Identifier
Created
Classification
Origin
07TASHKENT428
2007-03-15 10:49:00
CONFIDENTIAL
Embassy Tashkent
Cable title:  

COUNTING PENCILS AT TASHKENT'S INTERCONTINENTAL

Tags:  PGOV ECON UZ 
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VZCZCXRO6249
RR RUEHDBU
DE RUEHNT #0428/01 0741049
ZNY CCCCC ZZH
R 151049Z MAR 07
FM AMEMBASSY TASHKENT
TO RUEHC/SECSTATE WASHDC 7207
INFO RUEHAH/AMEMBASSY ASHGABAT 2616
RUEHTA/AMEMBASSY ASTANA 8697
RUEHEK/AMEMBASSY BISHKEK 3206
RUEHDBU/AMEMBASSY DUSHANBE 3081
RUCPDOC/DEPT OF COMMERCE WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 TASHKENT 000428 

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/15/2017
TAGS: PGOV ECON UZ
SUBJECT: COUNTING PENCILS AT TASHKENT'S INTERCONTINENTAL
HOTEL


Classified By: Amb. Jon R. Purnell for reasons 1.4 (d).

-------
Summary
--------

C O N F I D E N T I A L SECTION 01 OF 02 TASHKENT 000428

SIPDIS

SIPDIS

E.O. 12958: DECL: 03/15/2017
TAGS: PGOV ECON UZ
SUBJECT: COUNTING PENCILS AT TASHKENT'S INTERCONTINENTAL
HOTEL


Classified By: Amb. Jon R. Purnell for reasons 1.4 (d).

--------------
Summary
--------------


1. (C) Tashkent's Intercontinental Hotel is experiencing very
low occupancy rates as the result of fewer foreign visitors,
a situation that has caused cash flow and other problems for
the hotel. The hotel is restructuring its rates to attract
additional business travelers and mid-level government
officials from Russia, China, and other Asian countries.
Meanwhile, the Ministry of Foreign Economic Relations, which
owns the hotel, is of little help, refusing even to intervene
in what Intercontinental management characterizes as a
clearly illegal "money grab" by tax authorities. According
to the hotel's Finance Manager, the Intercontinental is now
only one of two non-Uzbek managed hotels in Tashkent, as
Radisson SAS has pulled its expatriate team out of Tashkent.
The Intercontinental's situation is typical of the problems
experienced by other businesses that cater to foreign,
primarily Western, visitors for the majority of their
revenue. End summary.

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Barely breaking even...at least in February
--------------


2. (SBU) A sharp decrease in the number of American and
European visitors is wreaking havoc on the Intercontinental
Hotel Tashkent's bottom line. Finance Manager John Davy told
poloff that the hotel's average occupancy rate has fallen
steadily since early 2005 and now stands at just 18 percent,
far below the hotel's break-even point of 39 percent.
According to Davy, the hotel's food and beverage sales
ordinarily would contribute only a relatively small amount to
overall profits. Presently, however, food and beverage sales
at the Intercontinental account for as much revenue as, or in
some months even more than, the sale of rooms. For example,
the hotel was able to break even in February as the result of
several trade expositions that brought higher than normal
food and beverage sales. However, the hotel is still
operating at a net loss in 2007 as there were no expositions
in January. (Note: In 2007, there will be approximately 27
international expositions, the majority of which will take

place at the Intercontinental. End note.) The low occupancy
rate is causing increasing cash flow problems, which has led
the hotel to cut back on purchasing and other discretionary
expenditures. Internal hotel supply stores are only open
once per week for requisitions, and Davy said, only somewhat
tongue-in-cheek, that he is to the point where he is
concerned about how many pencils the staff takes each week.

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When 90 percent is not enough
--------------


3. (SBU) The Intercontinental currently has no competition
for Western travelers. Davy estimated that 90 percent of
American and European visitors to Tashkent stay at the hotel.
The significant drop in the number of Westerners,
particularly businessmen, coming to town means that there are
simply not enough to fill the hotel. Senior government
delegations from the former Soviet republics and Asian
countries also stay at the Intercontinental, Davy said.
However, most businessmen and lower level delegations choose
to stay elsewhere because of the Intercontinental's higher
prices. The General Manager has restructured room rates to
attract additional mid-level visitors from Russia, China, and
other Asian countries and hopes to see higher occupancy rates
as a result. Intercontinental's Vienna regional office has
resisted the move, and wants to see the hotel's average daily
rate remain above $100. (Note: The average daily rate is
used to measure a hotel's pricing scale, and is calculated by
dividing the actual daily revenue from room sales by the
total number of available rooms. End note.)

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No help from the Government
--------------


4. (SBU) The hotel is fully owned by the Ministry of Foreign
Economic Relations. The Ministry pays Intercontinental an
annual management fee for running the hotel. The fee is
based entirely on net operating profit; thus, Davy said it is
conceivable that if occupancy rates do not rise over the next
ten months, Intercontinental could receive nothing for 2007.
He declined to disclose Intercontinental's fee in 2006,

TASHKENT 00000428 002 OF 002


saying only that it was less than his annual salary.


5. (C) According to the management agreement, the Ministry
has no role in hotel operations. In practice, Davy said,
interference is not uncommon, although the Ministry typically
backs down if Intercontinental stands its ground, which it
does in most cases. He said that Minister of Foreign
Economic Relations Elyor Ganiev has little interest in the
hotel other than the perceived prestige that it brings him
and his ministry and whatever money he can squeeze from it.
For the most part, this "benign neglect" is good for
Intercontinental; however, it also means that the Ministry is
of little help in resolving problems when they crop up. For
example, Ministry officials refused to intervene in a 2006
tax case -- a "clearly illegal money grab," according to Davy
-- until Intercontinental informed them that it would pull
out of Uzbekistan if its bank accounts were not unfrozen.
(Note: Intercontinental subsequently prevailed against tax
authorities in court. However, the hotel was audited again
in August 2006, and Davy suspects that it is only a matter
of time before tax collectors are again knocking on the
hotel's door. End note.)

--------------
And then there were two
--------------


6. (SBU) Davy said that the Intercontinental and the Dedeman
Silk Road are now the only non-Uzbek managed hotels in
Tashkent. The Radisson SAS Tashkent is a Radisson hotel in
name only, he said; the company has pulled its expatriate
management staff out because the Tashkent city government,
which owns the hotel, stopped paying management fees. The
Radisson sign remains on the building only because the
company has not yet made an issue of removing it. (Comment:
Rumors of Radisson's departure have circulated for almost a
year, but Davy is the first person from the hotel industry to
corroborate the reports. His information may well be true,
but as of March 13, poloff was able to make a reservation at
the hotel through Radisson's worldwide website. Radisson may
hope to work out its issues with the city and resume managing
the hotel in the future. End comment.) Davy said that
Intercontinental is in Tashkent for the long run, and will
not pull out as long as it can squeeze out at least a small
management fee from the hotel.

--------------
Comment
--------------


7. (SBU) There is little doubt that the downturn in
Uzbekistan's relations with the West has hurt the
Intercontinental's bottom line. Closing the base at K2 was a
major blow to the industry. Poloff recalls staying at the
Intercontinental during a 2003 visit and having breakfast
each morning in a relatively full dining room. In contrast,
on a recent Saturday morning, he was the only patron in the
restaurant. Post has heard similar accounts from other
businesses that depend on foreign, primarily Western,
visitors for the majority of their income. It is ironic, and
somehow appropriate, that in the case of the hotel, an
abysmal business climate is responsible for the Ministry of
Foreign Economic Relations losing money. The
Intercontinental's plight demonstrates that in addition to
running selected companies out of town, the GOU is doing
nothing to help those that remain.
PURNELL