Why Spending $50B on the Olympics Makes Sense for Sochi
Business + Economy

Why Spending $50B on the Olympics Makes Sense for Sochi

REUTERS/Alexander Demianchuk

At $50 billion, the 2014 Sochi Winter Olympics will be the most expensive in history. Corruption allegations of various magnitudes are an all too common fixture of the biannual geographic rotation of the modern Olympic Games. Russia is no exception, with its many usual detractors predictably citing corruption as the overwhelming cause of the expansive budget.

The cost, however, is more than anything else about turning a small, regional town into a modern venue for the world's most prestigious and widely viewed event. After all, Sochi's starting point for Olympic transformation was as an underdeveloped Russian regional city of less than 350,000 people with limited infrastructure and difficult mountainous terrain. 

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With a price tag of $40 billion - $47 billion inflation-adjusted through 2013 - the Beijing 2008 Summer Games were previously the most expensive games. In contrast to Sochi, Beijing is home to a population of 20 million and well supplied with hospitality offerings, sporting venues and infrastructure (transport, medical, administrative or otherwise) befitting the capital city of China.

In contrast, the small city of Sochi lacked prerequisite engineering sophistication, project management talent and labor required to address the challenge of an Olympic transformation. Hence, the investment program kicked off with port facilities required simply to receive construction materials and equipment, as well as construction of housing facilities for imported project management and labor.

Both rising economic powers eager for global recognition, is it any wonder that Russia's investment in Sochi is the same order of magnitude as China's investment in Beijing?

Sochi As Symbol
In many ways Sochi's $50 billion makeover is illustrative of the accelerating economic modernization of Russia, a journey that began with the dissolution of the Soviet Union in 1991 and the end of the centrally planned Soviet economic system.

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Located on the Black Sea coast in one of Russia's few subtropical climate zones, the Soviet Central Planners designated Sochi as the premier vacation resort for the Soviet Union. However, like all Communist System consumer undertakings, it was typified by constrained capacity with access doled out each year to a privileged few.

As Russia's largest resort city today, Sochi's available capacity falls far short of the vacation demand of Russia's 143 million citizens, resulting in high occupancy rates and even higher prices. The upshot is an annual exodus of holiday seekers to venues in Europe and Asia, despite language and cultural barriers. Indeed, direct beneficiaries of Russia's domestic "supply deficit" are the well-supplied markets around the world, particularly sun-and-sea locations, including France's Côte d'Azur and Spain's Costa Brava.

Underpinned by natural resource abundance, Russia's $2 trillion economy is the eighth largest in the world. Yet as of January 2014, Russia remains underpenetrated for basic goods and services - from health-care to hypermarket (supermarket–department stores common in the country) space - easily available to consumers in other globally relevant markets. Many large consumer sectors remain lightly penetrated, with enormous scope for future development. The Russian government supports continued economic modernization and promotes initiatives to sustain stability, high economic growth and consumer spending.

In today's challenging global marketplace, Russia stands out for its vibrant demand and "supply deficit," and yet this aspect of Russia's story is little known outside a relatively small albeit increasing number of multinational companies for whom Russia is a highly lucrative and strategically important middle-class BRIC.

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Russia's economic growth rate, the highest in Europe, and its $3.3 trillion 2017 economic forecast are supported by rapidly expanding consumer sectors driven by more than 51 million households with an average annual income of more than $30,000 that increasingly demand better-value consumer offerings. Addressing this "supply deficit" requires years of focused effort, coupled with capital investment magnitudes higher than the investment required for rebuilding a single regional city.

That said, it should be no surprise that the Russian government took the opportunity to spend $50 billion to host the Olympic Games.

Christopher Van Riet is managing director of customer solutions, legal and finance departments at Radius Group, a real estate infrastructure and investment company operating in Russia, and member of the CNBC-YPO Chief Executive Network

This article originally appeared in CNBC.

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