Russia Tourism Report Q3 2008

Tourism Overview Based on recently released official data, foreign visitor arrivals were up nearly 2% y-o-y in 2007 to almost 23mn visitors, although foreign tourist arrivals were down 9% y-o-y to just 2.2mn. This was a surprisingly weaker performance than we had expected, particularly following the recovery in tourist arrivals in 2006. A noticeable sharp fall y-o-y in tourist arrivals from Poland was clearly a contributing factor. Interestingly however, the number of foreign tourists visiting Moscow in 2007 was up a relatively strong 7.5% y-o-y. The largest number of tourist arrivals came from Germany. The other most important source countries, in order of importance, were the US, China, Britain and France.

Forecast Scenario We have revised upward our real GDP growth forecasts for Russia and are now anticipating economic expansion to average 6.4% until 2012. Our core views regarding the trends in the drivers of future growth remain unchanged however. While developments in net exports will continue to weigh on overall growth, an acceleration of capital investments and government consumption, alongside sustained robust private consumption, will keep the economy humming over the long term. After a disappointing performance for the tourism sector in 2007, we anticipate a further slowdown in foreign tourist arrivals in the short term, with modest growth over the forecast period to 2012. Further downward revisions to economic growth forecasts in the US and the eurozone - major source markets - are likely to dampen tourism in 2008 and 2009. The continuing appreciation of the Russian rouble is also likely to undermine potential tourism, and we have raised our long-term forecast for the rouble and now expect the unit to hit RUB17.50/US$ by end-2012.

Aeroflot Russian national airline Aeroflot carried some 8.2mn passengers in 2007, and 10.2mn passengers if one includes subsidiary companies. For the group as a whole, this represents a particularly strong 17% y-o-y growth rate in traffic, which exceeded the company's target growth rate. Such favourable growth continued in Q108, with Aeroflot carrying almost 2mn passengers, up 16.6% y-o-y. The airline also estimates that it made a net profit of US$280mn in 2007, largely unchanged in US dollar terms compared with the previous year.

S7 Airlines In 2007, S7 Airlines (Siberia Airlines) achieved buoyant growth in income, reaching RUB31.12bn (US$1.22bn) up 25% y-o-y, while net profit reached RUB109.75mn (US$4.3mn), an increase of 80% compared with 2006. The airline carried nearly 5.7mn passengers in 2007, up a strong 16% y-o-y. In Q108, the airline transported 1,252,000 passengers, up an impressive 38% on the corresponding period of 2007. Recent growth is associated with the start of new regular flights in H207, including Moscow-St.

Petersburg, Moscow-Ufa, Moscow-Khabarovsk, Moscow-Chisinau (Moldova), Moscow-Nadym, as well as increased frequencies on other routes.

Domodedovo International Airport Latest data for Q108 show continuing buoyant growth in passenger numbers at Moscow's Domodedovo International Airport of almost 24% y-o-y to around 4.1mn passengers (after very strong growth in the previous three years). Flights to Saint-Petersburg, Krasnodar, Bangkok, Vienna, Novosibirsk, Dushanbe, Phuket, Mineralnye Vody, Madrid and Khabarovsk registered the highest growth rates.