Will Sochi Winter Games thaw Russia’s rigid economy?

Will Sochi Winter Games thaw Russia’s rigid economy?

A mega event, such as the Olympics, does not necessarily bring short-term economic gains to the host country. But hosting may lead to a freer market economy down the line. Will this be the case for Russia as it prepares to host the 2014 Winter Olympic Games?

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

Then again, the upcoming Sochi 2014 Winter Olympics may revitalize the ailing economy and double 2013’s growth rate. Several studies have demonstrated this “Olympic Effect,” which show that when a country hosts a mega event, it outwardly signals a measure of market liberalization, which in turn spurs a marked increase in foreign trade and investment in the host country. According to this argument, the Olympics are a costly policy signal that indicates a willingness to be seen as an open and modern state.

However, the potential benefits of hosting a mega event have not been immediately clear in the cases of recent Olympic hosts such as Athens, Beijing and London. Considering the uninspiring fiscal returns following recent Olympic Games, it seems unlikely that Putin’s bid seeks short-term increases in trade and wealth generation.

Add to this the costs of the Sochi Games. Spending more than three times Russia’s education budget and twice its health budget, Russia seems primed to follow recent Olympics in creating the next great money pit. So why is Vladimir Putin pursuing this course when potential fiscal returns are minimal?

Studies on the Olympic Effect claim that the hosting of the Games themselves is not an indication of “big push” change in fundamental economics in-country, but rather a subtle change that allows the host to justify future liberalization. Simply put, hosting a multi-cultural event does not create an open market economy. What it does do is permit the foundation to be laid for more open economic conditions. Given the Russian state’s investment into the Games themselves, this suggests that Russian leadership is willing to entertain slight power reductions in state apparatuses to ensure future relevance.

More liberal markets on the horizon?

Putin may be signaling for a radical swing in the Russian economic process. While Sochi preparations have been characterized as amounting to one exercise in corruption after another, Putin has also recently been drawing parallels between his administration and Pyotr Stolypin. Stolypin, prime minister under Tsar Nicholas II, was seen as the last great economic reformer and the father of the small Russian middle class that has managed to persist until today. Putin’s idolizing of Stolypin softens his economic history of encouraging state-controlled enterprise and allows for the creation of a new economic policy reversing some of these decisions.

Putin’s continuance of former President Dmitri Medvedev’s economic reforms supports this idea, In fact, Putin’s third term has been characterized by a somewhat benevolent economic system. Diversifying away from an oil-dependent economy and fostering a modern technology sector implies future advances toward an economy not reliant on natural resource extraction. Some have claimed this push for reform is a necessity brought on by negative economic trends  – trends that Putin has strongly denied many times in his tenure.

While it is true that the Russian president’s policies have been somewhat haphazard in supporting and then suppressing market liberalization, his most recent actions are inconsistent with market suppression. In the oil market, he has increased opportunities for private citizens to own stakes in a Russian oil market previously dominated by state ownership. The diversification efforts also are inconsistent with an oligarchical centralization of power. Finally, the sheer amount of money spent on Sochi infrastructure cannot be seen only as Putin showmanship.

The Olympics, as an event, is a policy signal that heralds a sustained desire for institutional change in the economics of the host country. The amount of money utilized can never hope to be recovered nor can the facilities created expect to be justified in terms of short-term wealth generation. What can be interpreted from the upcoming Sochi Games is a foundation for future economic changes that may bring about a freer market economy. It is far from certain, but the Russian economy may warm up in the coming spring.

Categories: Economics, Europe

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