Of Potemkin Villages and Putinkin Arenas

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1 Matthias Fett Department of Economics Chair of Constitutional Economics Address. Holstenhofweg 85 D Hamburg Phone (0) Hamburg, 27 July 2018 Of Potemkin Villages and Putinkin Arenas This year s FIFA World Cup ended inside the Luzhniki-Stadium in a way, not even screenwriters could imagine. After four weeks of peace, joy and football, the patron leaves his guests stand in the rain. This image inevitably fits in with the impression one has had of the biggest sporting event of the year in the past four weeks. Instead of games, goals and superstars almost everything, whether intentional or not, revolved around Russian President Vladimir Putin. Since taking office, Putin had the goal, to make Russia great again. This goal was first tried to be fulfilled through soft power, the sport. Not only did he send friends and associates at the head of international sport-governing bodies 1, the next step was to bring international major sport-events back to Russia. First showpiece of this successful strategy was hosting the 2014 Winter Olympic Games in Sochi. The seaside resort on the Black Sea and Putin's summer residence was subjected to gigantic reconstruction measures and rebuilt into the scene of the Winter Games. Costs: approximately 50 billion US-Dollars. These games were not only the most expensive Winter, but also generally the most expensive Olympics in history. In addition to the Olympic venues (for example, Olympic Stadium, Media Center and Olympic Village) a Formula 1 race track was built for another 195 million US- Dollars. Since 2014 host to the Grand Prix of Russia. So, at least for this project a long-term use is guaranteed. The Olympic Stadium of Sochi (Fisht-Stadium) has then become host city for the FIFA World Cup In order to comply with the FIFA regulations, the stadium had to be remodeled (about 63.5 million US-Dollars extra cost), bringing the total cost to 787 million US-Dollars. By contrast, ten of the other eleven stadiums cost significantly less (see Table 1). The new national stadium, the Luzhniki Stadium in Moscow cost about 467 million US-Dollars and has marked both, the beginning and the end of the tournament. However, the most expensive stadium of the World Cup was built in St. Petersburg. With construction costs of at least The most famous example: Vitali Mutko, current Deputy Prime Minister and former Minister of Sport and in this capacity a member of the then FIFA Executive Committee, which decided on the awarding of football World Cups. 1

2 million US-Dollars (instead of planned 220 million US-Dollars 2 ), it is the second most expensive in the world, after the Wembley-Stadium in London. The reason for this cost explosion and a construction period of eleven years is not an extravagant architecture. Rather, the arena has become a symbol of corruption and mismanagement. Thus, the construction costs are out of all proportion to the (partially unpaid 3 ) labor costs for workers from Uzbekistan, Kyrgyzstan or North Korea. But in line with other mega-projects such as the new headquarters of Gazprom in St. Petersburg, the 462 meters high Lakhta Center, Europe's tallest skyscraper, which was also completed on time for the World Cup and whose costs are also in the ninefigure range. And even if Gazprom takes over the cost, this project represents another huge economic burden for the city of St. Petersburg. In addition to the costs for venues there are other costs for the host of mega sport-events. So a renovated or new stadium alone is not enough, but still requires the appropriate infrastructure: airports, rails or roads. The Moscow airports were modernised while others were rebuilt. Over 30 new train stations were built and roads were refurbished. According to Moody s, cost in this area is about 10.8 billion US-Dollars. Another cost factor, which has played an important role at least since the attacks in Paris on 15 November 2015, is security. Expenditures for security at Sochi 2014 were just under 1.6 billion US-Dollars. Even if no figures are available for this area yet, it can be assumed that the actual expenses will be significantly higher for eleven World Cup sites and further 32 training camps. Not only international terrorism posed a threat, but also anti-russian motivated assassins were to be feared. In addition, due to the bloody attacks of Russian hooligans in France in 2016, protection of foreign fans became a top priority. As a precautionary measure, a demonstration ban in all host cities was decided to prevent opposition protests. An autocratic / anti-democratic measure, which also had to be controlled by numerous policemen. FIFA can only ensure safety within the stadia. The cost of this area should therefore reach an elevation of estimated 11 billion US-Dollars for all eleven cities 4. In the figures published to date on the costs of the World Cup, neither these security costs nor follow-up costs arise. At least since the turn of the millennium, a topic that negatively dominates the aftermath of major sporting events are White Elephants - stadiums that are seldom or not used at all shortly after the event. This phenomenon is already visible for stadiums in Asia, South Africa or Brazil. Russia is trying to counteract this fate with various measures. After the World Cup, they plan to dismantle the stands of the Ekaterinburg Arena and will reduce the capacity, at a further substantial cost. A football team from St. Petersburg 2 Müller (2017) estimates, it cost already more than a billion US-Dollars in According to an investigation of Human Rights Watch. 4 As an optimistic estimation. Taking the official numbers of the Winter Olympics. There have been security costs of 95,43 million USD per day. For 32 days of the World Cup, it would mean billion USD in total, 3.06 billion USD for each host city. Because there are host cities with less occupancy than 32, a day-by-day-calculation would then lead to: billion USD. And to avoid an overestimation, 50% is assumed. 2

3 is forcibly relocated to the Fisht Stadium in Sochi to play first division football. An idea that will affect other similarly empty arenas. The Fisht Stadium also has another special feature. Due to the newly built port and the corresponding intervention in nature, rock is being washed away into the bay, so there is a risk that the stadium, including the promenade in the coming years will be undermined. So here one can certainly count on further tens or even hundreds of millions of dollars for the next few years in maintenance costs. If you sum up all the factors, you can quickly reach a cost dimension of more than 25 billion US-Dollars 5 for this World Cup, in which the Russian state invested at least 70%. It is therefore the most expensive World Cup in history. Wherever there are expenses, there should be revenue as well. Russia has been in a severe economic crisis since the sanctions due to the annexation of Crimea. The ruble lost value and increased the price of various products and, as a result, stadia construction. Only since the oil price has increased significantly in 2017, could the commodity-exporting country recover. The Russian government claims, that these gains in GDP are attributed to the World Cup, although a distinction is still difficult to do at this point of time. Historically, after 1990, World Cup tournaments have also led to increases in economic output, but there is a gap in volume between emerging economies and developed nations. Possible reasons can be a constantly refurbished infrastructure, better league performances or more privatisation of construction projects. Another way the Russian government has chosen to strengthen the economy is through economic reform. One of them was announced at the same time on the opening day of the World Cup: a pension reform. The retirement age was increased to 65 for men and to 63 years for women. Although this conversion is due to the demographics, but it aroused the displeasure of the population. Because of the above-mentioned demonstration bans in major cities, the opportunity for public protest is scarce. In addition, it was announced that VAT will be increased from the current 18% to 20%. This automatically leads to a raise in price of products and thus to a reduction in the purchasing power. Here, however, the question may be asked why this VAT increase had not already been implemented before the World Cup and so Russia could already have benefitted from the influx of tourists. Crowded and foreign fans are generally more generous and could have thus provided more tax revenue. Despite these unpleasant measures, the government hopes to generate additional revenues of around 9.3 billion US-Dollars annually. Thus, from an economic point of view, the conclusion of the "best World Cup ever" (FIFA President Infantino) is less positive. The cost of at least 25 billion US-Dollars 6 is disproportionate to neither the tournament's estimated FIFA revenue (6.5 billion US-Dollars 7 ), the level of corruption and the working conditions of the stadium workers. The unchanged or billion USD (venues) billion USD (infrastructure) + 11 billion USD (security) + legacy costs 6 Standard&Poor s has already warned in 2013 that the cost might rise up to 43 billion US-Dollars. 7 The money the event generated over four years. 3

4 even worsened foreign and domestic situation of Russia attracts neither foreign direct investment, nor new tourists to the country. At most, the surprising success of the national team can cause enthusiasm that the stadiums, at least temporarily, not completely alienate. Putin's arenas may turn out to be the famous Potemkin villages. Matthias Fett is an economist at the Chair of Constitutional Economics of the Helmut- Schmidt-University in Hamburg. In his dissertation, he studies how mega sport-events like the FIFA World Cup or Olympic Games affect the host country s economy. 4

5 Stadia Cost (at least) St. Petersburg Stadium (St. Petersburg) 933 m USD* Fisht Stadium (Sotchi) 787 m USD Luzhniki Stadium (Moscow) 467 m USD Kazan-Arena (Kazan) 400 m USD Spartak Stadium (Moscow) 390 m USD Rostov Arena (Rostov-on-Don) 348 m USD Nizhny Novgorod Stadium (Nizhny Novgorod) 325 m USD Samara Arena (Samara) 309 m USD Kaliningrad Stadium (Kaliningrad) 300 m USD Volgograd Stadium (Volgograd) 299 m USD Mordovia Arena (Saransk) 288 m USD Ekaterinburg Arena (Ekaterinburg) 227 m USD total 5,073 m USD Table 1: Cost of the World Cup 2018 stadia (Sources: StadiumDB.com (2018), *Steiner (2018)) Italy billion USD* USA million USD ** France billion USD Korea & Japan 2002 South Korea: at least 2.8 billion USD, Japan: between 5.6 & 7.84 billion USD Germany billion USD Assumption: billion USD South Africa billion USD, Assumption: 8.6 billion USD Brazil 2014 At least: 14.9 billion USD, Assumption: >20 billion USD Russia 2018 Assumption: 25 billion USD Table 2: Cost of the FIFA World Cups since 1990, own calculations from various sources. *Current value US-Dollar (July 2018). ** tournament expenditure only, because of no new stadium and no further investments into new infrastructure. 5

6 References Anonymous (2013): S&P warns Russia on High Cost for 2018 World Cup, The Moscow Times (April ): (last visited: July 23, 2018). Anonymous (2018a): Wo in Russland der WM-Kater droht, Frankfurter Allgemeine Zeitung (15 June 2018, No. 136, p. 22). Anonymous (2018b): Russland beschließt zum WM-Start unpopuläre Reformen, Frankfurter Allgemeine Zeitung (16 June 2018, No. 137, p. 22). Anonymous (2018c): Report: Why is Russia s World Cup so expensive?, StadiumDB.com: _1 (last visited: 23 July 2018). Anonymous (2018d): Infantino preist die beste WM, die es je gab, Frankfurter Allgemeine Zeitung (14 July 2018, No. 161, p. 34). Becker, Christoph (2017): Ausgebeutete Stadionarbeiter Kampf um die Deutungshoheit in Russland, FAZ.net (13 June 2017). Ehrhardt, Jan (2018): Kriegsschiffe und Panzer Wie Russland für Sicherheit bei der WM sorgen will, FAZ.net (06 June 2018): html (last visited: 23 July 2018). Fett, Matthias (2018): Does the FIFA World Cup Boost the Economy? An Empirical Analysis on the World s Biggest Single-Sport Event, in process of publication. FIFA (2018): FIFA Financial Report 2017, at: 68th FIFA Congress, June 13 th, 2018, Moscow. Koval, Ilya (2018): Russland: Wer zahlt für zu große Stadien?, Deutsche Welle: dw.com (11 April 2018): (last visited: 23 July 2018). Lobe, Adrian (2015): Rubel-Verfall: Kann sich Russland die Fußball-WM noch leisten?, welt.de (14 March 2015): Russland-die-Fussball-WM-noch-leisten.html (last visited: 23 July 2018). Müller, Martin (2017): How mega-events capture their hosts: event seizure and the World Cup 2018 in Russia, Urban Geography, 38:8, pp Rinke, Stefan & Kay Schiller (2014): The FIFA World Cup Politics, Commerce, Spectacle and Identities, Göttingen, Schmidt, Friedrich (2018): Auf Sumpf gebaut, Frankfurter Allgemeine Zeitung (23 June 2018, No. 6

7 143, p. 3). Steiner, Christian (2018): Größenwahn in Russland, Frankfurter Allgemeine Sonntagszeitung (10 June 2018, No. 23, p. 27). Veser, Reinhard (2018a): Putins Schlachtfelder, Frankfurter Allgemeine Sonntagszeitung (10 June 2018, No. 23, p. 39). Veser, Reinhard (2018b): Die Renten sind wichtiger, Frankfurter Allgemeine Zeitung (29 June 2018, No. 148, p. 32). 7

Investing into football passion: The effect of the World Cup in Russia

Investing into football passion: The effect of the World Cup in Russia Facts and figures 11 Russian cities 32 teams 64 matches RUB683bn total spending for the World Cup RUB265bn spent for the sport venues