By Olga Ponomarenko and Alexander Plekhanov
Sochi, a fashionable seaside city in Russia’s Krasnodar region, will be hosting the Winter Olympic Games from 7 to 23 February 2014. It is a major event in the world calendar: 60 foreign leaders are expected to be among the 40,000 spectators attending the opening ceremony.
But will it boost the economy – at the time when Russia’s growth slowed down to only 1.3 per cent last year?
Finding an answer in history is not easy. Hosting Olympic Games and other major sports events has until recently been a prerogative of advanced economies. They hosted all but four Olympics of the 20th century, the exceptions being the 1968 Olympics in Mexico, the 1980 Olympics in Moscow, the 1984 Winter Olympics in Sarajevo and the 1988 Olympics in Seoul.
Breaking with this trend, the Olympics of the 21st century are increasingly held in emerging markets: by 2016, they will have been hosted in China, Russia and Brazil, while South Africa hosted the FIFA World Cup in 2010 and Ukraine co-hosted the Euro Cup two years later.
Emerging markets typically face higher costs of staging such events – both because their existing stock of general and sports infrastructure is lower and because emerging market firms contributing to the preparation of the event may lack the technologies and management expertise available to their counterparts in advanced economies.
Yet the benefits may also be higher: from improved investor and consumer confidence to higher economic returns on the much-needed infrastructure.
Like good parties, Olympics almost never make money in pure accounting terms: revenue from ticket sales, sale of broadcasting rights and sponsorship do not cover the costs (Chart 1).
Sochi will be no exception. In fact, the accounting loss will probably be one of the highest on record, as average official ticket prices are generally lower than at comparable recent events while costs may be the highest in the history of the games (estimates have been revised multiple times since 2007, to reach around US$ 50 billion but are yet to be confirmed).
Even though the estimated costs may seem enormous, they represent a relatively modest 2.4 per cent of Russia’s annual GDP (which now exceeds US$ 2 trillion a year). For comparison, the Greek Olympics of 2004 cost around 7 per cent of country’s annual GDP. They will not per se have a significant effect on government finances or Russia’s debt.
Olympics also create jobs, typically 50,000 to 300,000 (Chart 2). However, most of such jobs are temporary: in construction, event management and tourism industries. Many of them may crowd out other jobs: of the 48,000 jobs created by the London Olympics in 2012 only around 10 per cent are estimated to have been filled by previously unemployed people.
Russia’s low unemployment rate and a tight labour market suggest a limited scope for creation of new employment and any demand for labour may have just pushed up labour costs – another factor that may have contributed to rising costs of the event.
Construction spending and employment creation span a number of years. Only a modest part of this effect is reflected in economic growth at the time of the event itself while a major part would have made a contribution to economic growth in the preceding years.
While the impact of any individual sports event on a large economy like Russia’s (or Britain’s, or China’s or Brazil’s) may ultimately be fairly limited, the Olympic Games and other major events do have a large impact on the regional economies. The 2012 Olympics gave a major boost to the regeneration of East London as well as arguably helped to improve the reliability of London’s public transport network.
There is some basis for comparison. For example in Russia the preparations for the APEC (Asia-Pacific Economic Cooperation) summit held in Vladivostok in September 2012 had a major impact on the economy of Primorsky Region, where Vladivostok is located.
The results of the latest round of the Business Environment and Enterprise Performance Survey conducted by the EBRD and the World Bank show that infrastructure no longer features among top obstacles to doing business in the region, in stark contrast with the results of the 2008-09 survey, while managers in the neighbouring Khabarovsk region still see infrastructure as the key obstacle to growth of their businesses.
Similarly, out of 235 Olympic projects undertaken in the run-up to the Sochi Games, 37 are road projects in and around Sochi, alongside other infrastructure projects such as the railways and airport upgrades, as well as new hotels, restaurants and so on.
The Conference Board of Canada estimates that the Vancouver Olympics lifted local economic growth by 0.8 per cent. In Krasnodar region the growth premium is likely to be higher. Since 2007, the start of the Sochi project, Krasnodar region has been growing much faster than the average Russian region, while between 1998-2007 it grew in line with the average (Chart 3).
A greater challenge is to leverage the local legacy of Olympics, such as sports centres, the Olympic village, hotels and convention centres to boost a region’s longer-term development prospects. In many cases, these objects remain idle or underutilised but a number of cities have been successful in putting them to good use.
For instance, many cities converted Olympic villages into affordable housing. Atlanta, already a business hub and home to the US’s busiest airport, managed to attract additional 280 international companies over 10 years following the 1994 Olympics, thanks possibly to improved business infrastructure.
Sochi might be in a position to further leverage its position as Russia’s leading sea resort – and perhaps have a shot at becoming a regional business hub in the South of Russia.