Soviet-Style Winter
Games
Vladimir Putin campaigned in 2007 at the International Olympic
Committee meeting in Guatemala to host the 2014 Winter Games in Sochi Russia. Sochi,
for Putin and Russia, would be a showcase to broadcast the progress of the
nation over two decades since the fall of the Soviet Union. He promised to
spend the unprecedented sum of $12 billion on the Games.
Following the end of the Olympic Games in February of 2014,
the Games ballooned to a final cost of $51 billion. Divide this sum by the
number of events in the Winter Games, and each event averaged at a cost of $520
million. Salt Lake City cost a total $2 billion and Vancouver cost $7 billion. Putin’s
international demonstration rescinded into Soviet characteristics: excessive
budgets fueled by corruption while attempting to boost national fervor. The
costs of some of the facilities of the game are shown below.
Corruption
In my opinion there are two reasons for the corruption
of Sochi: Russia having a resource economy and the inherent ability to act
dishonestly in the construction industry.
Russia receives over half of its national income from the
sale of hydrocarbons. These revenues make the Russian economy very reliant on
one very particular natural resource, therefore requiring heavy government intervention
to regulate the industry. With more government intervention, corruption
increases because of the lack of quality institutions to regulate the industry.
When individuals can scheme and collude to rake in profits through the existing
system, entrepreneurship and innovation is stymied. Russia has long been a
resource economy, which seems to make Russian politics and business inherently
corrupt (Look to the OPEC countries for more examples).
Combine the inherent nature of Russian corruption with the
promise to spend billions of dollars for the Winter Olympics and a corrupt industry
enters the market, construction. Construction has often been cited as the most
corrupt industry in the world as costs of fraud have been estimated to reach $1.5
trillion by 2025 according to Grant Thornton, an accounting firm. As mentioned
with the regulation of resources with weak institutions, construction also
requires heavy government involvement which creates corruption. Permits need to
be given out, and bids need to be won. When more individuals are involved in
the process, more corruption is possibly conjured. Known as the Tullock
Paradox, it is easy to bribe somebody when the bribe is much less than the cost
of the project. This is how the projected cost of Sochi skyrocketed from $12 billion to
the final cost of $50 billion.
So all of this spending is good for the economy, right?
Olympic Hangover
The Games will be over after the Paralympic Games finish
later in March. By that time, all of the spectators will be gone but the roads,
the hotels, and the venues will all still be in Sochi, most all of which are
permanent. There will be significant costs to maintaining the arenas and
facilities that will need to be funded by tourist revenues. However, Moody Investor Service predicts that
infrastructure maintenance in Sochi will surpass tourist revenue in the future.
For example, Sochi would need to double its current annual volume of tourists
to 5 million just to fill up hotels.
What makes the hangover all too predictable is the lack of
direction on behalf of the Russia to have a developed plan to make its
financial investment worthwhile. There aren’t any apparent plans. Atlanta
benefited from its spending by improving roads and its airport. London
benefitted from recognizing the benefit of using temporary structures for its
events. Temporary doesn’t cost as much to create as permanent, and doesn’t cost
anything to maintain in the long run.
Sochi was the pinnacle of tourist destinations for Russians
during the Soviet Era, a historical reputation that Putin wants to establish
globally. But Sochi isn’t a Westerner’s vision of a vacation. It’s in an
extremely volatile area, close to the Caucasus region (think Chechnya). While
Russians may visit, it’s still quite a distance to travel to for Americans and
even some Europeans.
The lack of future tourist revenues, a stagnating Russian economy, and $51 billion is excessive costs leaves the Russian taxpayer with quite an extra burden to cover. Was the national fervor worth it?
-Wilson Hallett
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