News | DistributionA year in Russian online travel - politics, games and investmentsThis article was originally published onBy Viewpoints | November 12, 2014 It's fair to say the travel industry won’t be the same in Russia after 2014. The year was full of shocking events that might entirely change the landscape of Russian economics in general and the travel industry will feel going forward.Therefore, I decided to wrap up the things that were important for the travel industry in general and for online travel as part of it. The year hasn’t finished yet, but the main travel season has ended and I hope we won’t see any more shocking news in the next two months (there have been enough already).NB: This is a viewpoint by Valentin Dombrovsky, vice president of innovations at Excursiopedia.Of course, January and February next year will be the time for us all to count profits and losses of 2014, so we won’t talk much about numbers – it will be more about facts and consequences.The Demise of Eviterra The very beginning of the year was shocking for the industry as reports emerged that Eviterra, one of the leading Russian OTAs, was in dispute with Avia Center, it's ticket consolidator.This was no ordinary dispute – some 6000 tickets were cancelled by Avia Center. In short, it is believed Avia Center enabled Eviterra to buy tickets using a substantial credit line and then tried to recover the funds when it understood Eviterra would not be able to return the debt.The story became one of the headlines for Russian media (and our Travel Startups group on Facebook also was in the spotlight as Eviterra’s CEO Nick Zayarny left comments about the situation in a thread that exceeded 700 comments from victims and travel professionals) including major TV channels.Most of the tickets were restored afterwards (it seems only about 50 people really couldn’t board their planes, but they later received refunds), so we can conclude that the majority of people were unlucky only in terms of uncertainty about their flights.However, the whole story was a major reputation blow for Russia's online travel industry. People began to be concerned about security issues when you buy a ticket from an agent and don’t know the fate of your money (have they paid for the ticket you bought or used the funds for their own purposes?).Airline representatives stressed that buying from an airline directly is a much more secure process and tour operators took the opportunity to highlight the safety of packaged tours bought from reliable operators (we’ll return to that a bit later).Luckily, we didn’t see any resulting legislation bringing restrictions to the industry although we don’t know yet what is to come.The case between Eviterrra and Avia Center is still in court. The latest verdict claims Zayarny is to repay about $2 million to Avia Center. Zayarny is believed to be away from Russia.Sochi Olympic GamesThe games held in February 2014 could become the sign of a "new Russia" and were to show how welcome Russia can be to foreign guests. Of course, relations between Russia and Western World have been tense and preparations for the Olympics were accompanied by some criticism.In general everything went well despite some confusing moments. Organizers claim that more than one million tickets for competitions were sold, but it’s hard to say exactly how many foreign tourists visited the Games.The Russian Government wanted to make Sochi a “world class resort” that would attract visitors from all over the world. However, events that followed made me think that billions of dollars were just wasted.Crimea annexation and political sanctionsThe question of 'Who owns Crimea?' became a litmus test to separate 'ours' from 'everyone else' in March 2014. Those who want to study the story further might read this Wikipedia article on the issue. The war in Donbass followed and Russia’s relations with Europe and the US became very tense.Political sanctions were imposed on some selected members of President Putin’s 'inner circle' – they were followed by sanctions imposed on some state companies and industries. It seem officials from the Department of the Interior were advised to restrict travel abroad for police officers, the same happened with those who work in the Federal Security Service.There was talk of restricting travel abroad to all government officials. Some say that it was done because of security reasons – others claim the measure was to increase tourists to Sochi and the new 'Russian' resort area – Crimea (which was also very popular among Russians before annexation).This article should not be about politics, but politics influence economics and, as I’ve mentioned before, the travel industry is particularly sensitive to such influence. Travel is all about an open world – less borders means more opportunities and restrictions harm everyone in the industry.The Ruble exchange rate against the dollar and euro also made trips to Europe and US more costly as it fell by 20-25 %.It is fair to say that a general tendency in Russian society is isolationism. However, Russia became more open to Asia as its government became disappointed in those whom it called its 'former allies'. Russian tourism authorities are seeking ways to increase the number of inbound tourists as well as to attract more Asian tourists.Another thing worth noting is the launch of Russian low-cost carrier Dobrolet – a subsidiary of state airline Aeroflot. Russia has been waiting for more affordable flights for some time and Dobrolet was a hope for everyone (Aeroflot officials say it will "tear up the competition").However, it is believed Dobrolet has had to serve political goals with flights to Crimea and that caused the EU to impose sanctions on it – which became the reason for cancelling its leasing contract. Right now Aeroflot plans to relaunch the low-cost carrier under the name "Pobeda" (Russian for "victory") and opened up sales in mid-November.The political situation has been the backdrop to everything that has happened in the Russian economy and travel industry after March 2014.Tour operators failures It is said that August is usually a month of bad news for Russia, as many disasters tend to happen during the last summer month. This year was no exception, although we should be happy that things that happened in the tour operator segment didn’t have deadly consequences.In fact, everything began on July 16 with the demise of tour operator "Neva" – a leading tour operator in St. Petersburg and a well-known brand in Russia in general.During July, August and September 14 tour operators failed with 130 000 either losing money they had paid for vacations or not being able to fly home from their vacations. Some 70 % were clients of "Neva", "Labirint", "Solvex Tour", "Versa" and "Southern Cross". The largest operator was "Labirint" – about 65 000 of its clients were victims of its demise.The main reason for the failures was the decrease in outbound tourism caused by multiple reasons – the restrictions for people working in the police mentioned above to Ruble exchange rates that made trips more costly. Some companies claim a 30 % drop in the number of tourists going abroad and it proved too much for some of tour operators working in a competitive Russian market.In some ways, the way tour operators in Russia work is similar to financial pyramids – they buy "blocks" of airline seats and hotel rooms for the future and pay for them with the money they get from tourists who buy packages. This scheme works well when the market is on the rise, but may cause problems when it falls – that’s what happened this year.Right now, we’re talking about some fundamental problems, but there are claims of cases of deliberate failures and several criminal cases have been opened due to alleged fraud by tour operators.The result - even more reluctance to spend money on travelling abroad at least in the near term. Some people viewed the situation as a reason to stop using packages – switching to independent travel with direct hotel booking and buying airline tickets.In general, I think fundamental factors will play a more important role in defining the way people travel – failures will be forgotten, but economic and political factors will remain which will define people’s travel habits next year.Some tour operators have tried to gain a competitive advantage using new technologies – Inna Tour launched a dynamic packaging engine, Bookinna, this July. Inna Tour IT director Leonid Pustov is quoted as saying: "We were first among Russian tour operators to offer agencies the opportunity of dynamic packaging. Tour packages are created in real time from scheduled flights from the GDS and inventory from international hotel consolidators. Such approach minimizes commercial risks for all involved in the deal. That’s what the market needs in the current unstable situation."Share this quote Most players on the market are positive about the outlook for dynamic packaging basing their view on European market data. According to rumors, some big market players had dynamic packaging integration projects that have been suspended because of the problems in the market.Ostrovok.ru investment One of Ostrovok (said to be Russia’s most funded OTA) cofounders Kirill Makharinsky left the company in May. This event came before a larger shock as General Catalyst and Accel Patners were reported to have divested their investment of $28 million Ostrovok received in an investment round at the beginning of 2013.However, in June Ostrovok.ru managed to raise additional funding of $12 million from Vaizra Capital - a venture fund founded by cofounders of Russian social network VK Lev Leviev and Vyacheslav Mirilashvili.In a press report General Catalyst managing director and cofounder Joel Cutler said the reason for divesting was "a difference of opinion about the way things should be done", - which doesn’t bring much more clarity to the issue.In an interview in Russian online media "Zuckerberg Will Call You" Ostrovok chief Serge Faguet claimed the company didn’t have clear KPIs from investors, but that they suddenly began to ask for some "quality operational and financial reports" the company could not present and that was the beginning of the breakdown in relations.The interview goes on to talk about investors insisting on cutting costs and some episodes of misunderstanding between investors and company founders.It still seems that much of the story will remain between the company and the investors. Whether there will be any fallout in terms of credibility for Russian startups amongst big US investors remains to be seen.Personal data lawThe Russian parliament passed a Personal Data Law in July saying foreign internet companies should store the personal data of users from Russia within the country's borders. As often happens in Russian legislation, there is lot of controversy in the law and many people don’t even understand exactly what the term "personal data" means.In addition, the law concerns not only foreign companies, but also Russian companies using Amazon web services, for example. In general, the law will make it impossible for companies such as Booking.com, Airbnb and a number of others including Google, Facebook and Twitter to work in Russia.The law will come into force on September 2016 (but there’s huge debate over the date). I don’t think that it will ever work. However, if it does, we’ll see the birth of a "Great Russian Firewall." And, of course, companies that might think about investing in establishing themselves in the Russian market will wait to see how the things pan out.Startup market growthThe year 2014 has been marked by active investments by the Internet Initiatives Development Fund. A fund of about $130 million is supported by Russian government and invests money from undisclosed Russian corporations, according to its boss Kirill Varlamov.IIDF's three month accelerator is probably the largest in Europe in terms of startups funded per year. It had about 120 startups in its first four batches and the aim of the fund is to invest in at least 400 companies. Of course, it has invested in some online travel companies too. Notable examples are listed below.My Hotel Tools is an example of fast and solid solutions for small hotel owners who don’t want to expand their costs for online property management. The killer feature of the product is the ability to provide a hotel team with an easy to use toolkit for a price as good as a one night’s stay in a room.Over the past month as a part of the IIDF acceleration program the team has demonstrated strong market traction and its first significant sales.Fingerpost entered IIDF as the first regional team, focused on development of the local travel market along with a great customer experience of purchasing online. Being a market leader in offline tourism in Eastern Siberia, the company is now ready to introduce an interactive platform for online bids on vacation tours in Russia.With several tests of the online auction drill, the team has found new ways to scale the business and is ready to nail the market.Previously IIDF has also backed Weatlas, Voxxter and 2do2go - companies that create a new experience of planning and consumption of travel and leisure attractions. Weatlas has received additional funding of about $1 million during 2014 including $600,000 from Run Capital venture fund that was founded by Andrey Romanenko, founder of Qiwi – the largest Russian network of cash terminals.Semyon Fomin, track of IIDF companies says: "It’s seems logical that we keep an eye on companies that work in travel. We believe that the market in the country is evolving and customers are ready to pay for tools our companies develop. Self-guided travel is a world trend and we want to make sure we don’t miss it."Share this quote Jetradar and Travelata investmentsAgainst a backdrop of negative reports, investments in Travelata and Jetradar (known in Russia as Aviasales) were glimmers of light in the dark. It’s interesting to see how different these companies are in their approach to the market and how they make bids on different trends.While Travelata tries to use its total funding of $12 million to grow the amount of package tours booked online, Jetradar uses $10 million from Itech Capital to get more users to buy airline tickets online independently. Besides the Aviasales brand, Jetradar has also developed hotel metasearch Hotellook and its online travel affiliate programs aggregator Travelpayouts.ConclusionIt has been a tough year for the Russian economy and the Russian online travel industry. And there are signs of tough times ahead. So, what are the opportunities for Russian online travel companies? Bidding on the rise of inbound tourism. Authorities on different levels are at least discussing many initiatives that might help to grow the number of inbound tourists. There’s huge demand for making travel in Russia attractive for Russian tourists. This has been known for some time but now there’s just no other choice. Maybe we’ll see the miracle and current crisis will be followed by the rise of the Phoenix.Foreign expansion. Companies such as Onetwotrip, Jetradar and App in the Air (Tlabs here) are exploring this opportunity. While App in the Air is relatively small, the majority of its user base is in the US, Onetwotrip and Jetradar are bigger and more dependent on the Russian market. And of course, while being well funded and having a strong position on the Russian market, they might have tough times trying to compete with major online travel companies on a global scale. At Excursiopedia we try to do both. While we are not fully concentrated on the Russian market, we see great opportunities in what Russia has to offer its visitors and try to put some effort in bringing the Russian tours and activities market online. On the other hand, we seek opportunities in new European markets and the US. We think that combination of the two approaches might help us standout.NB: This is a viewpoint from Valentin Dombrovsky, vice president of innovations at Excursiopedia.NB2: Red Square image via Shutterstock.