By Jérôme Osselaer

Russia. From the Principality of Muscovy emerging from over 200 years of Mongol domination, to Mikhail Gorbachev introducing glasnost and perestroika, to the splintering of the USSR into Russia and 14 other independent republics.

Russian football. In 2005, CSKA Moscow’s UEFA Cup victory was said to “… herald a new dawn in Russian football” (V. Gazzayev). In 2008, Zenit’s UEFA Cup victory was hailed as “… the start of something for Russian football” (D. Advocaat). Since the break-up of the Soviet Union, 2008 was the first time Russia made it out of the group stages of a major tournament.

“Developments in post-Soviet football have to be seen against the cataclysmic socio-political changes that have occurred since the demise of communism and the USSR in 1991” (J. Riordan). Let’s have a closer look.

During the 1990s, Russia went through an economic collapse. Simultaneously, what was commonly known as “post-Communist kleptocracy” led to key strategic assets being bought up at low prices. “What was billed as free market economics was in fact a quick fire sale of a nation’s wealth to a handful of well-positioned state apparatchiks. Gas, oil and minerals were flogged off at rock-bottom prices to Kremlin cronies” (T. Hunt).

When the USSR broke down into 15 different countries, the once-renowned sports structure collapsed as well. While the national teams and the clubs used to be all under the wing of the Communist party, in 1991 they became private enterprises, most of them losing their financing from the government and waiting for some forms of sponsorship. A massive muscle drain followed during “the big pause” (V. Onopko, who left Spartak to play in Spain): the time of bribery, corruption, murders (Larissa Nechayeva, Spartak’s General Director in 1997) and a series of titles for Spartak Moscow, the dominant force in the Top Division, winning 9 of the first 10 titles.

Propaganda through billionaires: The Kremlin’s prudent management of Russia’s energy wealth has helped the country rebound from the economic collapse of the 1990s. Oil export earnings have allowed Russia to increase its foreign reserves from $12 billion in 1999 to some $470 billion in 2007, the third largest reserves in the world.

At the same time, “when Vladimir Putin took over as Russian President in 1999, some of the ‘violent entrepreneurs’ reconstituted themselves into ‘legal’ oligarchs operating within bounds set by the regime” (J. Riordan), the most famous exception being the former Yukos chief Khodorkovsky, currently imprisoned in a Siberian labour camp for nine years on fraud and tax evasion charges. Putin, using sport as an element of national cohesion, urged oligarchs to invest massively, especially in football, the country’s most popular sport. Consequently, 400 M€ were invested in football between 2003 and 2006.

For Putin, the good news is that the number of Russian billionaires went from 60 in 2007 to 110 in 2008 (Forbes), and Russia is now number 2 behind the USA and ahead Germany. Among the 10 richest billionaire soccer club owners today are Russians Roman Abramovich and Oleg Deripaska (Forbes).

Metals magnate Deripaska, member of the Board of Directors of Rusal, is sinking £440 M into a sports village near Sochi, the city hosting the 2014 Winter Olympics. He also agreed to buy the soccer club from his native Kuban district in 2004, even though that hasn’t prevented the club’s yo-yo-like trajectory.

Roman Abramovich’s investment vehicle, Millhouse LLC, holds stakes in steel maker Evraz Group and Highland Gold Mining Ltd. When he acquired Chelsea in 2003, he held stakes in Russian oil firm Sibneft and part-owned the country’s top aluminium firm Rusal. In 2005, Abramovich had a great season: the Premier League title for Chelsea and the UEFA Cup for CSKA Moscow, the team Sibneft sponsored for £10 M a year.

The CSKA club president, Yevgeni Giner, Abramovich’s close friend, is also president of the Russian league. Abramovich sold his share of Sibneft to Gazprom in 2005, and Sibneft withdrew their sponsorship. The local VTB bank stepped in with a three-year, £12 M deal. CSKA is to build a new stadium, partly funded by VTB bank and the Russian Army.

Roman Abramovich is a central figure in Russian football. He is supposedly funding the construction of a “Russian Wembley” in Moscow. The stadium is just the latest in a long line of football-related projects funded by the oil tycoon: a £20 M training camp for Russia’s national football team, an annual £28 M to fund the National Football Academy and artificial pitches for youth, and part of Guus Hiddink’s $1.3 M salary. Abramovich is also governor of the Chukotka region, a position which gives him immunity from criminal prosecution.

Apart from Abramovich, who no longer has direct influence on Russian clubs, the biggest Russian companies are the major owners and sponsors of football clubs. Lukoil is the primary sponsor of Spartak Moscow, with Leonid Fedun, head of Spartak’s board of directors and Lukoil’s VP. FC Moscow benefits from the backing of metal giants Norilsk Nickel.

But the best example showing “the intricate and incestuous business of Russian football” (J.Riordan) is Zenit St Petersburg. Owned by Gazprom, Zenit symbolises the new Russian state, in which the influence of St Petersburg grows ever stronger thanks to Vladimir Putin and Dmitry Medvedev, both born in the former Leningrad. Medvedev is also the former president of Gazprom. Vitaly Mutko, the current Sports Minister and president of the Russian Football Union (RFU), is linked to Zenit as its former president.

Since 2005, the huge investment of the company helped the club win trophies. After significant transfers such as Dick Advocaat as head coach, Tymoshchuk for 13 M€ and Danny for 30 M€ - the same amount as Fernando Torres from Atletico to Liverpool - Gazprom has funded a 60,000 seat brand new stadium, the Gazprom Arena, for an estimated cost of 165 M€. According to Russian magazine Total Football, the top 3 best-paid footballers in Russia play for Zenit: Anatoly Tymoshchuk (3 M€), Andrey Arshavin (2.5 M€) and Fatih Tekke (1.7 M€).

Regardless of whether there is a strong correlation between the financial strength of a club and its results on the pitch, it is always good to remember that money cannot buy everything. Alexei Fedorychev learned the hard way, after owning the TV rights for the entire Premier League and investing more than $100 M in Dinamo between 2004 and 2007, when he sold the club. Despite acquiring numerous Portuguese-speaking players, mainly from Porto after they won the Champions’ League in 2004, such as Maniche and Costinha, Dinamo did not win a single trophy. Thanks to a 28 M€ deal, the current shirt sponsor of the club is the Russian steel firm Metalloinvest, half owned by Alisher Usmanov, a major shareholder of Arsenal, who cultivated close ties to Putin and Medvedev.

Fedorychev first failed to buy AS Monaco in 2002 because of allegations of money-laundering and criminal connections. However, Fedorychev lives in Monaco and his company, Fedcominvest, is the shirt sponsor of the local club. In some ways, the loser Fedorychev could be considered as the perfect opposite of the winner Abramovich: when Abramovich owns a club abroad and used to sponsor a Russian FC, Fedorychev used to own a club in Russia and sponsors a foreign FC.

To get immediate results, the nouveau riche of European football had the financial means to favour the migration of European and South American players to such an extreme that “in the 2005 season, the Russian Premiership had an astonishing average of 11-12 foreign players on the books of each club” (J. Riordan).

This short-term strategy, preferring average foreign players rather than home-grown players, was of course not very efficient, but mostly a downside to the national team. As a result, new regulations were implemented by Vitaly Mutko on the numbers of non-Russians in league matches. When it became clear that they weren’t going to qualify for the 2006 World Cup, the Russian league ordered clubs to limit their foreign quota to eight squad players, with only five on the pitch.

These regulations allowed more local talents to play in the RPL and as such, were a positive change to Guus Hiddink, who arrived as coach of the national team in 2006 together with Raymond Verheijen, his conditioning coach, while Dick Advocaat, another quality manager from Netherlands, was named Zenit’s head coach. It is no coincidence if the two coaches who brought success back to Russia are Dutch, as the Russian and Dutch schools of football were both established in the late 1960s and early 1970s, with a similar tactical approach encouraging pressing and a high offside line.

The Soviet Union was one of the giants of the European Championship, winning the inaugural competition in 1960 with Lev Yachine, the Black Spider, the only goalkeeper winner of the Golden Ball France Football in the history, and finishing as runner-up in 1964, 1972 and 1988. Twenty years later, Russia secured a semi-final against Hiddink’s native Netherlands, the Soviet Union’s conquerors in the 1988 final, when Van Basten scored a masterpiece volley against Dassaev.

A major shift in football’s balance of power? In 2006, Arsène Wenger declared, “a Russian team could win the Champions’ League in the next decade”. He could be right. Russia has risen to 6th in the UEFA league rankings, and is close to overtaking France to move into the top five. Next season, Russia will have three teams in the Champions League. According to Simon Chadwick, “given the level of financing of Russian football, it will pose a major threat [to European teams] over the next decade”. He, too, may be right.

The RPL recently lost Skrtel (Liverpool), Jo (Man City) and Pavlyuchenko (Tottenham), all three now playing now in the EPL. Arshavin is likely to go during the next transfer window. However, it is not the real issue compared to the fragile financial equilibrium of the whole economic system. Oil, natural gas, metals, and timber account for more than 80% of exports and 30% of government revenues, leaving the country vulnerable to swings in world commodity prices. The Russian football industry is especially threatened due to a business model based on a single, but massive…but single revenue stream: oligarchs.

The Russian oligarchs are faced with the dramatic fall of their assets, but above all, with problems of short-term debt. In recent months, nearly $1,000 billion ended up in smoke on the Russian Stock Market, 25% of which accounted for assets of the 25 major oligarchs (Forbes). For five years, the growth of these billionaires has often relied on borrowings secured against assets which are now depreciated. Consequently, they have to spend an additional guarantee, but they do not always have the necessary amount in cash and have to sell some of their assets. It recently happened to Oleg Deripaska, who sold his major international interest in Magna, Canada’s largest automobile parts manufacturer.

Given that Russian clubs are unprofitable, with matchday revenues, commercial revenues and TV rights being insufficient for them to break even, the current situation could see clubs without oligarch sponsorship, or even some FCs with no other revenue stream, heading for insolvency. In 2007, Zenit had a budget of around $70 M and Lokomotiv $60 M. Zenit only earns some 20% of its budget, the rest being covered by Gazprom. Lokomotiv similarly covers only around 16%.

With a projected 2007 deficit of $1.5 million, CSKA Moscow has the best balanced budget in Russian football. Expenditures were forecast at around $51.4 M while income was expected to be $49.9 M. CSKA is closer to breaking even than any other club in the Russian Premier League (RPL). CSKA is the only Russian club sponsored by a company not directly connected to the shareholders. In 2006, the club struck a sponsorship deal worth $20 M with VTB bank.

Towards a more balanced business model: “It is important the national team performs well, but even if the first team is not performing well you must go on with improving the infrastructure. I also recognise that if the national team wins it accelerates those processes. There must also be a renewal of the methods of training. With this huge country - 140 million people - if you organise well in scouting and youth development, then step by step it can be a powerhouse.” (G. Hiddink).

Dick Advocaat was also on the same wavelength, after he won the UEFA Cup: “The money is there and hopefully this prize will mean new stadiums, good pitches and facilities for the kids. Otherwise it will be incidental.” So Russia has built artificial pitches, “because 85% of Russia has an unfriendly climate” (V. Mutko) and a nationwide project to boost schools’ football has been highly successful.

As Russia wants to be ready to bid for the organization of the next European Championship and World Cup, it facilitated the construction boom. The country should have a minimum of 12 stadia with a capacity over 40,000 seats in the 3 years to come, as facilities are already under process in St Petersburg, Rostov, Samara, Kazan, Volgograd and 3 in Moscow.

Some of these modern stadia could be covered with a retractable roof, allowing Russian clubs to play 12 months a year. Up to now, unlike other European leagues, the RPL typically runs from March to November, to avoid playing games under the cold and snowy weather. That is why traditionally, Russian teams have struggled in the spring, barely awoken from a four-month hibernation having to play against top European sides in full capacity.

From Russia to England. There are several similarities between the RPL, a nascent emerging league, and the English Premier League (EPL), usually described as the richest and best league worldwide, among which:

• a huge concentration of clubs in the capital town: 7 clubs of the RPL out of 16 are located in Moscow, whereas 5 clubs of the EPL out of 20 are located in London,
• a large number of billionaires owning clubs, even if the motivation of Russian oligarchs to buy a club is different: whereas it is a deliberate choice in England (Abramovich with Chelsea, Usmanov with Arsenal), it is a duty in Russia,
• the issue of debt,
• an over-representation of foreign players, meaning an under-representation of local players, leading indirectly to a weaker national team,
• scouting and youth development to be strengthened.

Nevertheless, the major difference between the EPL and the RPL, except the first letter, is the level of dependence on oligarchs. Even if Chelsea were to be in a precarious situation if Abramovich left the club, the Premiership as a whole is generating operating profits, with Deloitte anticipating a boost in 2007/8 by increased broadcasting revenue.

It could be argued that Chelsea is not profitable yet, and that even in England, “the key strategy for earning a return from owning a club appears to be brand value and long term asset appreciation, rather than a more tangible ongoing measure such as profitability” (Deloitte). It may even be said that the model is increasingly looking like that of US sports franchises: purchased at a premium price and followed by years of limited returns and sale at a much higher price. Anyway, in order to avoid bankruptcy at worst and develop a profitable business at best, Russian clubs should create or increase other revenue streams.

A growing domestic market with a burgeoning maturity: Thirty years ago, the major grounds were full of supporters, with an average of 35,000 fans. In 2007, “the six major Moscow teams [averaged] just over 7,000 fans a game” (J. Riordan). Many reasons could explain this decrease in attendance: a lack of nationalistic interest in games between Russian teams, access to other leisure facilities for young people, hooliganism, games on TV from Russian league, but also English, Spanish, Italian or German football.

However, this trend should shift towards an increase in attendance, thanks to three major factors: first the modernization of stadia, second, a growing domestic market and third, the excellent results in European competitions. There has been no tradition of Russian football fans travelling outside their country to follow their clubs abroad, until recently. A relaxation in rules surrounding travel in and out of Russia means 13,000 Zenit fans were able to obtain the travel permits required to make the trip to Manchester for the UEFA Cup final.

Russia ended 2007 with its ninth straight year of growth, averaging 7% annually since the financial crisis of 1998. Although high oil prices and a relatively cheap rouble initially drove this growth, since 2003 consumer demand and, more recently, investment have played a significant role. In 2007, Russia’s GDP grew by 8.1%, led by non-tradable services and goods for the domestic market, as opposed to oil or mineral extraction and exports. Over the last 6 years, poverty has declined steadily and the middle class has continued to expand. Sixteen percent of the population is below the poverty line (UK: 14%, Germany: 11%, France: 6%), with a Gini coefficient of 0.41 (UK: 0.34, Germany: 0.28, France: 0.28). (The Gini coefficient is a measure of statistical dispersion most prominently used as a measure of inequality of income distribution or inequality of wealth distribution. It is defined as a ratio with values between 0 and 1: A low Gini coefficient indicates more equal income or wealth distribution. Most free market nations have a Gini coefficient between.25 and.50.)

With a burgeoning maturity, the Russian domestic market appears more and more attractive, and football seems to be a good vehicle with a great reach. That is why the RFU, covering the national teams and 2.5 M players, landed a five year sponsorship deal with Rosgosstrakh, the country’s largest insurance company, for more than $50 M, and announced a new partnership running until 2018 with adidas, the clear market leader in Russia, who took over the RFU contract from Nike.

In spite of these favourable elements, the Russian football business is currently limited by a glass ceiling concerning the major driver of revenues in the global sports industry: TV rights. Russian fans are not ready yet to the idea of paying to watch games, and were outraged by the exclusive television deal struck between the Russian league and the satellite station NTV+. “They want to rob us, football fans, of free broadcasts of matches” (V. Putin).

The separation of powers: Since 1991, Russia has struggled in its efforts to build a democratic political system and market economy to replace the social, political, and economic controls of the Communist period. Political uncertainties, associated with corruption and lack of trust in institutions, continue to dampen domestic and foreign investor sentiment. Finally, Russia has made little progress in building the rule of law, the bedrock of a modern market economy.

There is only one step from building the rule of law and introducing more regulation in the professional game, and this step is a small one in Russia. Mutko implemented a new legal framework and a strict licensing system. But as long as football is considered as a tool, used both by political and economic powers, instead of a game and a sound profitable business, the potential growth of the Russian football industry will still be hindered by corruption or at least, suspicion, and major decisions will not be made in the long-term interest of the game.

Jérôme Osselaer is a football consultant based in Paris. His column appears in Offsides on Fridays. Email him at josselaer@gmail.com.