The Economic Impact of Formula 1 Races in Azerbaijan: Myths and Realities

Article 1

Since 2016, Azerbaijan has been hosting the Formula 1 Grand Prix. The race was not held in 2020 due to COVID-19 and was conducted without spectators in 2021. The initial contract for the event was supposed to end in 2020, but it was extended for another three years. In 2023, Azerbaijan secured the continuation of its hosting rights until at least 2026[1].

Apart from Formula 1, Azerbaijan has also hosted several other prestigious international events, including the Eurovision Song Contest in 2012, the first European Olympic Games in 2015, the 4th Islamic Solidarity Games in 2017, and the European Youth Olympic Festival in 2019, and four matches of the 2020 UEFA European Football Championship. In 2024, Azerbaijan will host COP29, the largest event in its history since independence.

Despite the fact that hosting Formula 1 races in the city of Baku, as the host city, continues to raise more questions than other international sporting events, the government of Azerbaijan has been regularly organizing the races for 7 years, leaving these questions unanswered. The 2024 Formula 1 Azerbaijan Grand Prix is scheduled to take place again in Baku from September 13 to 15. Given this context, we examine the myths and realities regarding the economic impact of Formula 1 races.

Myth 1: Hosting Formula 1 races increases Azerbaijan's international prestige.

The reality is that in the modern world, prestigious sports events are also used as a tool of soft power in international relations. Azerbaijan's hosting of such significant international sporting events primarily serves this purpose, with political dividends mainly benefiting the government. Although Azerbaijan subsidizes these events from the state budget, the political gains from them are reaped by the authorities, who often use such events to present themselves as part of the modern world, aiming to secure political support. Additionally, these events can also serve purposes such as money laundering and corruption.

International rating assessments indicate that since Azerbaijan began hosting Formula 1 races in 2016, its rankings on issues like corruption, human rights, and freedoms have worsened. According to the 2023 results released by Transparency International[2], Azerbaijan ranked 154th out of 180 countries in the Corruption Perceptions Index, scoring 23 out of a possible 100 points, making it one of the most corrupt countries in the world.

Myth 2: Hosting Formula 1 races provides significant economic opportunities for Azerbaijan.

The reality is that developed countries that host these races or participate with their teams and drivers use Formula 1 both for business purposes and to advance their sports industries. Their main revenues come from direct earnings such as ticket sales and marketing activities, along with team victories and car advertisements. Additionally, they benefit from spending in other sectors, including services. Moreover, the global audience of Formula 1 races grew from 82.3 million in 2018 to 90.2 million[3] in 2019, indicating an expanding media reach and influence. Globally, sponsorship revenue for the 2023 season is projected to reach $445 million, while broadcasting revenue for the 2022 season reached $936 million[4].

As for Azerbaijan, according to an independent study conducted by the international auditing firm PricewaterhouseCoopers (PwC)[5], the first four races held in Baku brought $506.3 million to the country's economy. This total amount includes direct and indirect revenues generated by spending related to Formula 1 visitors, covering accommodation, food services, transportation, social and cultural services, postal and telecommunications services, trade, and utilities. This figure is the result of direct and indirect effects calculated across various sectors, including professional services, hotels, and others.

Additionally, the recurring Formula 1 event boosts both annual and seasonal employment, creating new jobs in various industries. In 2023, 207 people were employed by the Baku City Circuit Operations Company[6], and 1,500 volunteers were recruited for the F1 championship last year. In this way, Formula 1 directly contributes to the development of the local labor market by creating short- and medium-term job opportunities. The race has a long-term impact on infrastructure development and intangible areas such as enhancing the national brand's reputation and raising global awareness. By hosting this event, Azerbaijan demonstrates its ability to organize world-class sports and entertainment events as a modern, dynamic country.

It is clear that hosting the Grand Prix is an expensive endeavor. Azerbaijan announced that the Azerbaijan Grand Prix is insured for $100 million[7]. Therefore, hundreds of millions of manats are allocated annually from Azerbaijan for the Formula 1 Grand Prix. For instance, the 2021 state budget of Azerbaijan reveals that 80 million manats were spent on hosting the Formula 1 Grand Prix and the group stage matches of the UEFA European Football Championship in Baku. Additionally, the expenses for purchasing the broadcasting rights for the Formula 1 Grand Prix by the Azerbaijan Television and Radio Broadcasting Closed Joint-Stock Company are also covered by the state budget, although the exact amount is not disclosed.

In total, 170.2 million manats[8] were spent from the state budget on the financing of international, national, and other similar events in 2022, while 208.9 million manats[9] were allocated in 2023. The preliminary 2024 budget forecasts 234.7 million manats[10] for the same purpose. It is worth noting that the projected funds are not solely for the Formula 1 Grand Prix, but for all international and national events hosted by Azerbaijan during the budget year. As seen, the amount of these allocations has increased over the last two years and the current year, which can be explained by the rising number of events hosted by Azerbaijan and inflation.

The costs of Formula 1 races are not limited to these figures. Countries hosting this race must build infrastructure and circuits that meet the safety standards set by the International Automobile Federation (FIA). In international practice, the cost of building a typical permanent track[11] is around $270 million. This includes the construction of a medical center, media center, asphalt laying, pits, team and VIP rooms, specialized electricity supplies, grandstand installations, and other infrastructure.

However, holding the Grand Prix on a street circuit (as in Baku) is cheaper and can be set up faster than a permanent track. Nevertheless, it requires modifications to streets, the construction of barriers, and the installation of grandstands and other auxiliary facilities. The annual cost of setting up such a circuit is approximately $60 million. Therefore, building a permanent track for more than six years, including annual maintenance costs of up to $20 million, is more cost-effective than holding the race on city streets. A permanent circuit also offers additional benefits, such as the potential to host other races, sports events, and even music festivals. However, since Azerbaijan prefers a street circuit, additional funds are allocated each year for maintenance and renovation.

Furthermore, apart from Miami and Las Vegas, all other countries hosting Formula 1 races pay an annual hosting fee of around $30-40 million. The reason Miami and Las Vegas do not pay this fee is that the Formula 1 event in those cities is organized by an international company, not local ones. In such cases, the organizers keep all the revenue from ticket sales and sponsorship deals.

The hosting fee increases annually depending on the contracts of different countries. In 2023, Baku made the highest hosting payment among all cities and countries hosting the race, paying $57 million last year[12]. According to Statista, countries like Bahrain, Saudi Arabia, Azerbaijan, and Qatar are expected to pay over $50 million in hosting fees for the 2024 season[13].

Since 2020, no statements have been made regarding the economic and social benefits of the Formula 1 Azerbaijan Grand Prix, and due to the lack of transparency in reporting costs and benefits, corruption scandals related to the Formula 1 race in Azerbaijan have surfaced in the media. For example, Çingiz Mehdiyev, who served as the head of the Sports Operations Department of the Baku City Circuit Operations Company from 2015 to 2020, was accused of embezzlement and criminally charged. An investigation by the Anti-Corruption Department under the Prosecutor General's Office revealed that Mehdiyev artificially inflated the prices of goods ordered for marshals during the Formula 1 races, including uniforms, equipment, and towels. He also transferred state funds to companies owned by his close associates. Moreover, he established a company in an offshore zone—the Seychelles—under his mother's name and presented it as a specialized organization for organizing Formula 1 events, transferring a substantial amount of state funds there. The investigation revealed that Mehdiyev embezzled a total of 397,852 manats of state funds. Additionally, he transferred large sums of money to foreign banks to conceal the true source of the funds and laundered them[14].

During his trial, Mehdiyev, who was accused[15] of embezzling funds allocated for Formula 1, admitted that all orders were given by Arif Rahimov, the son of the late youth and sports minister, Azad Rahimov, and the executive director of the Baku City Circuit Operations Company. Arif Rahimov, who was appointed head of the Baku City Circuit Operations Company while his father was Azerbaijan’s youth and sports minister, held this position for seven years and was dismissed in 2022[16].

The reality is that the costs of Formula 1 races in Azerbaijan are increasing every year, while no information is provided about its earnings, indicating that the Baku City Circuit Operations Company is not managed transparently or accountably, and corruption and nepotism are prevalent.

In the next article, we will evaluate the myths and realities of the contribution of the Formula 1 race to Azerbaijan’s tourism revenues and its impact on attracting foreign visitors to the city.

[1] https://racingnews365.com/azerbaijan-gp-secures-f1-future-with-new-deal

[2] https://www.transparency.org/en/countries/azerbaijan

[3] https://www.bakucitycircuit.com/en/press-release/PricewaterhouseCoopers-Study-Reveals-%24506.3million-Benefit-to-Baku-since-arrival-of-F1-in-Azerbaijan

[4] https://sites.lsa.umich.edu/mje/2024/04/29/is-hosting-an-f1-race-financially-feasible/

[5]  https://azertag.az/xeber/Nigar_Arpadarai_2016_2019_cu_illerde_kechirilen_Formula_1_yarislari_Azerbaycan_iqtisadiyyatina_boyuk_fayda_verib-1387378

[6] https://www.bakucitycircuit.com

[7] https://en.vestikavkaza.ru/news/Economic-and-social-benefits-of-Formula-1-Azerbaijan-Grand-Prix-outlined-in-Baku.html

[8] https://www.maliyye.gov.az/scripts/pdfjs/web/viewer.html?file=/uploads/static-pages/files/64b149d771786.pdf

[9] https://www.maliyye.gov.az/scripts/pdfjs/web/viewer.html?file=/uploads/static-pages/files/6682702853f54.pdf

[10] https://www.maliyye.gov.az/scripts/pdfjs/web/viewer.html?file=/uploads/static-pages/files/65426bc58efc7.pdf

[11] https://www.forbes.com/sites/csylt/2017/03/13/the-1-billion-cost-of-hosting-an-f1-race/?sh=607849454f79

[12] https://speedcafe.com/formula-1-hosting-fees-2023/

[13]https://www.blackbookmotorsport.com/news/f1-monaco-grand-prix-liberty-media-hosting-fee/#:~:text=Currently%2C%20the%20circuit%20pays%20US,US%2450%20million%20a%20year.

[14] https://lent.az/xeber/hadise/formula-1e-ayrilan-pullari-menimsedi-baki-seher-halqasinda-korrupsiya-40601438

[15] https://azpolitika.info/?p=757736

[16] https://apa.az/diger-novler/arif-rehimov-baki-seher-halqasinin-icraci-direktoru-vezifesinden-azad-edilib-727998