Unsurprisingly, recent events in Ukraine have cast a pall over hotel development in CIS. Russia’s president Vladimir Putin seems to have squandered what little goodwill had been generated by the just-concluded Sochi Winter Olympics, notes Michael O’Hare, managing director Russia for the hospitality consultants, Horwath HTL, speaking to Mintel’s Macy Marvel in an exclusive interview at the International Hotel Investment Forum. Indeed, three hotel projects being managed by Horwath in western Ukraine have been put on hold in the last weeks, including one in a ski resort, one on the coast and one in an urban location.

The crisis is also affecting projects in Russia, itself, where Horwath has five or six underway at the present time. The problem here is financing, notes O’Hare, as Western banks have begun to get cold feet about lending in an environment perceived to be unstable and untrustworthy. Lending by foreign banks has generally been denominated in euros at an interest rate of 6% to 7%. Meanwhile loans in roubles carry interest charges of 14% to 16%.

The hotel market is heavily domestic, as 90% of the clients are Russian and there are only about 100 hotels operating under Western brands in the entire country, according to O’Hare; thus the potential for future development is enormous. However, the most attractive locations for new projects are no longer to be found in the main metropolises, but are rather in secondary or tertiary cities, with populations in a range of 150,000 to 200,000, where there is a dearth of quality budget mid-market hotel accommodation. Hampton by Hilton, Holiday Inn Express or Park Inn (Carlson Rezidor) are examples of brands well suited for this type of development, according to O’Hare, who also notes that there is even potential for developing resort properties to serve local markets in places like the Ural Mountains, Lake Baikal or even Archangel in the far north. While hotel investment in Russia carries significant risk, the returns can be juicy. According to O’Hare, the payback period for a new-build hotel is typically only 4 to 5 years.

There is no doubt that Russia remains a very attractive development market for foreign hotel brands, which are generally perceived to set the quality standard for hotel accommodation and services in the country. While there are Russian hotel chains, most of them have been slow to expand their networks in recent years and often have an image of inferior quality. Indeed, Brussels- based Rezidor, the licensee of Minneapolis -based Carlson’s Radisson and Park Inn brands is by far the number one hotel group in Russia with over 40 properties.