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Can Russia Afford to Host the Winter OIympics?

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Recent financial reports have brought to light the lackluster financial state of the Russian economy this past year. With a 2013 growth rate at an anemic 1.3% and fixed investments falling almost a full percentage point over this past year, the prospects for the Russian economy seem somewhat bleak.

Then again, there is research expecting the upcoming Sochi 2014 Winter Olympics to revitalize the ailing economy and double 2013's growth rate. This "Olympic Effect" has been shown in several studies to indicate a measure of market liberalization as well as a marked increase in foreign trade and investment in the host country. The increase and permanence in trade and wealth generation are not guaranteed, a fact that has been shown to be the case in Athens after the 2004 Olympics. While the buildup to the Olympics did bring an Athens that was "cleaner, brighter, easier to get around, vibrant, and modern," 95% of stadiums and venues constructed for the Games are closed or in various states of disrepair. At the start of the Beijing Games four years later, Greece was spending three quarters of a billion to maintain these degrading facilities. 

The London Games would seem to be another example of the "Olympic Effect" in action. Generating an estimated 9.9 billion pounds after hosting the 2012 Olympic and Paralympic Games, it would seem the British have successfully modeled the idea. Ignoring the fact that the Games cost an estimated 8.9 billion pounds to host, nearly every government project enacted in the wake of the event has fallen short of stated goals. Sometimes this failure to meet expectations has been due to budget shortfalls, other times this has come due to a lack of long-term achievable benchmarks. 

Sochi 2014

With similar long-term responses coming in the wake of the Beijing and Sydney Games, the astronomical amount of funds invested by Putin's Russia may be money the country does not have. Considering the dual stresses of lackluster growth as well as ever-growing economic strains on the Russian economy, are the benefits worth the costs? 

From an absolute numbers standpoint, this Olympic Games is expected to cost in excess of $50 billion, representing a 500% increase over initial budgets. With half this amount of money coming from the central government, there have already been allegations of graft and kickbacks to members of Putin's inner circle. One childhood friend was awarded a $7 billion contract worth more than the entire budget of the 2010 Vancouver Games. Another confidante has won the most expensive deal in developing all transportation infrastructure between the resort town and the mountains. 

One could initially claim success as a massive wave of income into the country means a revivified Russia. Unfortunately, with $30 billion of the bottom line being footed by state-run enterprises and agencies, the money expended is really just coming out of Russian coffers. Like Athens and other Games before it, many Sochi facilities are expected to prove commercially useless both before and after the Games.

This expense may not be quite so bad if Russia had recently come into fresh revenue streams, but this is not the case. The immediate incentives given to the Ukraine from the EU as well as long-term costs of the deal hamper Russia further. The recent security concerns due to various militant attacks represent an additional vector of expenditure that concerns the state. Already over 40,000 security officers are expected to be on-site during the games. This number is three times the number of officers employed for the London Games and fails to include the tens of thousands of army personnel deploying to the area in response to the aforementioned attacks. This security expense cannot go underrepresented in the total cost of the Games. 

With a Games costing more than three times Russia's education budget and twice the health budget, Russia seems primed to follow recent Olympics in creating the next great money pit. Considering the state of the Russian economy at the present as well as the state's ongoing security concerns, are the Games really where Russia's focus needs to be? Of course not, but as many point out, too much has happened to stop now. All that Putin may be left with is the hope that the Olympics can be a sign of market liberalization and recoup his state's investment in the long term.

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Kurt Avard

A January 2014 addition to the Motley Fool team, Kurt Avard prefers to focus on the "dark" side of business and how it interacts with politics. Rarely writing on the same thing twice, he feels that, if he manages to convince you that the two are inexorably linked, he has adequately done his job. Follow him on Twitter @kurtsavard

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