IN-DEPTH: In the future Russia will host a number of international events and major infrastructure investment is promised as a result. Meanwhile the country has 60 million online users, online advertising spend is soaring and inbound and outbound tourism is growing apace. No wonder venture capitalists have their eyes set on this vast, diverse and culturally rich country. Pamela Whitby investigates

Back in the mid-90s I found a little-known agency dealing with Russian travel in London. Soon I was Moscow-bound carrying a backpack, a weighty War & Peace, film for my camera, a travel diary and, of course, Lonely Planet: USSR. No iPhone, no iPad, no digital camera and no internet connection for nearly two months.

Nearly twenty years on and while much has changed on the travel technology front, the gems and jewels of Russia are still very much there to experience. And not only the country’s citizens, but tourists from all corners of the world, are taking note. A new report commissioned by Hilton Worldwide titled Balancing Russia's tourism deficit finds that incoming tourist expenditure in Russia could double to US$15.3bn by 2016. In addition the country’s outbound market is forecast to grow by 7.4% between 2011 and 2016. But nothing is ever straightforward and there is, of course a caveat to this. The market for inbound tourism can only realise its full potential if vital infrastructure changes promised by government are fully implemented.

Right now there is plenty of construction underway in the city of Kazan which will host the Summer Universiade next year. Meanwhile Sochi will host the Winter Olympics and the first Russian Grand Prix in 2014. And in 2018 Russia will host the Fifa World Football Championship.

As part of the government’s grand infrastructure plan, this needs to be completed but that is just for starters. Today there is a dearth of cheap and direct flights both within the Russian regions and abroad. “Foreign companies have started have started developing such itineraries but there are still not enough,” says Martin Lumbye, a partner at Momondo.com. Momondo.ru is one the top three meta-search engines for travel in the Russian market alongside Skyscanner and Aviasales. “Another problem is the cost of flights - which makes travel prohibitive. Today just 10% of Russians regularly travel abroad.”

While there are low-cost airlines flying to and from Moscow and St Petersburg, there are no Russian carriers – the two that tried (Avianova and SkyExpress) went bust.

Going for growth

While this is a problem on the one hand, it also presents some opportunities, says Yakov Sadchikov the founder of visual search engine Quintura.com which develops mobile apps for Android and iOS. He also founded RussiaDeal, an online financial deal information business, purchased by Internet Securities Inc, a EuroMoney company. As Sadchikov points out, this is a $60bn dollar market and it’s still growing. “Online penetration is just 10% (versus 50% in developed markets) but that is expected to grow to 30% within the next four years,” he says. But even so with 60 million users already online this is a huge domestic market. And if that is not enough, online advertising spend is also growing apace; estimated to be more worth $1.4 billion last year, this is expected to increase by 40 percent in 2012.

Momondo.com has certainly experienced Russia’s growth potential. Last year Russians booked air tickets and hotels to the tune of $4 billion online. Giving an indication of what this has meant for Momondo.ru, Lumbye says traffic has grown seven-fold in two years and there is somebody searching for travel every four seconds on the site.

But Momondo could not have done it alone. “We have added local suppliers [there are now 17 Russian OTAs] to the database that support the Russian interface,” he says, explaining that “to grow in the Russian market you have to have a simple and intuitive interface.” Many Russians are just starting to book online so trust is really important; ongoing work on the site to improve usability and convenience is essential. Russians have a strong educational background – not to mention a desire for comfort, success and money - and you are never far from a skilled engineer. This too could explain the growing number of internet start-ups in the country: online hotel booking site, oktogo.ru, real-time bidding firm Tinkoff Digital and the online game Zeptolab – which has had 100million downloads are just three. 

Looking not booking 

Momondo has also worked hard in the social space by having an open dialogue with users; it is used as a channel for marketing campaigns and a platform for organising competitions. “We help them understand how Momondo works, how to find tickets as well as providing them with up to date information and, of course, we inspire them to travel,” says Lumbye.

Work to improve the website is ongoing too – Momondo accepts that competition is coming soon – and the firm is constantly broadening the website’s database with alternative suppliers, offering additional services like insurance, training users to use search technologies and, of course, developing mobile apps.

As Marina Kolesnik, founder and chief executive of the hotel booking site Oktogo.ru which today has a million unique users monthly, points out the mass market consumer in Russia is still learning how to transact online. “User engagement through customer call centres and social media is critical for educating the consumer and driving new behaviour,” she says. 

This brings us to opportunities for mobile – another rapidly growing market. Smartphone penetration is said to be around 10 million and there it is estimated that there are a million iPads in the country, along with a similar number of Android tablets, although the majority are currently in Moscow and St Petersburg. In Russia Apple devices cost as much as 40% more than they do in Europe. So there is opportunity for developing lower cost devices although Sadchikov stresses that Russians will always choose quality over cost.

So far it is more about looking online than booking but this could be another opportunity for an external player. More than half of all payments in Russia are still made in cash, so now could be the time to leapfrog developed markets and introduce virtual payment card systems from day one. “Very few credit card payments are made over the Internet. Russia has just 13 million active credit cards,” says Lumbye. But this represents an opportunity too – right now OTAs are looking for alternative ways to pay. Kolesnik agrees: “Given the low credit card penetration in Russia means that virtual payments are likely to perform well here.”

Cost is certainly an issue: visas, flights and accommodation are still expensive and there is plenty of red tape. According to Kolesnik, however, the local challenges present opportunities. There is low credit card penetration, a propensity to pay and book offline and then, of course, the entry visas that all Russians need when travelling to major European destinations. “The major opportunities lie in perfectly serving needs of local customers,” she says.

But competition is intensifying with a number of players now operating in the travel space. Skyscanner, Momondo and Aviasales are the main meta-search engines, Booking.com and Oktogo.ru are for hotel sales and for airline ticket sales it is anywayanyday.com and Onetwotrip.com. “Competition is good,” says Sadchikov, “because Russians will always work to improve their service.” 

So to sum up the main are opportunities:

• Acquisitions of local start-ups to gain access to local knowledge and supply changes

• Low-cost flights both internally and abroad 

• Innovative online payment mechanisms to meet the needs of the unbanked

• Package tours or cruises that can be booked online – technically this is not possible right now

• Accommodation offering for all tastes and budgets

A few weeks ago, Mark Tanzer, chief executive of ABTA, the UK travel association, told EyeforTravel that firms look to other markets for opportunities and Russia was top of that list. It seems he has a point.

In 1995 travelling to and within Russia did not come cheap, you couldn’t travel completely independently and there was plenty of red tape. The only way to do it was through an agency. While much has changed there is still some way to go. Still, I feel a trip down memory lane coming on. Perhaps a Trans-Siberian train journey with the family? A fishing trip to Lake Baikal? And maybe even this time, a luxury hotel rather than a youth hostel in Russia’s answer to Versaille. Can any tour operators help?