage. In Moscow, on the other hand, these companies are generally managing the hotel without taking an equity stake in the business. This gives them a line on operating profits without the risks of ownership.


Not all management deals are created equal, however. Classically, a management company would take 100 percent control of the day-to-day operations of the hotel, which gives them a cut of the profits and the lion's share of blame when profits fail to meet expectations. In Moscow, industry sources say, a number of management companies are acting as little more than consultants to Russian managers.


Another lower-risk avenue taken by at least one international hotelier is franchising: The Marriott Grand Hotel, for example, bears the Marriott brand name but is managed by franchise-holder Interstate Hotels.


Jack Ward, an Interstate Hotel employee who is the general manager of the Marriott Grand Hotel, pointed out that Marriott's reputation is nonetheless on the line: If a customer has a bad stay, he'll associate the experience with Marriott, not Interstate.


The reason for these creative solutions is apparently to lower exposure to the vagaries of ownership in the Russian capital.


One industry source said more open real estate market and tax structures would see more foreign companies flooding into Moscow.


"Until Russia, Moscow and the authorities in Moscow come to grips with real assets -- to be owned in the real sector, and assigned as security -- they're not going to get the capital they need to grow their market," he said. "If there was an active, vibrant real estate law, a tax code that anyone believed in, and a workable register of real property, we wouldn't have any problem."


Gudbergsen of Arthur Andersen said the city has started to open up the business and offer more favorable terms for foreign companies.


"A couple years ago, there were projects up for grabs, but the conditions were not very favorable. The city didn't want to compete with itself with more hotels," he said.


"That's certainly changed since: A year before the city's 850th anniversary, they were pretty much giving away hotels" in exchange for renovation, he said. "The city has changed its focus from making a profit on these properties to running a city. And in a big city, you need hotels."