Russia Tourism Report Q1 2009

Tourism Overview The latest official data on foreign visitor arrivals are relatively positive, with arrivals up some 5% yearon- year (y-o-y) in H108 to over 11.1mn. Of these data, foreign tourist arrivals increased a favourable 7.7% y-o-y. As regards major source markets for tourist arrivals, Germany and Finland recorded increases of 5.6% and 4.3% y-o-y respectively, while tourist arrivals from the US were up a buoyant 27.2% y-o-y and arrivals from the UK were up a particularly strong 18.6% y-o-y. As is typical, Ukraine and Kazakhstan accounted for the largest number of foreign visitor arrivals to Russia, accounting for over 27% and 10.6% of the total respectively in the first six months of 2008. The proportion of arrivals from these two countries attributed to tourism however is traditionally extremely low.

Forecast Scenario We now expect the growth rate in foreign visitor arrivals to be up slightly in 2008, compared with a year earlier (in line with a relatively strong performance in H108), although we anticipate a decline in arrivals in 2009 but recovery in the following year. This view is largely based on downward revisions to our growth forecasts for the eurozone and the US – major source markets. Price rises (especially in accommodation) are also likely to have a negative influence on the tourism sector, with inflation reaching a five-year high of 15% y-o-y in August, indicating that inflationary pressures are likely to remain pronounced in the short term. Meanwhile, growth in arrivals over the remainder of the extended forecast period to 2013 is forecast to remain modest.

Commercial Airline Safety Concerns continue about Russian flight safety standards. In Russia’s worst air crash for two years, a Boeing 737-500 from Aeroflot-Nord (Aeroflot’s regional airline), crashed near Perm in September, killing all 88 people on board. After it was announced that engine failure was the cause, Russian prosecutors demanded a check on Aeroflot safety standards. Further, in October, a KD-Avia Boeing 737- 300 passenger plane flying from Barcelona crash-landed on its fuselage at Kaliningrad Airport after its landing gear failed, although no one on board was injured.

New Russian Airline In November 2008, reports stated that Russia intends to create a new state airline, Russian Airlines, for the purpose of absorbing up to eleven carriers struggling with the current financial crisis. As a result of record high fuel prices in 2008, a number of airlines in the summer faced financial collapse, grounding dozens of aircraft and leaving thousands of passengers stranded. The proposal by the government, however, may reverse years of progress towards competition in the airline industry.

Aeroflot Russian national airline Aeroflot recorded a net profit of US$72.2mn in H108, down 55% y-o-y.

Although revenues rose by 28.4% y-o-y to US$2.14bn, operational costs were up a considerable 42% y-oy to US$2bn, largely due to jet fuel costs. Aeroflot expects business traffic to shrink in 2008 due to the financial crisis, while net profit is forecast to fall more than 70% y-o-y to around US$85mn.

S7 Airlines Latest data show that S7 Airlines transported 4.8mn passengers in the first three quarters of 2008, up a relatively strong 13% y-o-y (although growth has slowed in the latter part of the year).