Russian Prime Minister Vladimir Putin recently held a press conference to announce funding for 30 new development projects in the North Caucasus. The announcement was the latest in a string of high profile, high-cost investment plans that aim to pull the troubled region out of a cycle of violence and instability. While the goals of the Russian government should be lauded, the most notable development efforts by the federal and provincial governments focus more on public relations ventures, such as elite ski resorts and soccer exhibitions, than on sustainable economic improvement.

BACKGROUND: Since the creation of the North Caucasus Federal District on January 19, 2010, the Kremlin and its emissaries in the region have prioritized economic development in an effort to quell the steady increase of violence in the region. The government’s economic development plans have evolved from a core development document to an overlapping menagerie of federal and provincial, public and private initiatives. The projects range from mineral extraction to establishment of world class ski resorts, and the cumulative budgets are in the tens of billions of dollars. The scope and variety of the plans not only highlight the extensive need for economic and infrastructure development in the North Caucasus, but also Russia’s need for regional stability after two decades of violence.

One of the most prominent features of the development plans is the creation of six special economic and tourist zones, which will feature alpine ski resorts. The plan is called “Height 5642” in honor of the height in meters of Mt. Elbrus and has a budget of approximately US$ 16 billion. The recently established state-run firm “Resorts of the North Caucasus” controls 87 percent of the budget allocation and will seek additional investments through a special tax regime that will exempt all businesses involved in the project from non-VAT taxes for ten years. According to a report in the New York Times, the plans require the construction of 90,000 hotel rooms and ski lift capacity for 150,000 skiers per day. 

While skiing aims to be the winter tourism centerpiece of the North Caucasus, soccer appears to be the favored development panacea of Ramzan Kadyrov, President of Chechnya. In addition to his government role, Kadyrov also serves as the Chairman of Terek Grozny, which has competed in the top flight of Russian soccer since 2008. While Terek muddles in the bottom half of the Russian Premier League table, the team has served as a platform for Kadyrov’s public relations campaign and provided him with an opportunity to play against legends of the sport. As part of the vast rehabilitation of Chechnya’s capital, Kadyrov ordered the construction of a US$ 250 million dollar stadium for the team. It is worth noting that the stadium is named after Ramzan’s father Akhmad Kadyrov, the former President of Chechnya who was assassinated in the stands of Terek’s former grounds.

In anticipation of the stadium’s grand opening, Kadyrov hired Ruud Gullit, former World and European player of the year, as Terek’s team manager. Kadyrov also arranged for well-publicized exhibition matches between members of Brazil’s 2002 World Cup winning team against a team of former Russian national team members. In the second match, a selection of former stars from around the world, including Diego Maradona, Luis Figo and Steve McManaman, played against a side known as “Team Caucasus.” In both matches, Kadyrov played for the home sides and conspicuously scored multiple goals against the aging legends.

IMPLICATIONS: While providing residents with the opportunity to watch global icons in their twilight may be admirable, the funding and arrangement of the matches remain a mystery; hinting at a problem of Chechnya’s soccer public relations campaign. Local press reported that Bulat Chagaev, a Chechen businessman based in Switzerland, played a role in funding the exhibitions. However, national Russian sources and Western press could not confirm the rumors. The opaque nature of the matches highlights the dilemma for such PR-based development efforts in the North Caucasus. While banners around Akhmad Kadyrov Arena boasted the new investment opportunities available in Chechnya, endemic corruption precludes any significant investment from businesses that are not connected to local politicians.

Besides the questionable merits of individual events, professional soccer as an industry cannot spur sustained economic growth. Even though it is the most popular sport in Russia, soccer is a well-recognized money pit for its owners. As a 2010 article in Rossiyskaya Gazeta notes, it is virtually impossible for Russian clubs turn a profit without enormous financial support from corporate benefactors or regional governments. For example, the revenues of reigning champions Zenit St. Petersburg will only cover 20 percent of expenditures for 2011 while Gazprom, its owner and main sponsor, will subsidize the remaining US$ 91 million of its budget. The example illustrates that while local clubs can boost the public standing of a city or region, they are a financial drain on regional budgets. The expenditures are defensible when oligarchs, such as Suleiman Kerimov, the new owner of Dagestan-based Anzhi Makhachkala, are personally responsible for signing stars, such as Brazil’s famed defender Roberto Carlos. However, it is a different matter when the money comes from regional government coffers.

Just as high profile soccer matches cannot attract a self-sustaining amount of capital, the aforementioned ski resorts in the North Caucasus face daunting investment challenges. In order to achieve the goals described in the development plan, Alexander Khloponin, head of the North Caucasus Federal District, told Prime Minister Vladimir Putin that the state-run developers of the projects need to raise US$ 1.9 billion from unspecified private investors. While raising almost US$ 2 billion is a daunting task for many investment environments, it seems implausible for the North Caucasus. Beyond concerns about corruption, violence remains a very real threat to both potential investors and potential tourists. In February, unknown assailants shot and killed three skiers near Mt. Elbrus and detonated a bomb that severed gondola cables. A few days after the attack, police found 70 kilograms of explosives in a car parked next to a hotel in the tourist village of Elbrus. “Resorts of the North Caucasus” has responded by announcing that they will surround all ski developments in a three-meter fence, but it remains to be seen whether investors are convinced by such measures. The upcoming Winter Olympics in Sochi could spur greater interest from potential investors, but international and private companies have distanced themselves from the Games. In April, organizers for the Sochi Olympics announced that they are US$ 200 million short of their commercial sponsorship target and the current total of US$ 1.1 billion comes primarily from state-run firms, such as Aeroflot and Rosneft.

CONCLUSIONS: Pouring billions of dollars into the development of ski resorts to compete with those in French Alps seems a bit incongruous when, according to figures by the Center for Strategic and International Studies, there were 16 suicide bombings and over 900 insurgency-related deaths as recently as 2009 in the North Caucasus. In fact, headline events, such as the recent star-studded soccer exhibitions in Grozny, reinforce the perception of endemic corruption in the region and the opaque manner of doing business in the North Caucasus. The North Caucasus Federal District sorely needs economic development and, in general, the plans by the Kremlin and Alexander Khloponin’s administration take important strides in the right direction. However, federal and local officials should solely concentrate on developing the fundamental infrastructure for economic growth, such as transportation, safety and transparency, and avoid glitzy displays that belie daily reality. While the matches and grandiose development may garner international attention, it is highly unlikely that they will create sustainable economic growth and the Kremlin will continue to heavily subsidize the region.

AUTHOR’S BIO: Gregory Zalasky is an independent analyst focusing on political affairs in Russia and the Caucasus. He holds an MA in international affairs from George Washington University and a BA in Russian studies and world politics from Hamilton College.