Tuesday, August 5, 2014

Global Impact: Increasingly Russian Tour Companies Feeling the Pinch, Billionaires, Too

According to The Associated Press, last week, tens of thousands of Russians sunning themselves on Italian beaches and Turkish resorts received an unpleasant surprise: their tour companies went broke, stranding them and forcing them to pay double for a ticket to get home.

The bankruptcy is the fifth among major Russian tour companies in less than two months, an indicator that cracks are appearing in Russia's economy after a months-long conflict in eastern Ukraine and an escalating stand-off with the West.

It's not just sanctioned Russian billionaires who are feeling the pinch now. Uncertainty over the future has caused the currency to drop, hurting the average Russian's ability to travel abroad and buy imported goods. Moreover, as new sanctions by the US and EU take hold,  companies worry about a looming recession and a future without access to the West's massive financial markets.

"The more tense the geopolitical situation, the more expensive (foreign) currency will be," said Konstantin Sonin, an economist at Moscow's Higher School of Economics. "And with sanctions, it becomes harder for financial institutions to give credit; there will be fewer business projects and fewer goods being produced. Income and salaries decline.

COMMENT: The one benefit that President Putin has on his side is that the majority of Russians support his expansionist strategies, even those on the low end of the food change.

Russian tour operators, many of whom are among the nation's oldest, say they have experienced an unprecedented slump in demand, which they blame on the bad political climate and the depreciation of the ruble, which has lost up to 10% against the dollar since January. 

The closure of one tour operator alone, Labirint, has left over 20,000 people abroad without a return ticket and affected another 40,000 who had already bought travel packages, tourism officials said.

The low-cost airline Dobrolyot, which was sanctioned by the EU because it services the Black Sea region of Crimea annexed by Russia, has temporarily cancelled all flights.
Companies also blamed the collapse in tourism on Moscow's request that members of the security services, interior ministry and military report where they travel to. The move, which authorities justified as an attempt to keep government employees out of any country that has an extradition agreement with the US, has discouraged trips abroad among the several million people who work in those sectors.

One person effected is Gennady Timchenko, an oligarch with an estimated fortune of $14.2 billion who as a longtime friend of President Vladimir Putin was hit with US sanctions, said he could no longer fly his private jet because it was serviced by American company Gulfstream. 

In July, the IMF slashed Russia's forecast for 2014 from 1.3% to 0.2%.

Shares in Russia's state airliner, Aeroflot, were trading down almost 6% on Tuesday (August 5) after leading business daily Vedomosti cited anonymous government officials as saying they were considering closing the airspace over Siberia to European flights heading to Asia. 

The move, allegedly in retaliation for the EU sanctions on Dobrolyot, would deprive Aeroflot of payments it receives from European airlines for the right to use Russian airspace.