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. Last Updated: 07/27/2016

St. Pete to Enlist Experts to Boost Hotel Values

ST. PETERSBURG -- St. Petersburg has decided not to privatize any more stakes in city-owned hotels until the property can command higher sell-off bids, city property officials said.

In a strategy expected to be finalized in a few weeks, City Hall will hire Western experts to fashion plans to raise the value of hotels for future sales, said Kirill Androsov, the city property committee official responsible for hotels.

Russia's second-largest city owns stakes in 20 hotels, which generate three-fourths of the sector's revenues, he said. St. Petersburg boasts about 150 hotels.

"As a proprietor, [the city] is interested in maximizing a hotel's value so it can be sold more profitably," Androsov said.

"[We are] preparing an individual plan for each hotel," he said, adding that City Hall is close to hiring several foreign management companies to assist in the plans.

News of the curb on hotel sales comes as the city's privatization program faces increasing pressure for its role in two recent sell-offs. A tender for the behemoth Moskva Hotel was abruptly canceled in January and a bitter legal dispute over the privatization of a 35 percent stake in the Astoria Hotel resulted in a court returning the shares to the city last month.

In addition to the 35 percent in the Astoria, St. Petersburg owns stakes in middle-class hotels Pulkovskaya and Pribaltiyskaya (both 100 percent) and Moskva, Oktyabrskaya and Rossiya (all 60 percent).

Analysts said, though, that increasing the value of city-owned hotels before they are sold may be easier said than done. Most of the hotels were built in Soviet times, and the hospitality industry was never one of the Communist nation's strong points.

With a few notable exceptions - such as the Grand Hotel Europe, Sheraton Nevsky Palace and the Astoria - it is impossible to even rank the city's hotels under international standards because most do not meet the basic evaluation requirements.

As a result, Androsov said, an experienced Western management team could go a long way toward developing and improving the value of middle-class hotels.

He would not reveal how much would be spent on the foreigners, saying only that their services would not put a big dent in the city's budget.

Analysts said, however, that the city's develop-and-sell approach may be reduced to merely a sell strategy because no matter what it says, St. Petersburg lacks the finances to improve its hotels.

"Experience shows that not one of the mid-class hotels, with a few exceptions, can be developed and increase in value under current conditions," said Sergei Bayov, director of investment and banking operations for the financial group Gamma. "Privatization is inevitable."

"The state is not an efficient proprietor," he added. "[The city] has no money to develop the hotels.

The property committee's Androsov said top international hotel operators remain attracted to St. Petersburg, where they hope to establish a presence in the promising tourism market.

With an estimated 50,000 people employed in the industry, tourism accounts for 8 percent to 10 percent of St. Petersburg's gross regional product - a figure analysts say could jump to as much as 20 percent.

Also, the hotel industry is one of the few areas that emerged from the August economic crash relatively unscathed. Hotels did not lower their rates, which are denominated in dollars, and occupancy decreased only slightly.

"Hotel revenues increased up to three times in 1998 compared to the previous year," Androsov said, without providing figures.

The city has been rethinking its privatization strategy since calling off the auction for its 60 percent share of the Moskva Hotel, officials said.

The minimum bid for the stake was set at $9.5 million, with total investment rising to $28.5 million when debts and reconstruction costs were factored in. The hotel posted gross earnings of about $7 million in 1998.

Officials from the city property fund, which oversees the auction process, said several large investors expressed interest in the hotel, including an affiliate of gas giant Gazprom.

But the tender was canceled on Jan. 20 because the price was too high for bidders, fund chairman Andrei Martynov said.

Industry sources have suggested, though, that the Moskva tender was canceled to prevent a buyer with unclear or even illegal financial resources from participating in the bidding.

Similar allegations emerged last year when the 35 percent stake in the Astoria Hotel was sold to a previously unknown company that had registered in the Leningrad region just a few days before the auction. The company, Aroma Investments, claimed no assets or liabilities at the time and managed to win with a bid just .25 percent above that of respected international hotelier Sir Rocco Forte, which already owned a stake in the hotel.

The St. Petersburg Arbitration Court declared the tender illegal several weeks ago and returned the stake to the city.