Business forced to pay much of the bill for Sochi Olympics build

SOCHI, Russia—The mountains of Sochi are now home to Potanin’s slope, Gazprom’s gondola lift and Sberbank’s ski jump. The nicknames used by locals and an army of construction workers leave no doubt about who is paying for the 2014 Winter Games: Russia’s business powerhouses.

Other countries that have hosted the Olympics have overwhelmingly used public funds to pay for the construction of needed venues and new infrastructure. The Russian government, however, has gotten state-controlled companies and tycoons to foot more than half of the bill, which now stands at $51 billion and makes the 2014 Winter Games by far the most expensive Olympics in history. In contrast, the much-larger 2012 Summer Olympics in London cost about $14.3 billion and the 2008 Summer Games in Beijing cost about $40 billion.

For President Vladimir Putin, the games have been a matter of pride. He has entrusted the country’s top businessmen with Sochi’s key projects. He himself is spending increasing amounts of time in the southern Russian city, hosting world leaders at his luxurious presidential palace.

Mikhail Kasyanov, a former prime minister under Putin, described the tycoons’ participation as a sort of tax imposed by the president.

“If you want to carry on doing business in Russia, here’s the tax you need to pay—the kind of a tax that he wants you to pay,” Kasyanov, now an opposition leader, told The Associated Press.

This is particularly true of those like metals tycoons Vladimir Potanin and Oleg Deripaska, who made their fortunes in the rags-to-riches privatizations after the 1991 collapse of the Soviet Union. For others who have grown fabulously wealthy since Putin came to power in 2000, the 2014 Olympics have been a chance to reap the profits through lucrative state contracts.

Most of the projects the tycoons are involved in are not profitable and many businessmen are making no secret of the losses they are incurring. But anyone who does business in Russia today is acutely aware of the importance of maintaining good relations with the government, and Putin in particular.

The tycoons remember well how Putin in 2008, with one verbal attack, sent the stock of metals company Mechel tumbling 40 per cent, cutting $6 billion from its shareholder value.

“Russian big business is heavily dependent on the government and often has to follow Putin’s requests and take on projects that are important for top officials,” said Vladimir Milov, an economist and former deputy energy minister who also is now part of the anti-Putin opposition.

The tycoons and state-owned companies dismiss claims that they were pressured to invest in Sochi or that they did so in exchange for promises of preferential treatment.

Gazprom, the world’s largest natural gas producer and a publicly traded company, said in a written statement to the AP that its work in Sochi is “both a business project and serious social responsibility.” Gazprom’s Sochi projects are vast—it’s building a pipeline to bring gas to the Sochi area, a power station in a Sochi suburb, an Alpine ski resort, one of the three Olympic villages and a cross-country skiing and biathlon centre. Its total costs run to $3 billion.

Andrei Elinson, deputy general director at Deripaska’s Basic Element investment vehicle, insists its Sochi projects were all designed to be profitable. The company is building an Olympic village and a seaport and has just finished revamping the Sochi airport, for a combined cost of $1.4 billion. After the games, Basic Element plans to convert the Olympic village into apartments and the sea port into a marina.

Even so, some tycoons are grumbling that they have been hit up with unexpected demands that are stretching their funds more than anticipated. Their balance sheets have been dragged down by a flow of requests from the state contractor Olimpstroi to build more infrastructure than originally planned.

Potanin started building his Roza Khutor ski resort even before Sochi was picked in 2007 to host the 2014 games. He is spending $2.5 billion, including $500 million on infrastructure required by the International Olympic Committee. In addition, the Alpine resort had to close to tourists for months at a time while hosting Olympic tests events during the past two winter seasons, costing it $3.2 million in lost revenue each month it was closed, according to Roza Khutor general director Sergei Bachin.

When Potanin’s Interros holding company first committed to the games, “we had no idea what exactly would be required from us,” Bachin said. Now delivering everything on time has become “a matter of honour,” he said. Still, looking back, Bachin said Roza Khutor should not have been so compliant.

Potanin was the first to raise his voice. Last year he said he expected the Russian government to compensate him for at least the $500 million he is spending doing work that he said should have been the government’s responsibility.

Last month, Basic Element, Interros, Gazprom and state-owned Sberbank asked the government for help in covering some of their losses.

Although there has not been an official response to the plea, the government has said in the past that investors bear full responsibility for any losses.

One Russian businessman in charge of an Olympic project was publicly disgraced when he failed to deliver. On a tour of Olympic sites in February, Putin harshly scolded officials for the huge delays and cost overruns in building the ski jump, a project run by real estate developer Akhmed Bilalov, who had once owned 90 per cent of it. The state-controlled Sberbank had taken a controlling stake in 2012 when it was clear the project was in trouble, and Bilalov’s younger brother handed over the remaining 40 per cent stake after Putin’s televised dressing down.

Bilalov was immediately stripped of his position as a vice-president of the Russian Olympic Committee, but Putin still was not done with him. In April, prosecutors charged Bilalov with abuse of office in relation to his work as chairman of a state company that is building ski resorts elsewhere in the Caucasus Mountains of southern Russia.

Facing up to four years in prison if convicted, Bilalov left Russia.