COMMENT: Sochi - Russia's costly public relations exercise

By bne IntelliNews February 7, 2014

Lilit Gevorgyan of IHS Global Insight -

Estimates vary but Russia has reportedly spent around $51bn on the Sochi Winter Olympics, making it one of the most expensive games, in nominal terms. This figure is significantly higher than $12bn that originally was earmarked for the games. And it also does not include a roughly $3bn spent on security measures, in the wake of a series militant attacks in southern Russia, hosting the Games, and threats of fresh violence by North Caucasian militants.

Like previous Olympics Games hosts, Russia too is hoping to turn the event into a public relations exercise. Russian president Vladimir Putin and his government are keen to use the occasion and present to the world the other, trouble- free and commercially attractive Russia.

Despite the concerns of the latest human rights, corruption and security issues, should the Games proceed according to the plan they will add to President Putin's ratings, shifting perhaps briefly the attention from dismal economic performance in 2013, with overall GDP slowing down significantly, despite the massive investment projects at Sochi. The economy managed to expand only by 1.3% in 2013, compared to 3.4% in 2012, while the outlook for 2014 is not promising either.

High hopes but low probability of return on investment

Olympic Games are not only a sizable public relations campaign for any country but also an investment decision. According to various reports, up to $44bn has been invested in non-sports related infrastructure. By venturing into this commercial project, Russia aims for short- term gains such as maximizing profits from inflow of tourists. As for the long-term goals, the Olympics is to showcase Russia's attractiveness as an investment destination. More specifically, the organizers hope that after the Olympics makeover, Sochi will return to its former Soviet glory of being a key resort destination. Also the newly built infrastructure in the region could unlock tourism potential in wider region, including in the troubled North Caucasus.

But these hopes may not fully materialize. Sochi and Krasnodar region do have the geographic advantages for developing into a major tourist hub. However, the vast resort network may remain underutilized for a long time after the games. For a start, the quality of hastily built infrastructure is a cause of concern due to poor supervision, and numerous allegations of corruption. The project has come under harsh criticism of the Russian opposition, questioning the commercial justification behind exorbitant spending and transparency of the construction contracts.

However, a key deterrent is not already customary talk of corruption but weak protection of investors' rights. The Russian authorities also admit that bureaucratic red-tape and problems with business environment are indeed having negative impact on the economy with the fixed investment sector noticeably underperforming. Russia continues hemorrhaging capital - it was in the region of $65bn in 2013. The authorities have tried to downplay the capital flight by arguing that part of that are Russian investments abroad. But the outflow only highlights that even Russian businesspeople have low confidence in their own country's investment attractiveness, including Sochi.

Still, writing off the Olympics Games and its commercial legacy as a fiasco would not be accurate. The famous resort city and the region will benefit from the new hotel and transport infrastructure by attracting more visits from Russian and former Soviet states where it does not need to be marketed as it is already well-known destination. Sochi and the wider Krasnodar region may fail to capture the attention of western investors, but it may still be more attractive for businesses from other former states. The problem is that this interest may not be enough to recoup the vast investment that has already been made.

Regional economies, and particularly Georgia, due to its proximity to Sochi, are also expected to see positive spillover from the Winter Games. The South Caucasus somewhat remains slightly outside of popular global tourist tracks, hence tourists travelling to Sochi might take the opportunity to visit the Southern Caucasus countries as well.

Not Corruption but militant attacks the biggest risk

The most serious threat to the Games remains the one made by North Caucasian Islamic militants and not the age-old corruption issues. The attacks in the southern Russian city of Volgograd in late January that killed over 30 people were a reminder that the militants were serious about their threat to derail "satanic" games in Sochi. Causing maximum economic damage to the federal government is one of the tactics the militants use in their war for the creation of a Caucasian Emirates across Russia's North Caucasus. The Sochi games are a high value economic target and an opportunity that militants would not want to miss.

Unlike some western countries, Russia's security issues are simply too wide and complex. The government has been working on containing militancy in the North Caucasus before being able to completely eradicate it, but attacks in the latter part of 2013 in mainland Russia prove that even this tactic is not working.

It is nearly impossible to completely prevent suicide or militant attacks. Even if huge state investments are made to prop up security in the stations, shopping malls and airports of Russian cities, there are far too many soft targets across the country vulnerable to unabating Islamist movements. Moreover, the impact of the destructive activity of a relatively small group of militants will always be disproportionately large compared to their numbers.

The gravity and scale of the problems that Moscow is facing in the North Caucasus cannot be underestimated. The roots are a combination of lack of strategy for peace, administrative and economic mismanagement, and also external factors such as rise and spread of organised Islamist militancy in the world. After all, foreign fighters have had direct involvement in radicalization of initially a secular and human rights movement demanding greater rights for Chechnya in early 1990s. Corruption and unemployment is rife in the mostly Muslim North Caucasian republics and rule of law, even by Russian standards, is very poor. These create fertile ground for Islamic militant recruiters, especially among disenfranchised youth who have been subject to unfair police treatment. But as the Boston bombings showed, the growing power of Islamic ideology among economically better off individuals should not be overlooked.

With regards to the Sochi games, the recent attacks as well as a recent stark warning from the US Homeland Security Department about a heightened risk of attacks on planes heading to Russia, probably will curb the number of tourists that would otherwise attend the event. This is a loss in revenues for the organizers of the Games.

Sochi, according to the Russian government, is heavily guarded, with some reports suggesting that between 25-50 policemen being assigned per athlete. Still, soft targets in the surrounding areas or in large Russian cities do not have the same degree of protection. A potential attack on airports, train stations or other soft targets in Moscow, St Petersburg or cities closer to Sochi is likely to tarnish the games and increases the sense of fear amongst the Olympics visitors. This is not the impression that the Russian president wanted visitors to take away from Olympics when he was personally lobbying for hosting the costly games.

Lilit Gevorgyan is Senior Economist - Russia/ CIS at IHS Global Insight

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