The World Cup has passed, but the problems have remained

(Murray Foubister, CC BY-SA)

Russia has organized the most expensive World Cup in history. However, the execution of this investment fell on a period of rapid deterioration in Russia's economic and geopolitical position.

In light of the enormous expenditures, high expectations, and years of preparations, the effects of the World Cup, and especially its measurable economic results, are far more modest than anticipated. In this respect, however, Russia did not fare significantly worse than the other countries that have organized large international sports events, the Olympic Games or the football World Cup in recent years.

The last World Cup tournament in Russia is ranked very highly when it comes to the organization of the event. However, when it comes to the expenditures incurred by the host country, Russia has broken all the previous records, leaving the competition far behind. It was already estimated in 2010, that the Russian tournament would be the most expensive World Cup in history. However, the official statistics which were made public recently, finally give a clear picture of how much have Russia’s expenditures exceeded those of the previous host countries.

How much has Russia spent?

The organization of large sporting events, such as the soccer World Cup, requires many years of preparations and enormous expenditures, which usually end up exceeding the original budget. These expenditures are mainly related to sports infrastructure, but in the case of Russia, equally important infrastructural investments were carried out in the field of transportation, information and communication technologies, banking and others areas.

The most sensitive part of the preparations for hosting the World Cup is the construction of stadiums. Preparations in this respect were launched immediately after Russia was chosen as the host of the event in December 2010. As a result, 12 new stadiums were built in 11 cities. Two of the venues were located in Moscow, and the remaining ones were constructed in Kazan, Sochi, Saint Petersburg, Ekaterinburg, Rostov-on-Don, Kaliningrad, Samara, Saransk, Volgograd and Nizhny Novgorod.

According to Russia’s application for the organization of the 2018 World Cup, which was approved by FIFA, the hosts planned to spend over RUB84bn, i.e. around USD2.8bn, on the construction of the new stadiums. In reality the expenditures reached almost RUB250bn, that is, nearly three times more than originally assumed. At the same time, the only way in which the organizers were able to limit the cost increases to just 300 per cent — compared to the original cost estimates — was by employing, in certain cases drastic, cost-cutting measures. This included, among other things, obtaining FIFA’s permission to reduce the capacity of the stadiums in Moscow, Kaliningrad and Ekaterinburg, and a significant modification of other designs, including the stadium in Rostov-on-Don. Another important factor was the replacement of more expensive elements with cheaper ones, including, in particular, the application of domestic substitutes for items imported from abroad. The latter was of significant importance, especially considering the fact, that when the majority of the construction works were initiated the exchange rate was around RUB30/USD1, and were being completed when the exchange rate was RUB60/USD1, after exceeding the level of RUB75 at the turn of 2015 and 2016. The exchange rate of the EUR against the RUB also rose in a similar way. The weakening of the RUB, especially in the years 2014-2017, proved to be an important cost-generating factor in a situation where practically all the stadium construction projects were largely based on imported elements, from the roof structures to the multimedia items and screens (read more).

The exchange rate changes that adversely affected the sports infrastructure expenditures expressed in the local currency, had the opposite effect in the case of expenditure statistics expressed in dollars. The fact that expenditures only exceeded the estimates by a little over USD2bn, i.e. by 73 per cent, was mainly the result of the weakening of the RUB, and only to a lesser extent the result of cost cutting decisions. Had it not been for the RUB’s depreciation, the cost of building the stadiums would amount to USD7-8bn instead of USD4.88bn. Even considering the latter amount, it is reasonable to say, that no previous World Cup has been so expensive when it comes to the expenditures incurred on the construction of stadium infrastructure.

According to official data, Russia spent a total of RUB683bn, or about USD13bn, to prepare and host the World Cup. The expenditures on the preparation of sports infrastructure were the single largest cost item and amounted to RUB265bn (USD5.05bn). The expenditures on the preparation of transport infrastructure were almost equally large and amounted to RUB228bn (USD4.44bn). The expenditures on the remaining infrastructure (energy, banking, information and communication technologies, and other types of infrastructure) amounted to RUB74bn (USD1.5bn). The total amount of investment expenditures reached RUB567bn (USD11bn). However, according to some estimates these expenditures, incurred in the years 2013-2018, were actually even higher and may have amounted to RUB747bn (USD14.2bn), while the analysts at McKinsey have even mentioned the amount of RUB1.2 trillion (USD23bn). Outside of the investment expenditures associated with the preparation of the World Cup, we also have to add up the operating costs of hosting the event, which amounted to RUB116bn (USD2bn).

What has Russia gained?

According to popular opinions, the World Cup in Russia was organized very well. There are even opinions according to which it may even have been the best tournament in the history of the game in terms of the quality of organization by the host country.

Arkady Dvorkovich, a former deputy prime minister and the chairman of Russia’s local organizing committee for the event, emphasized, that thanks to the World Cup Russia “has significantly improved its global reputation, which is more important than GDP”. Few are willing to dispute this assertion, especially considering the very modest economic effects brought by the World Cup.

According to the Central Bank of Russia, the world cup will accelerate the rate of growth of Russia’s GDP in 2018 by 0.1-0.2 percentage points. The increase will mainly be recorded in the second quarter, thanks to the increased revenues of retail trade outlets, hotels, restaurants and companies offering transport services. According to estimates, in the period from June to July consumption demand increased by USD5bn.

However, Russia’s Ministry of Economic Development believes, that the increase in consumption demand will not have a significant impact on economic growth. The infrastructural investments carried out in the areas of transportation, telecommunications and energy should have a greater impact. According to experts at McKinsey, the exploitation of this new infrastructure and the increase in the number of foreign tourists visiting Russia, could increase the national GDP by RUB150-210bn per year for a period of up to five years (2019-2023). The investments will account for RUB110-140bn and the increased tourism will account for RUB40-70bn.

However, other analysts do not believe in the long-term effects of the World Cup, while the experts at Moody’s believe, that such effects will be significantly weaker than in the case of the Olympic Games in Sochi.

According to the data of the organizing committee, a total of 1.3 million fans attended the matches on all the stadiums, including 570,000 foreigners. The sectors of retail, hospitality and transport have benefited the most as a result of the increased influx of tourists.

During the World Cup the turnover of all the restaurants and cafes in Russia increased by 16 percent, and the number of cashed cheques increased by 10 per cent. However, in the cities where the matches were played, that increase amounted to 31 per cent and 22 per cent, respectively. The shopping centers in Moscow recorded revenues at levels close to the highest results from the period around the Christmas and New Year’s season.

According to estimates, 52 per cent of all fans used hotel services, 28 per cent were hosted by friends and acquaintances, 15 per cent stayed in rented accommodation, and 4 per cent slept in campsites.

The considerable distances separating the individual venues resulted in a significant increase in air traffic, which grew by 32 per cent during the event. Meanwhile, Russian railways reported, that the number of passengers increased by an estimated 2 million people during the World Cup. However, according to the estimates, the profits brought to the airlines and railways by the World Cup will be short lived, and the annual increase in the number of passengers will not exceed 3 per cent.

The operators of Russian mobile networks also recorded a significant increase in revenues. This applies in particular to the segment of roaming users and the sales of special tariff packages. It is estimated, that the additional revenues of the mobile operators reached RUB8-10bn (USD127-160m).

Russian banks have also benefited from the World Cup. The largest Russian bank, Sberbank reported, that during the World Cup it recorded 899,000 operations with the use of foreign payment cards originating from 194 countries. In the period from June14th-July 13th, 2018, foreign tourists carried out operations for a total amount of RUB39bn (about USD622m) at its ATMs and terminals. Sberbank estimates that the foreign tourists’ overall spending during the World Cup reached USD1.5bn.

According to widespread assessments, the regions hosting the matches obtained most of the benefits stemming from the World Cup. They received modernized transport infrastructure, mainly including airports and roads, and avoided the significant costs associated with these investments, because, unlike in the case of the 2014 Olympic Games in Sochi and the 2013 Summer Universiade in Kazan, virtually all of these expenditures were covered by the federal budget. The opinions regarding the sports infrastructure taken over by the regions are more ambiguous. As shown by the example of other countries, but also the fate of objects constructed for the Olympic Games in Sochi, large and very modern stadiums oftentimes exceed the needs and the capabilities of their regional owners, ultimately becoming a significant financial burden. This could apply, to a varying extent, to all the Russian stadiums hosting the World Cup matches, with the noted exception of those located in Moscow and Saint Petersburg.

How does Russia compare to the rest of the world

Russia has organized the most expensive World Cup in history. It left other countries far behind both in terms of the overall expenditures, as well as the spending directly related to the construction of sports infrastructure, and in particular stadiums.

According to the official statistics, Russia spent USD13bn to prepare and host the 2018 World Cup, although there are also estimates indicating, that the expenditures may have even reached USD23bn (McKinsey). The analogous costs incurred by the hosts of the previous editions of the tournament were as follows: USD12bn in the case of Brazil (World Cup 2014), USD5bn in the case of South Africa (World Cup 2010), and USD7-8bn in the case of Germany (World Cup 2006).

Russia spent about USD5bn on the preparation of the sports infrastructure. That is USD1bn more than what Brazil spent in 2014, and the amount of USD5bn is additionally underestimated due to the collapse in the exchange rate of the RUB in the years 2014-2017.

Russia’s expenditures look even less favorable when expressed in terms of the cost of a single seat at the stadiums built for the World Cup. The cost of one seat in Russia reached USD8,387, however, before the RUB’s collapse in 2014, it was even estimated at USD11,600. For comparison, the corresponding cost of a single seat amounted to USD6,185 in Brazil, USD6,116 in South Africa, USD3,904 in Germany, and USD5,852 in Japan and Korea (World Cup 2002).

Was it worth it?

The 2018 World Cup is the last of a series of great international events that Russia initially sought to organize in the period of its greatest prosperity in the second half of the previous decade. The high oil prices, favorable development trends, and the seemingly good prospects for their continuation, created the temptation to strengthen the country’s image as an international power.

The organization of events, such as the 2012 Asia-Pacific Economic Cooperation Summit in Vladivostok, the 2013 Universiade in Kazan, the 2014 Olympic Games in Sochi and the 2018 World Cup, was supposed to serve this purpose. It seems that the common thread linking all these events is the unfavorable confrontation of the eminently measurable and enormous expenditures (the APEC forum in Vladivostok takes the leads in this regard, with overall costs of USD21.1bn) with the more unclear effects concerning the country’s image and prestige.

The implementation of the previously taken decisions, especially in the case of the World Cup, fell on a period of rapid weakening of Russia’s economic and geopolitical position. This had a double negative effect. On the one hand, it led to the relative increase in costs and the emergence of difficulties in the execution of the projects. On the other hand, it reduced the expected positive effects for the country’s image and prestige, both in terms of their scale and duration. This applies both to the domestic and the international aspect.

Russia was not able to use the World Cup to distract the public and draw its attention away from the unpopular decision to raise the retirement age. Meanwhile, the announcement of further sanctions shatters the expectations of a permanent increase in the inflow of foreign tourism to Russia, let alone the inflow of foreign investment. The world simply does not trust Russia, as it compares the image built by events, such as the World Cup, with its real activity on the international arena.

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