Why did successful financier James SKINNER, who had been to 110 countries around the world, decide to try his luck in far-flung, freezing Moscow?
“In 2002, I came to take a look at Moscow,” relates James. “I rented a flat, but I soon had to move out. The grounds for this were comical: the landlady didn’t like the fact that I ate a lot of watermelons. In this good lady’s opinion, my watermelons were the cause of the cockroaches in her flat multiplying, although, between you and me, the cockroaches were there before I turned up. Anyway, I had to look for somewhere else to live...”
In searching for a reasonably-priced hotel, James discovered that in the Russian capital...there were no hostels!
It is better not to deal with the banks in Russia: here the interest payments are very high and, let’s say, that paying 30-40% a year would have been unfavourable for me.
“At the time, there were all of three hostels in Moscow,” the Englishman recalls. “Russians perceived them as some kind of doss-house for down-and-outs. But then young people from abroad who couldn’t afford super-expensive suites in Moscow’s new luxury hotels began to arrive here. Budget hotels suited these people perfectly. It was then that I decided to open a “mini-hotel” in Moscow.”
Many considered his decision to start a business in the Russian capital a huge gamble, but he was interested to see what would come of it all. And Russia, and Moscow, and Russians were a closed secret to James, something which was not helped by his not knowing the language, and his reluctance to take on a Russian partner.
“I am used to controlling my own business myself,” admits James. “Which is why I looked not for a partner, but rather an assistant. I hired a Russian manager to help me find the property for a future hostel. We looked through announcements in the newspapers and on the internet. We found one regarding the sale of a former communal flat in Bolshoi Karetny Lane, in the centre of Moscow. Property is very expensive here, but we managed to haggle and agree a price of around $2,000 per square metre.”
James spent about two years finding a flat at such a reasonable price (it is almost twice lower than the market rate). But even so, immediately the issue arose of how to raise the money.
“It is better not to deal with the banks in Russia: here the interest payments are very high and, let’s say, that paying 30-40% a year would have been unfavourable for me,” says James. “I got a loan from my friends in England, and I had some savings of my own too. With this money I initially bought three flats. The building is old but completely sound: all it needed was a face-lift and to replace the plumbing. By the way, having repairs done in Moscow is so much cheaper than in England, but it is also so much more complicated. Cheapest of all was hiring the services of teams of builders in which people from other regions, and even other countries, work. I had no fewer than twenty teams working for me, many of which I had to get rid of. One day some builders even robbed the hostel! They caught one of them and put him behind bars. My advice: never pay builders in full beforehand. Pay only a small advance, otherwise you run the risk of never seeing them again.”
The rest of the properties in the building were let as offices but no sooner had the hostel opened than two flats became vacant, and James bought another 250 square metres.
“I won’t reveal the overall amount which I spent,” says the Englishman. “But considering the loans and the comparatively cheap price for beds in the hostel, the investment will only be recouped in nine years.”
The second problem which James had to solve was: registering the guests.
“To register guests over the internet, I would have had to buy a very expensive programme from the Immigration Service,” relates the hostel’s owner. “We chose a second option: one of our employees goes to the Immigration Service department every day, and registers our guests “by hand”. It is cheaper that way.”
The third problem James encountered was: staff.
“Finding qualified employees in Moscow to work in the hostel is more difficult than in Lithuania, Cyprus or even St. Petersburg where the hostel system is developed,” he says. “Here, people prefer to work in the big, luxury hotels. My requirements are simple: an employee needs to be respectable, approachable, professional and conscientious. I will part with anyone who is argumentative, lazy or light-fingered. We now have twenty people working for us. We recruit them via announcements on the internet, and I interview all of them. People work, on average, for no more than two years, although our cleaner, for example, has already been with us for six. I’m not about to give precise figures regarding salaries either, but I will say that they are higher than the average Moscow salary. Finally, the fourth problem is the bureaucratic obstacles which hinder the development of the business.
Why did successful financier James SKINNER, who had been to 110 countries around the world, decide to try his luck in far-flung, freezing Moscow?
“In England, of course, taxes are high: we pay up to 30% there, and here it is only 6%,” says James who is registered in Russia as a sole proprietor and pays tax through the simplified tax system. “We had no problems at all registering the business in Moscow. In my opinion, the sole proprietorship system in Russia is excellent. But there is here a huge amount of unnecessary paperwork: every step you take has to be documented, you have to draw up a mountain of petty cash receipts, bills and other documents, and this increases your overheads.”In his years of working in Moscow, James has accumulated no little experience in dealing with bureaucrats and with Russian businessmen.
“In starting a business in Russia, you need to know how to bargain, because prices for foreigners are often inflated, “ says James. “It is better to find out what the average prices for the goods or services you require are in Moscow before negotiating. The golden rule is: work first, money later. The second rule: never show any weakness to either your partners, competitors, or to bureaucrats. Business here is usually attempted from a position of strength, and it is best to show straight away that you are not one of the timid ones. The third rule is: if you were refused the first time, it doesn’t mean that you will be a second time, so be patient. And the fourth rule: personal relations can resolve a lot in Russia. Try to be on a friendly footing with business partners and even with civil servants. I would even add a fifth rule: learn Russian, even if it is only conversational, as quickly as you can.”
James is convinced that there is no such thing as a triviality in his business, even when it is a matter of minor repairs.
Yulia SHPONKINA, head of the market research department of Intesco Research Group:
The last few years have been quite favourable for Russia in the development of the hospitality industry and the hotel business in general. This has led to the appearance of hotels of international companies, the reconstruction of old hotels and the opening of many small hotels, including hostels. At present, there are more than 70 of these in Moscow. They are located mainly in the historic centre of the city (more than 80% of all the capital’s hostels are in the Central Administrative District of Moscow). But even so, the number of them here is still markedly less than in other world capitals, which means that this sector of business has good growth prospects. In Moscow, there is a particular shortage of low-budget 2-3-star hostels and hotels, where 80% of rooms are always full. To build a hostel on a purchased site of about 500 sq.m. (for 90 guests) requires an investment of 103,600,000 roubles (over $3,600,000), of which 10,500,000 ($337,847) to purchase the land, 86,100,000 (over $2,770,000) for construction and fitting out, and 1,800,000 ($57,916) for turnover. At a rate per bed per day for a room for four of 1,000 roubles ($32), in a room for six of 800 roubles ($19) and in a room for ten of 500 roubles ($16), assuming 80% booking on average per annum, the hostel will pay for itself in 3.8 years. Clear discounted income will be 26,800,000 roubles ($862,315).
“Not long ago we had to repair a pipe,” the Briton recalls. “The tradesmen said that the whole “riser” needed replacing and wanted a huge amount of money to do this. Five years ago, I would have believed them and paid the required sum. But I consulted another company, and the matter was resolved by replacing only the one pipe. Just through this “mistrust” I managed to save a lot of money.”
As a member of Hostelling International, the Godzillas 1-star, budget hotel is now able to accommodate up to 90 visitors. The hostel’s overall area is more than 500 square metres. It occupies an entire staircase of a three-storey mansion block. And Godzillas is practically never empty: the prices here are completely affordable for young, western tourists.
“Our prices depend on the level of comfort of the room,” says James. “A luxury room for 1-2 people costs $75 per night, a bed in a room sleeping six is $28. We don’t sell alcohol and we don’t encourage the drinking of spirits in the hostel. But it depends, really. Eight German football fans somehow managed to leave behind 500 empty beer cans!”
By 2017, Moscow wants to increase the annual inflow of tourists from 4,400,000 to 7,300,000, and to build a further 100 1-3-star hotels. But over the past 20 years, hopes of attracting foreign investors into the hotel business have not been fulfilled. Of 45,000 rooms, more than a third are 4-5-star hotels, whereas for mass tourism, 2-3-star hotels and hostels are what is required. The local market, with its unpredictability and administrative barriers, makes it difficult for foreigners to operate here. The Moscow authorities are now making changes to the classification of hotels, so that the hostels sector will meet legal requirements. This will have a positive effect on the investment attractiveness of this sector of the hotel business.
On the Godzillas website potential customers are warned: “Sorry, we don’t speak Russian”. Surely it is not the case that James is not interested in Russian guests?
“Of course, all guests are welcome,” the Englishman dispels such doubts. “But I want to oversee all of the orders, and it is more convenient for me to read in English. There is no more to it than that. By the way, there are always more Russian guests in winter, it’s just that in summer they are predominantly from abroad.”
James is expanding his business in Russia.
“A couple of years ago, I got to know a builder from Suzdal, working for a small firm,” relates James. “Suzdal is a beautiful, historical city which attracts a lot of tourists, and so I thought that a hostel in such a place wouldn’t stand empty. It was my acquaintance himself who found a building with an area of 600 square metres, with a garden even, and three times cheaper than an equivalent property in Moscow. It was this guy who helped, not just with the repairs, but also with drawing up the necessary documentation, and with recruiting the staff. It all took a year and a half and more than $300,000. Now, the Suzdal hostel can take 40 people. It’s true that Russians prefer 3-4 star hotels, and that foreign visitors tend to come in the summer, so you can’t expect a provincial hostel to be 100% full.”
James truly has grown to love Moscow, although he admits that there is still much about it which he doesn’t understand.
“Stereotypes about Russia still persist in the west,” says the English proprietor of Godzillas. “It so happened that I was flying by Aeroflot and the English transit passenger sitting next to me, when he found out that I live and work in Russia, started to...pity me! But I replied that I like it here, that the people are fine, that Moscow is very beautiful, and that I have got used to the snow now. Though it’s true that up until now the Russian winter has always seemed too long to me...”