Russia’s World Cup lumbers some regions with stadia they can’t afford

Russia’s World Cup lumbers some regions with stadia they can’t afford
Russia’s World Cup will lumber some regions with statdia they cant afford
By bne IntelliNews June 19, 2018

Some Russian regions will not be financially capable of maintaining their 2018 FIFA World Cup facilities in the long run after the tournament is over, Fitch said in a report released on June 15.

However, infrastructure — especially roads and airports constructed for the World Cup — could improve their economic growth potential and a rise in tourism will result in small revenue increases in the short term for local and regional governments, the ratings agency opined.

Eleven large Russian cities are hosting the World Cup. Unlike previous large international sporting events, including the Sochi Olympics in 2014, Universiade 2013 in Kazan and the 2014 World Cup in Brazil, Russian regions and cities managed to avoid significant World Cup-related debt increases. The majority of costs were carried by the federal government and private investors.

Keeping World Cup project-related debt low was important to the ratings of the regional governments, as it could have reversed the general trend toward lower debt, Fitch said. Total regional debt fell by RUB31bn to RUB2.23 trillion ($34.8bn) in 2017, or 2.5% of GDP – the first absolute decline in more than a decade.

“We estimate median World Cup-related expenditure accounted for 13% of 2017 annual revenue and about 20% of accumulated debt, as of YE 2017. In contrast, Brazilian state debt grew more quickly during its World Cup and just after. Brazilian state debt increased by 32.4% in 2015, totalling BRL205bn [$54.5bn], or 3.4% of Brazilian GDP,” Fitch said.

Russian local governments are only likely to see small revenue increases from the World Cup, as local governments did during the 2014 World Cup in Brazil. Hotel taxes and temporary job creation raised Brazil's local and regional tax collections by less than 5% during the tournament, Fitch reports. The occupancy rate of hotels in the 12 Brazilian host cities was 77% during the games, with Rio de Janeiro leading the ranking with a 92% occupancy rate, according to the Forum of Hotel Operators of Brazil. Unemployment fell to an all-time low in December 2014, at 4.3%, but rose to 11.5% in 2016, according to IBGE/PME.

After the World Cup concludes, Russian regions could be required to pay for the maintenance of the stadia. The larger Russian regions, including Moscow and Saint Petersburg, should be able to shoulder the approximately RUB400mn in annual maintenance costs with no credit implications. These cities' annual revenues usually exceed RUB150bn. For small or financially weak regions the additional costs of stadia maintenance would be challenging, as annual revenues range between RUB35bn and RUB85bn.

“The Republic of Mordovia is a case in point. Mordovia has high debt, a low operating balance and a weak institutional framework, common to Russian regions. In recent years Mordovia recorded a high deficit, averaging 18% in 2013-2017 and a peak of 27% in 2017, due to large capex related to the World Cup. One mitigating factor is approximately 63% of Mordovia's debt is owed to the federal government and has a 0.1% annual interest rate,” Fitch said in a note.  

“Mordovia shares other risk factors with the weaker regions, such as economic metrics lagging the national average, leading to weak tax capacities and low operating balances. Fiscal flexibility is also low, including low tax rate setting autonomy,” the agency added.

 

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