Russia is the world’s largest country by land area, with the eighth-largest population. After some initial struggles following the breakup of the Soviet Union, Russia emerged as an energy superpower. It’s the largest producer of natural gas and second-largest oil producer on the planet. Oil has vastly increased the country’s economic wealth, but the recent collapse in commodity prices has exposed Russia’s vulnerability to market volatility.
In 2015, Russia’s economy contracted by 3.7%, as lower oil prices, international sanctions, high inflation and a sharply weaker currency took their toll. The economy recorded its worst performance since 2009. Russia is likely to endure another year of recession in 2016. Oxford Economics expects the economy to shrink by a further 2.1% in 2016 and a weak recovery to begin in 2017.
Business travel industry insight
Almost 35 million international travelers visited Russia in 2015. Most travelers arrived from former Soviet bloc countries, including Ukraine, Kazakhstan, Uzbekistan and Poland. About 17% of travelers visit Russia for business; compare that to France, where just 9% of travelers come for business.
Russia is Europe’s 10th-largest business travel market with close to US$9 billion spent in 2015. That figure reflects a drop in spending that began in 2014 as the Russian currency weakened, so the potential business travel spend in Russia is much greater.
International hotel chains have largely focused on serving Moscow and St. Petersburg, and expansion continues in these cities. But hoteliers also are moving into other parts of the country. New international hotels are scheduled to open over the next 12 months in Krasnodar, Perm and Voronezh.
Sanctions, recession and currency devaluation hit Russia’s airlines hard. The collapse of leading private airline Transaero left S7 Airlines and UTair as Aeroflot’s only credible competitors. Aeroflot remains far ahead in the domestic market, operating 43% of all flights.
- The government’s efforts to cut inflation should lead to lower interest rates later in 2016. That is expected to boost confidence and encourage investment.
- Despite current economic problems, Russia remains a massive market with substantial commercial potential for international companies.
- The reallocation of Transaero’s traffic rights has given smaller players like Ural Airlines access to Western markets. The increased competition should keep airfares in check.
- The future direction of Russia’s economy depends heavily on oil prices, which market experts forecast will remain low over the next two years.
- The drop in oil prices has severely strained state finances, forcing the government to adopt tax policies that have the potential to drag down economic growth even more.
- The drop in currency value has reduced consumers’ real income and spending power. They continue to cut back and suffer the effects of Russia’s ongoing recession.
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