It has a fast-growing e-commerce sector and no shortage of international interest but Russian firms are keeping their options open, writes Sally White

Let’s keep away from the politics and just say that the Russian travel market is ‘difficult’. Economic turbulence has decimated the rouble and numbers for Russians travelling abroad, travel agencies are folding and airlines are going bust! Underneath all of this, however, the online travel industry is growing nicely and even attracting Western investors. Yet IPO aspirants abound.  

Like all developing economies, Russia has a fast-growing e-commerce sector despite its crisis. According to international gurus Frost & Sullivan digital business there is proving resilient. According to President Vladimir Putin it makes up 10% of GDP and should be nurtured!

Though Putin’s idea is to use it to lure millions more foreign tourists in. Inbound tourist numbers are expected to drop from 24.6m in 2014 to 16.5m by 2018. He has in mind, the Moscow Times says, a Russian version of TripAdvisor or Booking.com. Of course, at the moment, recently passed laws would allow the authorities to ban such foreign companies from operating in Russia from 2016.

E-commerce numbers are still robust in roubles even if now slightly less dynamic in foreign currency terms - business had been growing at 20%-30% annually. Critical mass is developing as more companies dip their toes in technology. After all, it is a country of 146m people, with over 90m said (by live internet stats) to be internet users (making it world No.6) and forming a market in which current growth rates are put at 10% per annum.

When it comes to value, the numbers are a bit all-over-the-place, partially because e-commerce there is so fragmented. A report from East-West Digital News gave a Russian e-commerce figure of $16.5bn for 2013. However, this a bit hard to tally with numbers for online travel booking in 2012 from research group PhoCusWright – 14% of a Russian travel market total of $53bn. Online travel company Travelata.ru had a $5bn online travel figure for 2013.

The latest figure, from PhoCusWright, is that last year online travel booking sales probably reached $10bn. Past numbers put airline tickets at 70% of revenues.

Colourful stuff

Easier to quantify are the online travel booking companies. Since several have eyes on foreign stock markets there are more numbers around. Last year was a very active one in the sector, with new products as well as many start-ups. My Hotel Tools, for example, is aimed at small hotel owners.

The leaders seem to have had no trouble attracting investment from venture funds, or from international entrepreneurs. Names that can be spotted in media coverage include Israel’s ‘king of diamonds’, Uzbeki-born international magnate Lev Leviev. Another is Skype backer Mark Tluszcz, one of the first investors in Europe to feature on the ‘Forbes Midas List of Top Technology Investors’. Colourful stuff!

Tluszcz’s fund, Mangrove, was one of the first to invest in top Russian on-line travel group Oktogo, leader in the local hotel booking market, after its IPO in 2010. Oktogo has grown steadily, buying Travel.ru (a tourist information portal for Russian travellers) and raising $40m in total. Its latest fund-raising, in December, attracted $5m, including from Poland’s MCI Management, Mangrove (again) and France’s Ventech.

Onetwotrip.com, which vends air tickets and hotel bookings to users from Russia and Europe, also raised funds late last year. US investment Goldman Sachs invested $8m, Russian business daily Kommersant has just disclosed. Apparently, its story says, Onetwotrip has been profitable since its 2011 launch and is growing in spite of the crisis.

Onetwotrip expanded into the US in 2013, buying US hotel booking start-up DealAngel. This company is one of the thwarted IPOs.   

Yet another which attracted foreign funds last year is OnlineTours, a reseller of packaged tours. It drew a group of investors in a VC consortium which included some useful experience. Among them was Holtzbrinck Ventures, whose partner Christian Saller previously managed KAYAK’s activities (now part of Priceline) in Europe. Last year the Russian market in packaged tours was put at $15bn with just 2% generated online.

Less good news last year was a squall at one of Russia’s most funded OTAs, Ostrovok. It not only lost a co-founder, says East-West Digital News, but two major foreign investors sold out. Of course, that started scares that maybe Russian online investment was off limits! However, Lev Leviev’s fund, Vaizra Capital, reportedly stepped in to fill some of the gap.

While that calmed nerves, it has increased wishes to get out. App in the Air, although relatively small, already has a US user base, and Excursopedia says it is looking at new opportunities in Europe and the US. Foreign expansion seems to be the Russian game for 2015.