Blood In The Suites: The Russian Hotel Wars

Westerners, city governments, and mobsters fight for control

When Yevgeny Tsimbalitov failed to emerge from his Moscow apartment building on the morning of Jan. 9, his driver was worried. Entering the lobby, he noticed a trail of blood leading down a basement stairwell. At the bottom lay the bullet-riddled body of Tsimbalitov, 48, director of the Rossiya Hotel overlooking Red Square. Tsimbalitov's death marked the fourth slaying of a Moscow hotel executive--including one American--in less than 18 months. None of the murders has been solved.

Hotels are the latest battleground in the fight for control of coveted Russian assets. Moscow and St. Petersburg rank among the world's most profitable hotel markets, thanks to an influx of travelers willing to pay top dollar for Western-style accommodations. Global chains are jostling for a piece of the action. But investors are finding that entrenched players will stop at nothing to protect their turf. While killings have tapered off in other Russian industries, bloodshed is now following the flow of money into the hotel business.

The trouble is that although the industry is open to investors, it is far from privatized. Government authorities still control most hotels. For example, Moscow Mayor Yuri Luzhkov's government has stakes in nearly all the city's hotels. It welcomes foreign partners--but at a price. Government officials often demand payments or other concessions that executives say would be illegal in the West. "Corruption is a very, very big problem," says a Western hotel executive. The city-run company that oversees Moscow's hotel properties says allegations of official corruption are "offensive" and declines to comment.

Partnerships with the government often protect businesses from organized crime, but not always. Gangs still muscle in, paying off city officials to turn a blind eye. For example, police think the director of the government-controlled Mezhdunarodnaya Hotel complex in Moscow was killed last November because he instituted reforms that disrupted mafia operations there.

Despite the risks, Western hoteliers are flocking to Russia. Moscow's booming economy keeps occupancy rates at a healthy 75% year-round, despite rates averaging more than $300 a night. Tourists are filling luxury hotels in St. Petersburg, too. And the industry has a ways to run: Moscow and St. Petersburg have less than one-third as much hotel space as comparable Western cities.

TRUMP'S CARD. Marriott Corp., for one, is keen on Moscow. The Marriott Grand Hotel opened last year on prestigious Tverskaya Street, and Marriott took a stake in the Renaissance Penta Hotel after acquiring the Renaissance chain. Now, it is looking at other Moscow properties, including the Intourist Hotel site near the Kremlin. "Every major hotel company wishes to be in a market that has the potential of Moscow," says Wendell Ward, Marriott's senior vice-president for international hotel development.

Recently, players such as ITT Sheraton, Hilton International, Holiday Inn, and the Forte hotel group have signed their first Russian deals. Donald Trump has jetted over to talk with Moscow officials about renovating the Rossiya and the nearby Moskva Hotel.

But while more Russian hotels have Western names on their front doors, behind the scenes the picture is complicated. Marriott, for example, neither owns nor manages the Grand. The hotel's owner, a company affiliated with the city government, uses the Marriott name in exchange for a franchise fee.

Marriott's caution about more active involvement is understandable. A Canadian group with a 50% stake in Moscow's Aerostar Hotel has been frozen out by its Russian partners, who canceled its management agreement and altered the hotel lease. And Radisson International, which owns 10% of Moscow's Radisson Slavjanskaya, became entangled in a feud between its partners, Moscow's Property Committee and Paul Tatum's Americom Business Centers. Tatum was gunned down in front of the hotel in November, 1996.

Even if the bloodshed subsides, investors face hurdles. High construction costs have forced some to check out early. And the luxury hotel market is approaching saturation. Yet hoteliers see a promising future for business-class hotels. Clearly, the industry still offers opportunities. The trick is exploiting them without courting lethal danger.

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