QUANTUM BLOG

The Fall Of The Russian Ruble

March 12, 2015

It is well established and widely agreed upon that the Kontinental Hockey League is the second-highest level of professional hockey being played in the world today. Founded in 2008, the KHL has since been home to twenty-eight clubs from countries such as Russia, Astana, Kazakhstan, Latvia, Ukraine, Belarus, Slovakia and the Czech Republic. While generally not quite on par with the National Hockey League in terms of player talent and global popularity, it wasn’t long ago that the KHL burst onto the international hockey scene as a major threat to lure high-profile hockey talent to the motherland. At one point it seemed that every potential NHL free agent would be tied to rumours of a KHL departure in the media. Those rumours were escalated tenfold if that player happened to be of Eastern European nationality. This trend became especially worrying for NHL teams hoping to draft Russian amateurs, as these players always ran the risk of staying overseas and the team essentially wasting a draft pick. While this scenario played out fewer times in reality than in media speculation, notable Russian-born NHL stars like Alexander Radulov and Ilya Kovalchuk managed to break ties with their NHL clubs in favour of playing overseas. What exactly was the KHL offering these players?

 

The answer is simple: money, money, money.

 

The price of oil began skyrocketing until it peaked in 2012. Russia’s largest export as a nation is crude oil, and as a result, the oil-baron owned KHL franchises were swimming in Rubles. This strong Russian economy backed by billionaire oil tycoons is what fueled the KHL spending war on hockey talent. It marked the first time that an alternative market to the NHL could actually compete financially in terms of player contracts.

 

Enter 2014 - the plummeting price of oil is the major energy story of the year, as developing nations cut usage and developed nations shift to investments in renewable sources. In addition, major economic sanctions hit Russia due to hostile political actions involving the Ukraine. The combination of these two factors destabilizes the Russian economy and quickly devalues their currency. Suddenly not only is the KHL no longer in position to overpay for hockey talent, it is struggling to pay the larger contracts of players already signed to the league. Those that are still getting paid are doing so in Rubles; worth close to only half of what they were when many of these players initially signed.

 

From several of the forty-one Canadians and countless other nationalities playing in the KHL come complaints of salaries not being paid and contracts not being honoured. Smaller-market teams are being forced to waive their higher-paid players, which ironically consists of their foreign talent which usually left the NHL for a fatter paycheque in the first place. All of this has led to the KHL putting further restrictions on the number of foreign players allowed per roster. As a result, new tactics have been adopted by the league to secure foreign talent. Gone are the days of oil tycoons throwing wads of cash at anyone and everyone. The KHL has learned to be a lot more cunning in its approach.

 

NHL teams can begin signing players as of July 1 and players can choose to wait several months before agreeing to terms. The KHL is smart in forcing their potential signings to commit to an entirely different system and schedule for contract negotiations. Negotiations between KHL players and franchises begin in April. Players are forced to commit almost immediately rather than being given time to entertain multiple offers, not necessarily from other KHL teams, but from other rival leagues. Young talent or fringe NHL players may jump at the opportunity for a guaranteed contract in Russia, especially at a competitive if not significantly better salary than they would make in the NHL. By waiting, they often run the risk that an NHL team is not interested and the player has to spend a season in a lower-tier league at a significant pay cut. It’s clear why some opt for the KHL trap.

 

How can the NHL fight back? Well, in many ways they don’t really have to. The fact remains that it is the premier professional hockey league in the world. This doesn’t mean that there aren’t many NHL teams that potentially stand to gain from the turmoil in Russia. If trends continue, it won’t be long until a number of ex-NHL players playing overseas consider making the return-trip home permanently. Hockey operations executives should be prepared for this and be aware of the talent available. While NHL teams may still hold rights to certain players like Kovalchuk (NJ), Radulov (NSH) or Tikhonov (ARI), other teams should be ready to offer trade packages to acquire these rights in preparation for their eventual return to the league. There are also countless players that stood out at the Olympic level in Sochi who did not represent NHL teams:

                Evgeny Medvedev – D – Russia
                Robert Kristan – G – Slovenia
                Patrick Thoresen – F – Norway
                Antti Pihlström – F – Finland
                Bernhard Starkbaum – G – Austria
                Jarkko Immonen – F – Finland

 

What would the harm be in trying to reach a buyout agreement with a financially struggling KHL team for one of these contracts? Sure, there are restrictions in place and a plethora of obstacles – but this is a time of financial crisis and an opportune time to strike. It would also involve giving up a lot less than acquiring the rights to a previously drafted defector like Radulov or Kovalchuk. Leo Komarov is an example of a player who was featured on this list prior to his return to the NHL in 2014/2015. The impact he makes when in the lineup is significant for the Toronto Maple Leafs. These under-the-radar type players can go a long way in solidifying depth without sacrificing many organizational resources.

               

With 2015 now well underway, we see how the dynamic of the international hockey world is changing. NHL teams would be smart in being proactive to these changes rather than to wait until the floodgates burst open and every other team in the league is fishing from the same pond. The sooner in advance this is done – the cheaper the cost will be.  A quick buyout here or acquisition of rights there may represent the best calculated gambles NHL teams can take on acquiring cheap, NHL-ready talent; maybe even more-so than the NHL Entry Draft. While drafted amateurs may command lower entry-level salaries and cap-hits, they also generally require years of seasoning at lower levels before being ready to make an impact. In the modern salary-cap era of the NHL it is creative practices like these that secure cost-effective and talented players and build winning teams. This opportunity will not exist forever if the Russian economy shows any sign of improvement, luckily the NHL offseason is fast approaching. This timeline seems to suggest that the perfect storm is brewing for such activities to take place.

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