Russian Prospect Update

The recent "James Bondesque" incident involving top NHL prospect Evgeny Malkin, has returned the spot light back on Russian hockey. Quotes of Gennadi Velichkin, Malkin's former team HC Metallurg's general manager, have appeared throughout the media reports, especially after the young forward's reappearance in Los Angeles. In those quotes, Velichkin threatened to sue the Pittsburgh Penguins, as well as the whole of the NHL for the violation of Malkin's one-year contract with his Magnitogorsk based club.

While Malkin's case continues to play out in the media and the end result will likely not become known for a few weeks, it is clear that this incident is a symptom of a bigger problem that lies in the relationship between the Russian Hockey Federation and the National Hockey League due to a lack of a transfer agreement between the two sides. Thus far, a lot of the accusations have pointed towards Russian hockey bosses for being the ones unwilling to accept the NHL's revamped and improved transfer agreement offer that has already been accepted by the rest of Europe under the IIHF (International Ice Hockey Federation) umbrella. However, it would be inaccurate to accept that the entire fault lies squarely on the Russians. This article will examine the positions of the sides involved in the conflict and attempt to further clarify their perspectives.

For NHL all of Europe is created equal

When the NHL offered a new player transfer agreement to Europe, the league recognized IIHF as the appropriate governing body to accept such an agreement and used this organization to rally support for the agreement amongst the affiliated European nations. The maneuver was an efficient one, as it allowed the NHL to negotiate bilaterally with a single body instead of with each European nation that raises future NHL players.

IIHF president Rene Fasel proved effective in his role and most of Europe was on board with the new agreement by the deadline. The new deal addressed some of the previously voiced concerns, raising the flat transfer fee for players drafted beyond the first round to $200k, and instituting a sliding fee scale for players drafted in the first round that started close to a million dollars for the first overall pick and was reduced by $25k for each pick further in.

Still, right from the beginning, the voice of dissent arose amongst the European leagues, as Russia and Czech Republic refused to sign the initial draft, though the Czechs were later convinced to sign by the NHL raising the player transfer fee from $150k to $200k and reducing the length of the proposed agreement from five to just two years. Still, the NHL held the line that the league would only negotiate with the IIHF and all European leagues were going to be given a single transfer deal. Consequently, after months of grumbling and verbal warfare, the Russian Super League clubs voiced their opinion by voting for the Russian Hockey Federation to not to join the transfer agreement with the NHL.

Why is Russia Different?

Russia is a significant producer of hockey talent and constituted approximately 20% of the Europeans signed by NHL clubs between 2001 and 2004. Why did this one nation reject the IIHF-NHL transfer agreement and why does this rejection have such a significance? The answer lies well outside the rink and has directly to do with the country's impressive economic boom enjoyed for the past six years primarily due to the rising price of oil and other natural resources. While the other European economies grew steadily at relatively low rates, Russia's economy boomed at high levels, allowing the nation to pay off significant portions of its former Soviet debt, but also landing billions of dollars in the hands of select individuals, who in turn re-invested the money in various ventures, including hockey clubs.

In most other European countries the local professional clubs are ran as business that depends on both ticket sales and sponsorship revenues. Thus, such teams have a naturally established salary ceiling and financial viability that may grow slightly from year to year. Like in the NHL, these clubs depend on financially breaking even as a business and thus must remain fiscally responsible.

On the contrary, to the aforementioned model, Russian Super League clubs are solely dependent on the sponsorship funding. Accordingly, with the increased wealth of sponsors, many clubs saw their budgets increase drastically. Oil was the main driver that kept clubs including HC Ak Bars from Kazan and HC Avangard from Omsk well funded and stocked with a number of NHL caliber players. Additionally, steel production propped up the other Russian hockey giants HC Metallurg from Magnitogorsk and HC Severstal from Cherepovets. Besides natural resources, there are some cosmopolitan exceptions such as Moscow's Dynamo and Vosskresensk's Khimik.

Overall, for the aforementioned reasons, the Russian Super League clubs possess budgets significantly higher than those from any other professional league in Europe. These clubs enjoyed a unique advantage of being fiscally accountable only to their sponsor and beyond following the established budget, they lacked any other financial obligations, such as ticket sales or concession revenues. The sponsors, in turn, viewed the team not as a profit oriented financial venture, but as an avenue through which to improve, the quality of life of many Russians in their locality who otherwise have seen little of the billions of dollars recovered from the economic boom. Thus, the sponsors demanded two things from the clubs: adhere to the established budget and most importantly…win!

Considering the price of oil crossing the at once thought to be unreachable $75USD per barrel, does it, mean that Russian Super League will soon compete with the NHL for being the most pre-eminent league in the world? Of course not! NHL is a financially sounder and stable organization that is located in the richest market in the world. However, it is one of the factors that should lead Russia to be evaluated separately from the rest of Europe. Granted, Russian hockey's dependency on sponsorship does create some instability, as was the case with several sponsors recently experiencing severe financial difficulties and in turn causing certain clubs to release highly paid players or retain them at reduced salaries. However, overall, the league's funding has steadily grown every year for the past six years and it has become a better-organized administrative body.

Ignoring the Economies of Scale

Unfortunately, during negotiations with IIHF, the NHL either failed to see or simply ignored the changing economic conditions in Russia. When Andrei Kovalenko returned to Russia in 2001, his reported approximate $300k salary was likely the highest in Europe and unheard of before in Russia. At that time, only a handful of players, such as Russian local super star and former Minnesota Wild sniper Maxim Sushinsky could command anything comparable. Only five years later the Russian super stars like the same Maxim Sushinsky and former Pittsburgh Penguin player Alexei Morozov command salaries upwards of two million dollars and average players in Russia earn upwards of $200k each! This salary boom has boosted the infusion of other European players into Russia, being constrained only by the rule that allows only two foreign players to be fielded by a club in a single game.

Consequently, while the previous transfer agreement's $100k or $150k may have been sufficient to satisfy all of Europe including Russia in the earlier years, a marginal raise offered in 2005 was simply not enough to properly compensate Russian clubs. Granted, the upwards of $900k that Russian clubs stood to earn from transfer fees for NHL super star Alexander Ovechkin and 2007 Calder Trophy favorite Evgeny Malkin do seem reasonable and somewhat comparable with their Russian salaries. However, how can $200k provided for players beyond the first round properly compensate a club for a player of the caliber of say Sergei Mozyakin, who commands a salary of more than a million dollars in Russia? Is it a fair practice for Russia's HC Ak Bars to lose Detroit Red Wings super star Pavel Datsyuk for a lowly $150k, as they did just a few years ago?

The huge disparity between the NHL offered transfer compensation for players drafted later than the first round and the financial worth of those players to their respective Russian clubs was the primary driver behind Russian Hockey Federation to reject the agreement. Considering what the league had to lose by signing the agreement when compared to the comparatively meager financial gains, it is difficult to call Russia's rejection unreasonable.

The not so reasonable Russian hockey system complaint

The Russian complaint regarding disparity between Super League player salaries and the NHL offered transfer fees holds up in most cases. Additionally, the Russian Super League club officials also often complain that the transfer fees do not sufficiently cover a Russian club's hockey school system expenditures that helped raise the players now making their way to the NHL. This particular complaint has little merit, as in many cases the transfer fee is reaped by the club owning the rights to the player and not the club that raised him. In many cases outside the unique cases such as top prospects Alexander Ovechkin, Evgeny Malkin, and Ilya Kovalchuk, the two clubs are not the same and the hockey system that raises players reaps no part of the transfer fee.

While the Phoenix Coyotes are busy negotiating with HC Ak Bars for Enver Lisin's rights, his hockey school until the 2004-05 season was the Moscow based HC Dynamo and it will see not a single penny from his move to the NHL. The same situation goes for players including Alexei Mikhnov and Andrei Taratukhin, who are both on their way to the NHL, and while they are currently under contract with HC Lokomotiv, they were at one point raised by HC Dynamo and HC Avangard respectively.

In most cases, a young Russian player signs the maximum allowable four-year rookie deal at the age of 16 with his hockey school's parent club. Unless a player truly shines during those four years, notably only two of which are after his draft eligible age, he often moves on to another team after the rookie contract expires. In these cases, the club that raised the player chose to waive him or collect a transfer fee from another Russian club, thus the argument that the NHL transfer fees do not adequately support Russia's hockey systems becomes moot. Furthermore, considering the young players' often negligible salaries, a relatively low cost of labor in Russia, and the fact that the hockey school systems often share the same facilities with the Super League club, a single $200k transfer fee would go a long way to boost any Russian hockey school, if this money was used strictly for the purpose of funding the hockey school.

The 2-week notice loophole

Rarely mentioned or used prior to this summer, the Russian labor regulation includes a loophole clause specifying that any employee can nullify their contract by simply giving two-week notice. This clause has rarely been used in sports and most often contract disputes were settled in arbitration with one team being forced to pay some sort of compensation to another. NHL bound players' agents, to the author's knowledge, never used this clause to nullify a player's Russian contract and pave the way for him to join the NHL. That is, they never used this clause until the groundbreaking cases that took place this summer with Evgeny Malkin, Alexei Mikhnov, and Andrei Taratukhin.

It is hard to call the newly developed scenario unpredictable, as the Russian Hockey Federation's refusal to ratify the new IIHF-NHL transfer agreement has forced the sports agents of young players wishing to play in the NHL, but still held back with Russian contracts, to look for new options and loopholes in the Russian labor regulations to serve their clients and consequently keep their jobs. Thus, a "nuclear option" has been developed and perfected by the sports agents and these methods of resignation will likely force the Russian Super League clubs to either lobby the government and change the law, or stand to lose claim to transfer fees for every young player who leaves Russia for North America.

Is there an end to the heated Cold War?

No matter who is right or wrong in the current rift between Russia and the NHL, one thing is clear: young Russian players with NHL aspirations are the ones hurt most by this unfortunate situation. The Russian clubs do have a strong point regarding NHL offered compensation often insufficiently covering the financial worth of a player taken from the Super League. However, the 14-day notice clause in the Russian labor law has made the entire argument in regards to transfer compensation irrelevant until the loophole is closed. Consequently, the Russian hockey clubs, no matter how valid their case is, will have to "clean house" internally before being able to address the transfer fee structure with the NHL.

The Russian Hockey Federation will likely find a solution to the newly discovered loophole by next summer, when the NHL-IIHF two year transfer agreement expires. At that point, NHL should be more understanding of Russia's unique economic position when compared to the rest of Europe and either further negotiate a separate deal with the country, or more likely, boost the overall transfer agreement with all of Europe. In the long term, a larger investment in European hockey only stands to further boost player development and hockey's popularity on that continent, further boosting the quality of the hockey product that the NHL will be able to offer across the ocean in North America to the league's consumers – the faithful fans!