Problems of hotel brands in Russia are snowballing

Problems of hotel brands in Russia are snowballing

Sanctions imposed on Russia by the authorities of the UK, the EU and the US and others in response to the start of a special operation in Ukraine caused difficulties in various areas, including hotel and tourism sectors. As geopolitical events unfold, hotel brands are “overgrown” with new problems, analysts at Pinsent Masons said.

Franchises and contracts

Hotel groups that are considered continue to operate in Russia have faced potentially significant reputational damage. Ukrainian hoteliers appealed to large chains with a call to completely leave Russia.

In many areas, the first reaction to the sanctions imposed against Russia was a complete withdrawal from our country, experts noted. However, complex franchising and management agreements that allowed large hotel chains such as Accor, IHG, Hilton and Marriott to enter the Russian market in the first place, now prevent them from taking their brands out of the country.

The chain's Russian hotels are owned and operated under their brands through franchising and management agreements, which are usually very long-term contracts. Several major hotel chains issued statements following the February 24 events, confirming that they were closing their Moscow headquarters and suspending brand expansion and new investment in Russia. Among them:

  • Hyattterminated its partnerships, contracts and relationships with Hyatt Regency Moscow Petrovsky Park and the provision of services under its existing management agreement at Hyatt Regency Sochi and stated that it continues to evaluate its existing agreements with other third parties in Russia.
  • Hilton also said it has closed its Russian corporate office and is suspending new development activities in Russia, and is donating profits from any business operations in the country to humanitarian aid to Ukraine.
  • IHG issued a similar statement.
  • Marriott said: “Our hotels in Russia are owned by third parties and we continue to evaluate the ability of these hotels to remain open.”
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    Because franchise and management agreements are often very lengthy, network exits can be difficult and costly, experts say. This forces hotel operators to act cautiously with contracts in Russia, for fear of provoking a lengthy and costly dispute with hotel owners.

    Hotel chains also need to consider labor agreements. The closure of corporate offices affects the jobs of Russian employees. To date, all major chains have said they take employees into account when making decisions, such as offering them job transfers.

    According to analysts, the situation was further complicated by the decree of the Russian Federation of March 6, 2022, which states that Russian companies are not required to compensate owners of brands, patents and samples of foreign countries who have committed “unfriendly actions” against Russian legal entities and individuals. In practice, this means that hotel owners in Russia can continue to operate under a major brand, regardless of the brand's actions. According to reports, the decree has already led to a large number of trademark applications in Russia.

    Several hotel brands have already tried to mitigate reputational issues by making large charitable donations and repurposing hotels for refugees. However, as the operation continues, the pressure on hotel companies and other brands still operating in Russia will continue. The dilemmas for hotel operators caused by the war will not be easy to resolve and will certainly remain on their agenda for some time to come, analysts say.

    Operations and supply chains< /p>

    Sanctions have also hit Russian banks, preventing transactions with financial services institutions that may have outstanding agreements with hotel chains. With the start of the special operation, seven Russian banks were removed from the global messaging system for banking transactions SWIFT.
    This may prevent owners from paying fees, brand royalties owed under franchises and management agreements – another reason to give hotel chains the opportunity to terminate their agreements.

    Sanctions have also affected the supply of goods and services, making it difficult and expensive for hotels that continue to operate in Russia, the supply of consumables and equipment necessary for their work. This could only exacerbate the financial impact of falling travel to Russia.

    Macroeconomic factors

    The hospitality sector also has problems outside of Russia, as it is also affected by macroeconomic and geopolitical factors that are becoming increasingly apparent as a result of developing relations between countries.

    < p>Energy is the second largest expense category for hotels. Rising energy prices will increase overhead costs and lower profits, while power outages in the EU could further impact costs. This comes in addition to broader cost pressures, especially on personnel, which have already been a significant problem in many markets.

    In addition to directly impacting tourism in Russia and Ukraine for the foreseeable future, neighboring countries are also likely to , will suffer from a reduction in the tourist flow, experts concluded.

    For those who care about a healthy lifestyle, we recommend reading: “Russians warned what regular hot baths can lead to.”

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