ISSUE: 208
"My life has been full of terrible misfortunes, most of which never happened"
-Michel de Montaigne
DIALOGUE AND DEBATE

Where Do We Put The Foreign Tourists?
By John MARONE

Following the Orange Revolution and this year's Eurovision song contest, Ukraine is arguably at an all time high in terms of positive international recognition. Most people have forgotten about the not-so-distant string of military disasters, corruption and murdered journalists are largely associated with the former authorities, and the Chernobyl plant has since been used as a set for a Hollywood film.

So the country's tourist industry must be boiling over with business-right? Last month, news agencies reported that a German businessman who had arrived at Kyiv's Boryspil airport without a passport was promptly put on a return flight. The Border Guards were quoted as saying that the man really believed that he could enter the country on a driver's license following Ukraine's limited cancellation of visa requirements for EU citizens. Surely there must be tens of thousands of other Europeans willing to pay reasonable prices to avoid such inconveniences in their search for a quality vacation.

A Matter of Space

"The Orange Revolution has played a positive role," allowing people in other countries to learn just how charming Kyiv and the rest of Ukraine really is, says Alla Nikitchenko, the director of Hamalia tourist agency, "now the task is to maintain that positive image."

Last month's hosting of Eurovision provided just such an opportunity, and the new government helped things along by allowing Europeans to avoid cumbersome consular procedures between May and September of this year. But this wasn't enough. As the song contest approached, Ukrainian tour operators and the tourists themselves complained of cancelled hotel bookings - often without any advance notice.

Nikitchenko blames the song contest organizers, whom she accuses of forcing hotels to set aside rooms for official delegations - often unnecessarily. "I have no complaints about the hotels themselves."

But everyone, including Nikitchenko, agrees that hotels, or more specifically the lack of hotel space, really is the crux of the problem. There aren't enough of them even in Kyiv, and those that exist charge more than they're worth.

"Our foreign partners faint when they see our prices," says Nikitchenko, referring not just to hotel rates. In fact, the country's entire tourist industry remains undeveloped and plagued by a largely deserved reputation for quality inconsistent with the price.

So why is the price so high? Well, besides the fact that hotels, being in short supply, can charge what they want, the new government has to take some of the blame. For example, according to recent amendments to this year's budget, tour operators like Hamalia no longer get the so-called "Zero Option," which used to guarantee them a return of the VAT charged by hotels. This of course cuts into an already small profit margin, and thus higher operating cost gets passed on to the consumer (i.e. tourist).

This year's sharp rise in the hryvnia also didn't help matters much, as prices for services (i.e. bookings of tours and package deals) are agreed in advance. Serious tour operators like Hamalia get an idea of their costs and market during exhibitions several months ahead of the tourist season.

Continuing Growth

All this having been said, the flow of foreign tourists to Ukraine continues to grow. The head of Ukraine's State Tourist Administration, Valery Tsybukh, recently reported that Ukraine earned about 36 million dollars from tourism last year. This year, twice that amount is expected.

According to information put out by Tsybukh's agency, Russia leads as the country of origin (primarily vacationers headed to Crimea). Next comes Moldova (whose access to the Black Sea is geographically blocked by Ukraine), Hungary then Poland.

Although Germany and the USA place seventh and ninth respectively, they fall well behind Russia. For example, in 2004, almost 900,000 Russians paid for organized tours to Ukraine - as compared to less than 61,000 Germans and just over 13,000 Americans. Even more revealing is that often much higher numbers of North Americans and many Europeans come to Ukraine on business or for "private" reasons. Thus, Western interest in Ukraine exists, but not in its tourist industry.

Igor Yatsenko of New Logic travel agency isn't surprised, and like everyone else, he says "the main problem is the shortage of hotels ... Ukraine is a country of 48 million but it only has one five-star hotel."

Why? First, hotels require long-term investment (the kind Ukrainian businessmen don't like); two, Ukrainians don't have the spending power to support them in the off season; and three, the Radison SAS still hasn't opened in Kyiv for reasons unknown and beyond the scope of this article.

"Very often we have to turn people down," says Yatsenko, who also acknowledges the country's undeveloped infrastructure and service culture. This is particularly damaging to travel agencies that specialize in bringing in foreign tourists (as opposed to sending Ukrainians abroad). Foreign travel agencies want certainty, to know that their bookings won't be cancelled. Once that has been solved, they simply look for the cheapest price for their own markup or their customers' demands.

On the other hand, the ubiquitous Ukrainian tourist agency is typically small and always trying to undercut the price of its competition. This leads to competitive rates for Ukrainians going abroad. But for Ukrainian tour operators, the result can be chaos.

"Basically, everyone is competing on the basis of how good their contacts are with hotels ... it's about hotel bookings," says Yatsenko. Things like trying to provide better service for cheaper matter less.

On the positive side, the market is getting more specialized - business, classic tours and outdoor recreation - but this doesn't change the law of supply and demand for lodging. Even roping events like Eurovision have little overall effect, says Yatsenko. In many ways, it hurt operators, who not only had their bookings for the event cancelled but lost out on their usual summer business due to the same space problems.

Government's View

In April 2002, the (now former) government passed a state program on development of the country's tourist industry up until 2010. The program noted that Ukraine had inherited 4,500 hotels, resorts, sanatoriums and other facilities after the break up of the Soviet Union. Plus new facilities like an aqua park in Crimea and ski lifts in the Carpathians had begun to spring up.

Proposals included industry tax breaks and cancellation of the much-hated higher hotel rates for foreigners, which was eventually approved. In addition, laws have been passed which better define the difference between tour operators and travel agencies - a distinction that didn't used to exist in Ukraine.

"We not only have to advertise more, we have to offer a better product," says Yevhen Samartsev, deputy head of the State Tourist Administration. All the same, Ukraine is getting ready to prepare its tender to host the 2012 European football championship, although the facilities it has on hand in the regions are woefully inadequate to the task, he adds.

If properly coordinated with investment, advertising can be an engine for growth. For example, Samartsev says Truskavets spa (in Western Ukraine) is known in the U.S. because a German company invested in it and promotion went international.

Most Western tourists take the classical city excursions, which are almost entirely limited to Kyiv, Lviv and Odessa. Crimea makes its money off the Russians, while Western Ukraine is for the Ukrainians. According to Samartsev, 100 tour operators service 95% of the market, and only 30-40 of these are relatively serious players.

So is the answer to industry growth the attraction of foreign investment and tourists? "There is already enough money in Ukraine," says Samartsev, who thinks that the state should assist private investment by developing the infrastructure and then gradually occupy itself more with regulation.

That all sounds fine and well if it weren't for that pesky problem with the shortage of hotel space. Here Samartsev offers fresh insight into the problem: "people are lining up to build hotels ... but the problem is that land in tourist areas is already in the hands of speculators." Now it's the new government's job to get the deals rolling or - as has been happening in other industries - to look into the possible illegal acquisition of this property.

Although investigations have already been launched into the sale of prime Crimean turf at rock bottom prices with the assistance of suspect local officials, Samartsev cautions against scaring off investors: "We can't throw the baby out with the bath water."

"Crimea is a separate issue altogether," he adds. The interior could offer golf courses, hiking, etc., but this needs to be built. As far as the coast, each facility must be addressed individually. This could mean the closure of an outdated sanatorium, the modernization of a potentially luxurious spa or an investigation into a resort facility being milked by local administrators.

In short, it sounds like the government at least has a solid plan of action. But why then did it cancel the "Zero Option" VAT set-up just before the start of a new tourist season? "Ask (Economics Minister Serhiy) Teryokhin," says Samartsev, who adds that the new government probably was motivated by the need to increase revenues. Apparently, tourism is not yet seen as major way of doing so.


More in the section:
GUUAM: Under Reconstruction
Ukraine's Health Care System. Finding the Right Cure
The Party And I

Read also previous issue' articles:
The Gas Curtain: Tip of an Iceberg?
Dismissal of the government Gas Attacks on the Cabinet
Yushchenko's First Year: A Mixed Balance Sheet
The War of Symbols: Monuments Are Not Guilty
A Rich, Cursed Land
Rising Stakes


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Where Do We Put The Foreign Tourists?
GUUAM: Under Reconstruction
Ukraine's Health Care System. Finding the Right Cure
The Party And I

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