By Michael Alexeev and Shlomo Weber
Much of the world watched the Winter Olympics in Sochi. While most people are primarily interested in the athletic achievements, the fact that the Games are taking place in Russia has also brought the Russian political system, economy, human rights, etc., into focus, inadvertently highlighting the interaction of the still pervasive Soviet legacy and the momentous changes since the collapse of the USSR.
Presumably the intended message of the Games is, as the Economist put it, “Russia is back.” The question, however, is back to what? Is it back simply in terms of playing a major role on the international stage or also back to the Soviet ways of doing things such as creating Potemkin villages and making wasteful investments that foster corruption?
One of the major themes in the media coverage on the eve of the Games was the cost of construction. The commonly cited number of approximately $50 billion would make the Sochi Olympics the most expensive Games ever. According to the Washington Post, this number has appeared in almost 2000 news accounts last year, yet it almost certainly misrepresents the true cost of the Games. It is based on a year-old statement by Dmitry Kozak, a deputy prime minister in charge of preparation for the Games, and it includes both the state budget expenditures of about $23 billion and private investments by Olympic sponsors, although some of these sponsors appear to have been pressured by the government to invest.
Moreover, on closer inspection, some of the “private” investments have been actually made by state-owned or state-controlled corporations such as the Russian Railways and Gazprom. Much of the funds have been spent on improving general infrastructure and it is unclear what part of this investment would have been made in the absence of the Games. The Russian government argues that the investments in infrastructure and at least some of the Olympic facilities have turned Sochi into a much more attractive resort for Russian vacationers and would replace foreign resort destinations for the Russian middle class. At the same time, the number provided by Kozak a year ago probably underestimates the actual expenditures as such large projects typically exceed their projected costs.
Like most large investment projects in Russia, the Olympics probably involved a substantial amount of corruption and fraud which are in part responsible for the high price tag. A report co-authored by the former Deputy Prime Minister Boris Nemtsov, a long-time critic of President Vladimir Putin, claimed that “between $25bn and $30bn have been stolen” from the funds invested in the Olympics. While Russian officials strongly deny the presence of widespread fraud in the Olympic construction projects, Nemtsov’s numbers are roughly in line with the estimates from a survey conducted by Mark J. Levin and Georgy A. Satarov, which found that bribe revenue in Russia amounted to about 50% of GDP in 2005. Of course, “bribe revenue” could involve some double counting because lower level officials may share bribes with their higher-ups, but at the same time construction projects represent notoriously fertile soil for corruption.
Whatever one thinks of the reliability of the investment or, for that matter, corruption numbers cited above, it is clear that public and private investments engendered by the Games have been substantial. Let’s put the $50 billion number into perspective: this sum represents about 2.5% of the Russian 2013 GDP. While rating agency Fitch says that this amount is too small to produce a significant impact on the state budget, this percentage is close to one half of approximately 5.5% of GDP of the United States post-2008 recession stimulus under the American Recovery and Reinvestment Act of 2009.
This investment could help increase the size of the service sector, particularly tourism, in the Russian economy that continues to be highly dependent on oil and gas rents. While the diversification effect on the economy is likely to be relatively small, the impact on Krasnodar region that includes Sochi and the rest of the Russian Black Sea shoreline, as well as most of the Azov Sea shoreline, could be substantial. The new hotels could accommodate a three-fold increase in the number of tourists visiting the Sochi region. Perhaps the investment in residential housing and infrastructure could even facilitate, at least on the margin, relocation of some of the Russian population from the Northern parts of the country — a relocation that is needed but has not been proceeding at sufficiently fast pace.
Initially, the prospect of the Games hinted at a macroeconomic stimulus for Russia. Indeed, the Krasnodar region has been growing at roughly twice the rate of the rest of the economy since the Games were awarded to Russia in 2007. But the stimulating effect on the overall economy is hard to discern. Russia’s economic growth slowed down considerably in 2013, as was predicted by Revold Entov and Oleg Lugovoy, and in the last half of the year, the growth stalled almost completely, despite some recovery in much of the world. Moreover, the seasonally adjusted January index of manufacturing activity in Russia released on February 17 dropped to 48.0 — the lowest level since the 2009 crisis and almost a full point lower than an already weak level of December 2013.
As with most large projects, the effects of the Olympic Games on the Russian economy appear to be ambiguous and demonstrate both the new-found economic prowess of the country and the old ills of corruption and inefficiencies of the state involvement in the economy. Perhaps the best thing to do is to leave the more detailed analysis of these issues to some future date and for now simply enjoy the recent memories of Olympic competition and pageantry.
Michael Alexeev and Shlomo Weber are the co-editors of The Oxford Handbook of the Russian Economy. Michael Alexeev is a Professor of Economics at Indiana University in Bloomington. Shlomo Weber is the Robert H. and Nancy Dedman Trustee Professor of Economics at Southern Methodist University, Dallas, and PINE Foundation Professor of Economics at the New Economic School of Moscow.
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Image credit: “Sochi Olympic Park Architecture” by Alex1983. Public domain via pixabay.
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