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Some Russian Local Governments Might Lose on World Cup

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Tuesday, June 19, 2018 09:48 AM /Fitch Ratings

 

Some Russian regions are not financially capable of maintaining their 2018 FIFA World Cup facilities in the long run and this could become a credit risk, Fitch Ratings says. However, infrastructure, especially roads and airports, constructed for the World Cup should improve economic growth potential and a rise in tourism will result in small revenue increases in the short term for local and regional governments. 

Eleven Russian cities will host the World Cup over the next month. Unlike previous large international sporting events, including the Sochi Olympics in 2014, Universiade 2013 in Kazan and the 2014 World Cup in Brazil, Russian regions and cities managed to avoid significant World Cup-related debt increases. The majority of costs were carried by the federal government and private investors. 

Keeping World Cup project-related debt low was important to the ratings of the regional governments, as it could have reversed the general trend toward lower debt. Total regional debt fell by RUB31 billion to RUB2.23 trillion last year, or 2.5% of GDP, the first absolute decline in more than a decade. We estimate median World Cup-related expenditure accounted for 13% of 2017 annual revenue and about 20% of accumulated debt, as of YE 2017. In contrast, Brazilian state debt grew more quickly during its World Cup and just after. Brazilian state debt increased by 32.4% in 2015, totaling BRL205 billion, or 3.4% of Brazilian GDP. 

Russian local governments are only likely to see small revenue increases from the World Cup, as local governments did during the 2014 World Cup in Brazil. Hotel taxes and temporary job creation raised Brazil's local and regional tax collections by less than 5% during the tournament. The occupancy rate of hotels in the 12 Brazilian host cities was 77% during the games, with Rio de Janeiro leading the ranking with a 92% occupancy rate, according to the Forum of Hotel Operators of Brazil. Unemployment fell to an all-time low in December 2014, at 4.3%, but rose to 11.5% in 2016, according to IBGE/PME. 

After the World Cup concludes, Russian regions could be required to pay for the maintenance of the stadia. The larger Russian regions, including Moscow and Saint Petersburg, should be able to shoulder the approximately RUB400 million, or USD6.4 million, in annual maintenance costs with no credit implications. These cities' annual revenues usually exceed RUB150 billion, or USD2.4 billion. For small or financially weak regions the additional costs of stadia maintenance would be challenging, as annual revenues range between RUB35 billion, or USD0.6 billion, and RUB85 billion, or USD1.4 billion. 

The Republic of Mordovia is a case in point. Mordovia has high debt, a low operating balance and a weak institutional framework, common to Russian regions. In recent years Mordovia recorded a high deficit, averaging 18% in 2013-2017 and a peak of 27% in 2017, due to large capex related to the World Cup. One mitigating factor is approximately 63% of Mordovia's debt is owed to the federal government and has a 0.1% annual interest rate. 

Mordovia shares other risk factors with the weaker regions, such as economic metrics lagging the national average, leading to weak tax capacities and low operating balances. Fiscal flexibility is also low, including low tax rate setting autonomy.

 
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