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As cracks appear in Russian economy, collapse of tour operators leaves thousands stranded

MOSCOW - Last week, tens of thousands of Russians sunning themselves on Italian beaches and Turkish resorts received an unpleasant surprise: their tour companies had gone bust, stranding them and forcing them to pay double for a ticket to get home.

The bankruptcy is the fifth among major Russian tour companies in less than two months — a sign that cracks are appearing in Russia's economy after a months-long conflict in eastern Ukraine and an escalating stand-off with the West.

It's not just sanctioned Russian billionaires who are feeling the pinch now — uncertainty over the future has caused the currency to drop, hurting the average Russian's ability to travel abroad and buy imported goods. And as new sanctions by the U.S. and the European Union start to bite, companies worry about a looming recession and a future without access to the West's massive financial markets.

"The more tense the geopolitical situation, the more expensive (foreign) currency will be," said Konstantin Sonin, an economist at Moscow's Higher School of Economics. "And with sanctions, it becomes harder for financial institutions to give credit, and there will be fewer business projects and fewer goods being produced. Income and salaries drop and consumption doesn't increase."

The U.S. and the EU have accused Russia, which annexed Ukraine's Crimean Peninsula in March, of fomenting tensions in eastern Ukraine by supplying arms and expertise to a pro-Moscow insurgency, and have imposed asset freezes and loan bans on a score of individuals and companies.

Tour operators, some of whom are among the nation's oldest, say they have experienced an unprecedented slump in demand, which they blame on the bad political climate and the depreciation of the ruble, which has lost up to 10 per cent against the dollar since January. The closure of one tour operator alone, Labirint, has left over 20,000 people abroad without a return ticket and affected another 40,000 who had already bought travel packages, tourism officials said.

The low-cost airline Dobrolyot, which was sanctioned by the EU because it services the Black Sea region of Crimea annexed by Russia, has temporarily cancelled all flights.

Companies also blamed the collapse in tourism on Moscow's request that members of the security service, interior ministry, and military report where they travel to. The move, which authorities justified as an attempt to keep government employees out of any country that has an extradition agreement with the U.S., has discouraged trips abroad among the several million people who work in those sectors.

Until the recent troubles in Russia's budget tourism industry, the direct casualties of Western sanctions had been few and far between — and rich. Gennady Timchenko, an oligarch with an estimated fortune of $14.2 billion who as a longtime friend of President Vladimir Putin was hit with U.S. sanctions, said Sunday he could no longer fly his private jet because it was serviced by American company Gulfstream. Though other companies could in theory service the plane, he told Russian news agency ITAR TASS they would not have the right replacement parts for maintenance.

The collapse of major tourism companies could be the first sign that Russia, which is reeling from months of market volatility an estimated withdrawal by investors of $75 billion in funds, could be at the start of a lengthy recession. In July, the International Monetary Fund slashed its forecast for 2014 from 1.3 per cent to 0.2 per cent.

Any attempt by Moscow to fighting back against the sanctions is also likely to come at a high cost to Russian consumers and investors. Russia has banned a range of fruit and vegetable imports from Poland, in what Polish government officials said was retaliation for its support of the latest round of EU sanctions.

Shares in Russia's state airliner, Aeroflot, were trading down almost 6 per cent Tuesday after leading business daily Vedomosti cited anonymous government officials as saying they were considering closing the airspace over Siberia to European flights heading to Asia. The move, allegedly in retaliation for the EU sanctions on Dobrolyot, would deprive Aeroflot of payments it receives from European airlines for the right to use Russian airspace.

The government had no comment on the report, but Putin said Tuesday he had ordered officials to develop measures in response to Western sanctions. He did not elaborate.

Though the Russian government is in relatively good shape financially, with little public debt, its budget will be strained this year as revenue drops from state-owned companies and new burdens of infrastructure and pensions come to bear in Crimea. On Tuesday, the government said it would likely use money in contributions to employees' privately-controlled pension funds to smooth over holes in the budget for the second year running. A report in Vedomosti estimated that amount at 300 billion rubles ($8.3 billion).

While Western officials say the main purpose of sanctions is to target the country's elite, so far businessmen close to Putin have shown little public intention of backing down and have only ramped up hawkish, anti-Western rhetoric in response to the measures. During his interview with ITAR TASS, Timchenko, who is on the US sanctions list but has a Finnish passport and therefore is not on the equivalent EU list, bragged that he was ready to spend more time in his homeland and expand his growing Russian and Soviet art collection.

"In any situation, Vladimir Vladimirovich (Putin) is guided by the interests of Russia," Timchenko said. "There can be no compromise here, and it doesn't even come into our heads to argue on the subject."

The Canadian Press

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