Russia has spent more than two and a half years at war and in isolation from much of the Western world. While its hotels see a steady wave of domestic demand, Russia's hospitality industry is feeling the effects of a labor crisis.
On top of the labor shortage, a rising fiscal burden and unaffordable commercial loans are challenging Russian hoteliers.
In December 2023, the Russian Academy of Science's Institute of Economics reported the country lacked nearly 5 million employees across all industries and predicted the labor shortage would persist in 2024.
Marianna Neumann, general director of the Dom Boutique Hotel in St. Petersburg, said finding employees has been among her team's biggest obstacles.
“The personnel shortage is the key challenge,” Neumann said. “Salary demands are increasing exponentially.”
Olga Kiseleva, general director of the Admiralteyskaya Hotel — also in St. Petersburg — didn't mince words about the severity of labor challenges in Russia.
“The labor shortage in the industry is close to catastrophic,” she said.
Kiseleva added the labor shortage affects not only the quality of service but also puts a strain on existing hotel employees, leading to increased workloads and potential burnout.
The source of the Russian labor crisis has several causes, depending whom you ask. The government largely attributes it to weak demography in the 1990s, which resulted in a drop in the working-age population. But the lack of workers is likely exacerbated by ongoing drafts into the Russian Army, record emigration during the last two years and a boom in the e-commerce sector.
Hotels have no opportunity to match the high salaries offered by some other industries, Kiseleva said.
An estimate by Russian recruitment service Superjob showed military couriers in Moscow can earn 200,000 Russian rubles ($2,054) per month. Hoteliers have had to raise wages but cannot offer even 50% of that figure, hoteliers said.
“Many young people, instead of going to work in the hospitality and service industries as maids, waiters or cooks, where you need to make both moral and physical efforts, opt for a courier job,” Neumann said.
Kiseleva added the hospitality industry is pulling out all the stops to entice job candidates.
“Hotels are scrambling to adapt. To compensate for the lack of personnel, they introduce ‘motivational tricks,’ offering various bonuses, including monetary sums for guests refusing room cleaning,” Kiseleva said.
On the economic front, Russia’s tax levels keep rising and on Oct. 25, the Russian Central Bank raised interest rates by two percentage points to 21% in another attempt to curb inflation. Russia's inflation level is forecast to end 2024 up between 8% to 8.5% year over year.
The move has made commercial loans almost unaffordable for Russian hoteliers, sources said.
At a press conference in August, Ilya Umansky, president of the Russian Union of Travel Industry, said Russian investors have nearly stopped investing in larger hotels due to rising tax burdens.
Property taxes are due to increase from 2% to 2.5%, and the recently introduced tourism tax is set to rise to 5% by 2029, Umansky said. In addition, within recently approved tax reforms, the fixed basic profit tax rate is due next year to increase from 20% to 25%. Coupled with other rising costs, these taxes are putting a significant strain on profitability.
Russia's tourism demand picture
Wealthy Russians are opting to vacation domestically, but largely do not have a choice. Visa restrictions and a lack of direct flights to Europe have seen Russian citizens stay at home. In 2019, nearly 8 million Russian tourists visited the European Union Schengen zone, while the latest 2024 figure for outbound traveler numbers is only 140,000.
Russian's hotel industry is for now capitalizing on the surge in domestic demand, though hoteliers are facing higher operational costs.
According to CoStar data, year to date through September, occupancy among brand-affiliated hotels in Moscow is up 7.4% year over year to 75%. Average daily rate is up 42.7% to 10,488.03 rubles and revenue per available room is up 53.3% to 7,868.25 rubles. In Saint Petersburg, hotel occupancy has risen 10.5% year over year to 60.7%, ADR is up 52% to 12,285.66 rubles and RevPAR is up 68.1% to 7,452.08 rubles over the same year-to-date period.
Alexey Efimov, general director of IBC Real Estate, a Moscow-based business consultancy, said RevPAR gains are "driven by strong demand."
He added that labor, construction and other operating costs have all placed pressure on hotels’ profit-and-loss accounts.
While Western countries have by and large stayed away from visiting Russia, countries in Asia and the Middle East now make up Russia's largest feeder markets for international inbound tourism.
“The reorientation of hotel services toward tourists from Asia and the Middle East is most visible in the luxury segment,” Efimov said, adding there now is almost zero inbound travel from Europe and North America.
During the first half of 2024, the number of international visitors to Russia increased 30% from the previous year’s total of 1.8 million. The government’s target of attracting 5 million guests in 2024 likely will not be met, but the rise in tourist flow is still tangible.
“When the recovery of inbound tourism is associated with an increase in the flow of guests from Asian and Middle Eastern countries, some of the rooms in [Russia’s] best hotels are occupied by tourists from these regions,” Efimov said.
He said Russia aimed to boost the inbound tourism flow to 6.5 million visitors per year, hoping to become a more popular destination for visitors from China, Iran and Saudi Arabia.
Russian investors and hoteliers are following the sun. Hotel projects are under commission in the Southern Federal District, primarily in the Sochi and Krasnodar Krai.
Efimov cited Russian hotel firm Cosmos Hotel Group’s plans to launch a hotel with 1,000 rooms in Gelendzhik by 2029, and Alean’s plans to open two hotels in Sochi with a total of 2,500 rooms by 2026.