Wednesday, 24 May 2017

Russian Belt Tightening

I'd like to say that I'm shocked, but the reality is that I'm not. You shouldn't be shocked either when I tell you that today's news of the KHL cutting two teams from its membership finally happened. For a league that has had numerous reports of players not being paid, potential franchises leaving over costs, and owners and sponsors unable to keep up with the US dollar amidst the falling price of the ruble, the writing was on the wall and it was only a matter of time. Today, the announcement came from KHL president Dmitry Chernyshenko that the league would contract Metallurg Novokuznetsk while allowing Medvescak Zagreb to walk away as they had promised in March. 29 teams are now 27, and the cuts being made don't appear to be stopping any time soon.

Again, I'd like to say that this is a shock, but I wrote about the possibility of the KHL making drastic changes in November. Today, the money problems that were discussed back then have become the reality we see before us today. Chernyshenko stated that the reasons that prompted the league to contract Novokuznesk were their 14-46 record from this past season and small crowds attending the games - two factors which often sees the latter as a result of the former. What makes this contraction a little more puzzling, however, is that Novokuznetsk was still making player transactions as recently as two days ago!
I have no idea what Alexei Tkachuk's status is at this moment in terms of who owns his rights, but it seems he's getting screwed over in a big way with this decision by the KHL. Again, it seems strange that the team is still making deals when contraction was clearly on the table, but this is Russia where the inexplicable often happens in the business world.

The other team that is leaving is Croatian team Medvescak Zagreb who finally made good on their promise to leave the KHL. It seems that for the last few summers, the threat of Zagreb leaving the league was always in play yet they always wound up playing another season in the KHL. In March, however, the club announced it would be joining the Austrian-based EBEL league for next season, finally cutting its ties to the Russian league where it always seemed it was behind in payments to players, staff, the arena, the league, and a host of other vendors. It appears they will keep the majority of their roster intact during the move to the EBEL, including Canadians Alexandre Giroux, Derek Smith, and captain Mike Glumac.

The other major piece of news that was floated by Chernyshenko today was that the league will also contract three more teams next season to reduce the field to 24 teams total. The Associated Press reports,
From 27 teams next season, the KHL will cut three more for the 2018-19 season, Chernyshenko said. A statistical rating system measuring teams' on-ice ability, their finances and crowd appeal will be used to determine who quits the league.
In total, the league will have reduced its footprint in and around Russia by five teams by the time the 2019-20 season starts based on the fact that teams are struggling. While they were once a socialist country when they went by the USSR name, it appears that there will be no help given from the league or the other 24 clubs, some of whom have budgets that rival small countries.

I read through the statement put out by Chernyshenko on Tuesday about how he views the finances of the KHL. You can read that report here, but there are some glaring issues he brings forth in his statement that should be addressed sooner than later when it comes to keeping the KHL viable.
"Such support for sport is a task for us all, but few would argue that it is the professional leagues and clubs which supply the personnel for our national teams. And professional sports should aspire to be financially sustainable. The KHL has just returned a profit for the third year running, but on average 52% of the clubs' budgets derive in some way from state funding, and not all the teams spend this money in a way that justifies these subsidies. As a result, the League has developed a set of measures designed to raise the level of competitiveness and to increase demand for the product."
Obviously, having a financial solvent and stable league is good, so good on the KHL for turning a profit three years running. However, the point Chernyshenko makes about 15 of the 29 clubs getting operating money from some state-funded source should worry the pants off Chernyshenko. If taxes and utilities are keeping half the teams in the league afloat, there's a serious issue with the accounting and funding of these teams. I fully understand that taxes and bills are a certainty in life, but we've seen industries fall in countries like the US that were once thought to be impervious to these perils. This should have Chernyshenko looking for other sources of income for his league and teams or ways to control the spending, and he addresses those methods two paragraphs below this one.

However, he continues,
"We are also increasingly active in attracting some formidable new member clubs. A recent example is Kunlun Red Star of Beijing, whose arrival has seriously expanded our marketing prospects in terms of raising additional income. With our product – a League set up in Russia with headquarters in Moscow – we can and should be pulling in revenue on the Asian and European markets. We are doing this. Our television rights, our main source, have already been sold to 28 countries, and we need to increase that number."
This isn't good enough. Two teams have already been set adrift and three more will join them, so the number of markets clamoring for KHL hockey is shrinking. I don't know what "formidable member clubs" he is boasting about attracting, but the league already tried and failed in Croatia and the Czech Republic as well as within its own borders in Russia. They might be able to get into Sweden or Great Britain, but that will only strain the league's finances once more. And if the league is already televised in 28 countries, there aren't a lot of remaining countries left to which they can sell KHL hockey.

Chernyshenko goes on to say,
"At the same time, however, we must reduce costs, and we can do this by lowering the wage ceiling. Tomorrow the KHL Board of Directors has its meeting, at which we shall discuss these measures. It might be necessary to make some unpopular decisions, but we cannot please everyone. Clubs that are unable to meet certain criteria will have to search for openings in other leagues, but the overall effect will be the release of funds from the budget, especially in the regions. These measures are aimed at improving all hockey operations and enhancing the prestige and quality of the League as our product. And the funds which will be made available, including the funding our clubs receive from the state, can be directed at strengthening the national teams. In tackling this issue, we will cooperate closely with the Russian Hockey Federation."
So not only is contraction seemingly the best way to manage costs, improve hockey operations, and enhance the "prestige and quality" of the KHL, but lowering the salary cap - which never seems to be enforced anyway - is also a good way at curbing the growing costs. This seems like the old USSR again - suppress wages and control growth so a few can benefit greatly! Honestly, if the KHL had enforced the salary cap from the beginning, there wouldn't be an arms race between three or four clubs when it comes to winning every year. When SKA St. Petersburg and Metallurg Magnitogorsk go 29-7 in the playoffs - including 5 of those losses coming in the final against one another - there's a problem. Both teams were 12-1 entering the final, and neither team was challenged along the way. They are consistently two of the top teams in the KHL and arguably boast the most talent of any of the KHL squads. I expect these two teams and CSKA to cruise through the regular season once again next season.

In the end, there will be no changes until all the money filtered into the Big Three starts getting spread to teams like Lada Togliatti, Amur Khabarovsk, and Ugra Khanty-Mansiysk followed by the strict enforcement of a lowered salary cap so that some of the smaller teams can catch up to these powerhouse big spenders. Secondly, there would have to be strict penalties in place for these big-spending teams so that if they did exceed the salary cap, they would be hindered moving forward. I'm not sure what could be done in this case - fines would have no effect when these teams are sometimes spending 800% more than the low-budget teams - but perhaps there would be loss of draft picks or loss of cap space for the following year in the same amount that exceeded the cap. Either way, these big-spending teams are more the problem than the solution right now when it comes to evening out the playing field.

Lastly, stop expanding. Until the KHL can get its house in order, expansion stops immediately. Chernyshenko talked about reducing costs, yet wants to add teams in far-off countries. The contradiction in this method is astounding if this is how the KHL believes it will strengthen itself, and I'd suggest that the KHL is turning more into a Champions League than an alternative to the NHL by looking outside its borders for more clubs to join the league. Fix the house before making additions. It's the only way to get stronger.

Out of all this, the only question will be which three teams join Metallurg Novokuznetsk and Medvescak Zagreb as former KHL teams. My guess is that HC Sochi, Slovan Bratislava, and Dynamo Riga are the most likely to be under the gun with this new calculation system, but we'll see who the three will be next summer once the calculations are done. Despite Chernyshenko stating about the missed payments to players from clubs that, "“The KHL will not stand for this," it seems he's only making things worse for a number of teams, players, and communities by either contracting their clubs or not helping them to attain some sort of parity with the free-spenders.

When all is said and done, the numbers don't lie, and the only guaranteed number for next season's KHL is 24. Good luck with that.

Until next time, keep your sticks on the ice!

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