The future of the Russian shopper... by Fintrax

T R E N D W AT C H

The future of the Russian shopper The ongoing dispute between Ukraine and Russia, along with the latter’s annexation of Crimea, has had a series of knock-on effects for Russian outbound tourism to Europe. This geopolitical tension and economic sanctions has caused Russian spend to drop by 10-25 per cent, dependent on the sector of the retailer, in Europe the average transaction value decreased by 14 per cent. And Ukraine has been even more severely affected with spend dropping by at least 20 per cent across all European countries. According to the European Tourism Council, 44 million tourists travelled from Russia in 2013, of these, 31.6 million (77 per cent) travelled to Europe. Sunnier climes will be less affected by the downturn; Greece, for example, was the only country to see a growth in sales in July/August 2014 (albeit only 1.3%) This can be attributed to the fact that Russians are responsible for 9% of Greek inbound tourism, and are more likely to continue to visit hot countries despite a weak Ruble. Southern Europe’s share of the Russian market was 21.8 per cent in 2013, compared to Western Europe’s 6 per cent.

44 million tourists travelled from Russia in 2013, of these 31.6 million (77 per cent) traveled to Europe.

ECONOMIC WOES The World Bank has forecast Russia’s GDP at 0.5 per cent, meaning they will narrowly avoid recession in 2015. A key indicator by which to gauge Russia’s future will be the price of oil; if this were to drop to $60 a barrel (as some at Russia’s Central Bank predict it might) it would put incredible stress on the Russian banks and economy as a whole. This would likely reset Russian outbound travel figures to 2009 levels, roughly 29 million globally and a 41% drop. While the cease-fire in Ukraine offers an opportunity, Russia has maintained its ability to destabilise Ukraine and remains in breach of International law, as such, a short term positive outcome is not likely. KEY FACTORS AFFECTING RUSSIA Huge capital flight - Investors are pulling money out of Russia; $75bn in investments were withdrawn by July 2014, the World Bank has estimated by the year’s end this will grow to double the 2013 figure of $62bn. Anecdotal evidence suggests the actual figure to be far bleaker, with a source at the European Central Bank stating that the loss to date could be closer to $222bn. The Ruble was on a significant downward trend for Q1 (14.3 per cent drop against Euro, see graph) between troubles starting in November and March (when most Russian holiday makers would traditionally be planning trips. It looks like the Ruble’s value will tumble further, jeapordising tourism to Europe in 2015. Corporate credit to Russia has reduced from

$50 billion to $3 billion. Europe has also put in place Visa bans and asset freezes on Russian companies and officials Due to this capital flight, Putin has since threatened repercussions for any Russians that do not ‘keep their money at home’ during the troubles. Russia has dipped into the national pension fund to help develop Crimea, making any contributions this year and next worth nothing. All Russians will be affected by this decision. All of the economic factors covered will lower both the ability and willingness of Russians to spend; For some staying home will seem attractive while they look after business interests or attempt to plan ahead for what is an economically uncertain future. Although, they are less likely to prevent them from traveling altogether. OTHER INFLUENCING FACTORS This year has seen multiple high profile air disasters tamping the appetite for tourism worldwide; as the MH17 crash indirectly involved Russia this will likely have had a more pronounced effect on their travel patterns. It is difficult to find reliable travel statistics over this period for Russia, however, comparatively, Malaysia saw a near 30 per cent reduction in air travel in the months after the disappearance of flight MH370. Large Russian tour operator IntAir went bankrupt, as have 13 others, including:

Labyrint, SurgutKurort, Nordic Star, Expo-Tour, Roza Vetrov Mir and St. Petersburg based Neva. More are predicted to follow. This is likely to have significantly lowered Russian confidence in travel; Russian media coverage has been running regular stories throughout the summer stating that several thousands of Russian tourists were stranded all over Europe after each successive operator ceased trading. Estimates differ wildly, with some outlets reporting up to 130,000 tourists being affected in total. The policy direction is unclear, as sanctions also affect the issuing country, albeit not equally. Messages have been mixed, one US government source has been cited as saying that ‘US sanctions were designed to be easily lifted’, while Angela Merkel has been cited as being ‘Very far away’ from lifting Germany’s. A source within Cabinet Office ‘cannot see the sanctions being lifted within the next 6 months’, despite Russia’s Lavrov requesting a ‘reset 2.0’ for ties with Washington and Europe.

be slow and GDP will return to 2.5% in 2016. In shopping terms this will mean numbers are likely to remain consistent, and not decline further. As previously stated warmer climes such as Spain and Greece will be less affected by this, and may even register growth on 2014 figures. The second possible scenario is what Euromonitor has labeled as a ‘Severe recession scenario’. In this worst case, Russian banks and firms are almost completely locked out of international financial markets and credit growth becomes negative. The Ruble depreciates by 15%, and inflation for 2014 increases to 13.4%. In this case we would likely see another double digit dip in Russian spend for 2015, with slow recovery in late 2016 at the earliest. Retailers should prepare for this eventuality by diversifying their portfolio, and ensuring their marketing efforts target other key inbound tourist markets, creating a buffer for this potential shortfall.

CONCLUSION The outlook for 2015 is flat, and while the immediate conflict has passed, Putin’s policy decisions have caused global financial institutions to recoil, and therefore caused 2 likely scenarios. The first is that the Russia’s economic freefall will hit a plateau, recovery will

Sources : World Tourism Organisation, Euromonitor, Oxford Economics,, World Travel and Tourism Council, European Travel Commission.

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