Hoteliers are increasingly returning to investment projects in Moscow and St. Petersburg that were paused during the worst period of the COVID-19 pandemic.

Like other urban markets around the globe, Moscow and St. Petersburg experienced the highest numbers of coronavirus cases of any Russian region. The lockdowns in both cities were also the tightest, which further taxed the hotel sector.

Yana Ukhanova, head of hotels and hospitality for Russia and Commonwealth of Independent States at business advisory JLL, said full-year 2020 hotel occupancy for branded properties in Moscow dropped between 50% and 70% year over year, depending on the segment. She said luxury hotels fared worse compared to other segments.

“As a result of such a devastating drop in occupancy, [revenue per available room] in the luxury segment experienced a 70% drop," Ukhanova said, noting midscale and upscale hotels experienced a 50% drop in occupancy year to date.

However, midscale and upscale hotels took a harder hit on average daily rate, which fell by 20% to 25% across the segments, resulting in revenue per available room declines of 60% to 65% year to date.

At the beginning of the pandemic, thousands of citizens fled from Moscow, spurring occupancy in numerous leisure destinations and in hotels surrounding the city from May to October.

In downtown Moscow, operational performance at most hotels left much to be desired, said Svetlana Burova, general director of Design Hotels' StandArt Hotel Moscow.

“For us, April was the worst month," Burova said. "Our modern hotel with a premium location in the Moscow downtown for the first time ever experienced occupancy of 4%, if we could even name this an occupancy.

“Like most hotels, we were forced to cut costs as much as possible by tightening our belts."

Hotels in St. Petersburg are facing similar obstacles to its sister city.

“St. Petersburg hotels demonstrated a comparable drop in occupancy and rate" to Moscow, Ukhanova said.

But St. Petersburg hotels are still generating some demand, even from Moscow residents.

Another factor is that, for the first time, Moscow hotel tariffs dropped to the same level of those in St. Petersburg.

“We have to cut prices, taking the economic situation [into] account. Everybody cut their tariffs, but I would not say that the price decline was drastic,” said Marianna Neumann, general manager of St. Petersburg’s Dom Boutique Hotel, adding her hotel had an influx of Muscovite tourists in August.

Anastasia Kuledzhishvili, marketing and communications manager at the Domina St. Petersburg Hotel, said St. Petersburg's profile is rising with domestic tourists in Russia.

“Domestic tourism has become more active," Kuledzhishvili said. "St. Petersburg in this respect is one of the most attractive destinations in Russia, so there is a flow of individual tourists, and they are in the spotlight now.”

In St. Petersburg's low season, room rate decreased by 20%, and occupancy remained lower compared to previous years, Kuledzhishvili said.

According to STR, CoStar's hospitality analytics firm, Moscow’s hotel occupancy dropped 45.9% year over year to 40.1% in November. During the month, Moscow’s average daily rate decreased 31.2% to 4,074.26 Russian rubles ($53.47), while revenue per available room dropped 62.7% to 1,633.79 rubles ($21.44).

St. Petersburg’s average daily rate in November declined by only 3% to 4,036.68 rubles ($52.98). Occupancy dropped 52.8% to 27.8% and revenue per available room declined 54.2% to 1,123.38 rubles ($14.74).

According to Ukhanova, the pandemic did not halt investment projects, but rather stalled the opening of those projects that were near completion or in the pre-opening stage. Some hotels scheduled to open did not due to a lack of clarity as to when international tourists would be allowed to travel to Russia.

The past few months have been marked with some big announcements in the two cities’ hospitality industries.

In December, Accor and Kievskaya Ploshchad Group announced the signing of the first Raffles-branded hotel in Russia, a new flagship close to Red Square in Moscow.

Among other major openings in Moscow are the Radisson Blu Leninsky Prospect; Bvlgari Hotel Moscow; Corinthia Hotel & Residences Moscow; and Mandarin Oriental Moscow, all of which are slated to open in 2021 or 2022.

Russia has developed its own vaccine, Sputnik V, which is encouraging hoteliers and economists.

On Jan. 18, the Russian government rolled out a nationwide vaccination campaign, stating it will produce sufficient doses for 1.2 billion people nationally and internationally in 2021.

Russian hoteliers are tempering their expectations.

“We want to believe that the market will gradually revive," Kuledzhishvili said. "It is possible that the vaccination would stimulate this process, although one should not look forward to fast results this year."

Ukhanova said the vaccine will contribute to the normalization of domestic business demand, but that its beneficial effects will be seen first in leisure travel.

“Leisure demand within the country is on the rise and experiencing levels never seen before," she said. "Wider use of the vaccine most likely will lead to the emotional safety of many people, which in turn will stimulate domestic demand to more actively explore remote destinations and finally to travel abroad."

In December, Russian social ombudsman Anastasia Tatulova appealed to the Russian government to reduce value-added/sales tax for Russian hotels from 20% to 10% during the current crisis, a move supported by the country’s main industry associations.