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Series of Bankruptcies of Tour Operators to Result in Further Decline of Tourism Flows from Russia

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Marija Milasevic Bio

In summer 2014, the Russian tourism industry was significantly affected by a number of serious bankruptcies of local tour operators. Six tour operators did not manage to solve their financial issues and declared bankruptcy. Many companies were unable to honour existing commitments – with more than 10,000 tourists left stranded in foreign destinations without return tickets and/or hotels booked for their stay. This resulted in a failure of trust among Russian consumers. Lack of consumer confidence, a weak legislative system, poor economic forecasts and a lack of promotion for domestic destinations will negatively affect the industry in the next couple of years.

Russian Economic Slowdown and Weak Legislation Behind the Collapse

The Russian economic slowdown is considered to be the most significant factor causing a sharp deterioration in the market. Russian tour operators were resorting to dumping prices on the market due to the very tough competition among market players. Because of this, the majority of companies in the industry were at risk of becoming insolvent. The value of the local currency against the euro has declined significantly since the beginning of the year, from Rb45 in January to Rb48 or even Rb50, depending on the month. As a result, many tour operators faced problems with foreign partners’ payments, leading to further financial problems.

The gap in the local legislative system is considered to be the second major issue facing the tourism industry in Russia. Despite the fact that all Russian tour operators were insured by Turpomosh, the obligatory government insurance scheme, this insurance did not work in such urgent situations when more than one tour operator was affected. Insurance contributions were not sufficient to meet the possible costs of transporting tourists home. As a result, thousands of tourists were forced to solve their problems themselves – either purchasing return tickets or paying for hotels out of their own pocket.

Crisis Between Russia and Ukraine Affects Outbound Tourism

The current situation between Ukraine and Russia is also having a negative effect on tourism development. Due to the current tense atmosphere in Russia, employees of defence and law enforcement agencies in the country have been banned by local authorities from going abroad. These organisations have a combined total of more than four million employees. Many of these had bookings for foreign holidays with various tour operators, which were later cancelled because of the ban on them going abroad. The official advice of the Russian government is to opt instead for domestic tourism. This is reflected in declining demand for trips to foreign destinations.

Consolidation Expected in the Russian Tour Operating Sector

The series of bankruptcies also led to a decrease in demand for package holidays in Russia. Consumers do not feel confident in the quality of services provided by tour operators. This is another blow to the domestic travel agencies. According to the official statistics, travel agencies are the businesses most actively closing down in 2014. According to tourism industry experts, more bankruptcies should be expected this year.

Russia has too many tour operators and it is very hard to control all of them. Therefore, in the case of events beyond their control, the deficiencies in the legislative system become more obvious. The Russian legislative system in terms of the tourism industry requires significant improvements. One of the solutions would be market consolidation. Only strong and responsible market players would remain on the market. At the same time, a more effective insurance system could play a beneficial role in market development and repairing the image of the industry.

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