RUSSIA

POWER DRIVE: , here driving a snowmobile at ’s ski resort of Krasnaya Polyana near in early 2010, sees the Olympics as a chance for Russia to reassert itself on the world stage. /RIA Novosti/Kremlin/Dmitry Astakhov Putin’s $50 billion Olympic gamble As the price tag soars for the winter games in Russia, wealthy private investors are pushing back over costs

By Thomas Grove SOCHI, February 21, 2013

SPECIAL REPORT 1 RUSSIA Putin’s $50 billion Olympic gamble

bove the Black Sea city of Sochi, one The bargaining power is said Bower. The Russian president may of Russia’s richest men is spending with until 2014, hope to recoup a return on the investment Abillions of roubles to turn a patch because they can come to the later. Whether the oligarchs will as well is of mountainside into a global showpiece. state for money or threaten that far from clear. Metals magnate Vladimir Potanin has paid the construction won’t get done “All (rises in costs) there are justified. for new buildings, new lifts and hundreds It is not possible to calculate everything of snow canons in the hope of transforming in time. in advance. New demands arise, includ- slopes not far from sub-tropical Sochi into Bruce Bower ing those from the International Olympic a world-class ski resort. Verno Capital Committee, which require additional costs. Like most of the plans to host the There’s nothing extraordinary about it,” Winter Olympic Games next year, Russia’s said Putin’s spokesman, Dmitry Peskov. ambitions for the ski village and other “Regarding possible disputes (between venues are outsized in scale and ambition. investors and developers), they are inevi- Total investment to make the sleepy region table when large-scale projects like this one fit to welcome thousands of competitors are being developed.” and the world’s media is expected to exceed A ‘SOCIAL PROJECT’ $50 billion, according to Russia’s interna- tional RIA Novosti. In the eyes of many Russians, it was Putin’s That would make it the most expen- BIG FIGURES: Vladimir Potanin, left, and Oleg barnstorming style that won the country sive games, summer or winter, ever staged. Deripaska are unhappy with escalating costs and the right to stage the 2014 games. In 2007 The 2010 Winter Olympics in Vancouver, lack of support from . REUTERS/Denis Putin flew to Guatemala where he wooed Canada, cost a mere $3.6 billion, according Sinyakov (L) REUTERS/Mick Tsikas (R) the International Olympic Committee in a to an estimate by PricewaterhouseCoopers, speech in English, French and Spanish. He though others put the bill closer to $6 billion. presented an ambitious plan of public and While Russia’s President Vladimir Putin bank Vnesheconombank of up to $750 private partnerships to create the necessary has not flinched at Sochi’s eye-popping ex- million. Olympic infrastructure from scratch in what pense, some private investors and wealthy “We are carrying out talks with the was one of Russia’s least developed areas. oligarchs, recruited by Putin to help foot government on the compensation of a Russia’s wealthy were always going to the bill, are chafing at how much they are part of these expenditures through inter- be part of the plan, said Bower, adding that expected to do. In a rare challenge to the est rate subsidies,” said Potanin, speaking to they were encouraged by the prospect of Kremlin they are demanding that the state Reuters. “Many see this as a form of govern- gaining other high-profile state contracts help with the rising costs. ment support. But actually it is only com- in the future. Though precise figures on who is paying pensation for expenditures, which are not Infrastructure is expected to remain for what in Sochi are hard to obtain, RIA characteristic of ... commercial projects.” a growing market as Moscow and re- Novosti says private investors have spent , another billionaire oli- gional governments look to replace crum- nearly $25 billion. Federal and regional garch, has similar complaints, reflecting the bling Soviet-era facilities for the football budgets have accounted for some $13 bil- complex, symbiotic relationship Putin has World Cup to be staged in Russia in 2018. lion of the costs incurred to date, according with Russia’s rich elite. Morgan Stanley says infrastructure spend- to Deputy Prime Minister . “The bargaining power is with the oli- ing is expected to account for 7 percent of Potanin, whose estimated fortune of garchs until 2014, because they can come Russia’s rising GDP at least until 2018. $14.5 billion makes him Russia’s fourth to the state for money or threaten that the Many Russia watchers believe the coun- richest man, according to Forbes, is com- construction won’t get done in time,” said try’s most powerful businessmen keep their plaining of at least $530 million of extra Bruce Bower, a partner at the investment wealth at the pleasure of the Kremlin. For work his company was required to do. Now firm Verno Capital, who has lived in Russia Sochi, many of the biggest ventures were he wants the government to boost its con- since 2005. split up between Russia’s oligarchs, most tribution to his projects by cutting interest Putin wants the Games to project a pos- of whom, like Potanin and Deripaska, are rates on his debt, which includes money itive image of Russia to the world and may close to Putin. borrowed through a line of credit with state endure the rising bills with a fixed smile, “It wasn’t a question of either of them

SPECIAL REPORT 2 RUSSIA Putin’s $50 billion Olympic gamble

SLIPPERY SLOPE: Snowboarders practice in the half pipe at Extreme Park, a Sochi venue, this month. REUTERS/Kai Pfaffenbach

making business decisions to join in with of a number of roads and traffic junctions. Olympics preparation. They were essen- Deripaska’s projects include the $760 tially told it would be a good idea for them million Olympic village, which will host to help out,” said one contractor. Another $50 billion 3,000 people in 47 buildings, and a 42-km source, who bid for a contract in Sochi but road around the venues. He is also spend- Estimate of total investment in was eliminated on a technicality, said that Olympic-related infrastructure ing nearly $300 million to expand Sochi the Kremlin had suggested its continued International Airport, according to his support for their business ventures depend- website. The construction of a new termi- ed on oligarchs getting involved. biggest nickel producer. nal will allow the airport to handle 2,500 Deripaska’s construction firm Basic Deripaska, a former physicist who came passengers per hour - up from a previous Element declined to comment on whether to control , the world’s largest alu- capacity of 900 passengers per hour. his participation in the Olympics was a re- minium company, will hold a 27.8 percent LOYAL SHOWING sult of political pressure. Potanin has said stake in . the idea was born after he skiied with Putin. In Sochi, Potanin’s projects include ho- In general, Russia’s super-rich elite dare not But in an interview on Ren TV he said his tels and chalets as well as the ski slopes at defy Putin, according to Maria Lipman, participation in the Games was altruistic. the resort of Rosa Khutor in the nearby an analyst at think tank Carnegie Moscow “I look at this project like a regular social mountains. Another investor is Arkady Centre. “They may be more demanding be- project coming from a person who has the Rotenburg, a construction billionaire who hind the scenes, but for now the show of ability to realise such a project for the coun- in his youth was a judo sparring partner loyalty is all part of the informal deals that try,” he said. of Putin. Stroygazmontazh, the pipeline Russia is based on,” she said. Well-connected Russians grew rich in company that he owns, has built a 177-km But there can be occasional discord. the chaotic years after the fall of the Soviet (110-mile) on and off-shore gas pipeline The soaring costs of Olympic projects have Union by acquiring some of the country’s around Sochi. driven officials at Deripaska’s company most valuable assets at well below market Rotenburg also has a stake in Russia’s Transstroy to pursue an arbitration battle values. Potanin made his first fortune as largest bridge builder, Mostotrest, with Olympstroy, the state-owned compa- a banker handling high-profile state ac- through investment vehicle Marco Polo ny coordinating construction of the venues. counts. Under a current deal, he will own Investments, where he is a main share- Transstroy says costs crept up after it had a 30.3 percent share in the former state- holder. Mostotrest is carrying out extensive taken on the project. owned company Norilsk Nickel, the world’s work in Sochi, including the construction “At the beginning of the project a

SPECIAL REPORT 3 RUSSIA Putin’s $50 billion Olympic gamble

UNDER CONSTRUCTION: Builders are hard at work to turn Moscow’s vision for Sochi, top Sochi’s blizzard of money right, into reality. A photo taken in December The 2014 Winter Games in Sochi will be the most expensive Olympics shows mountains, but little snow. REUTERS/GK ever. Russia is spending $50 billion to prepare venues on the Black Sea Olympstroy/Handout coast and in nearby mountains.

Belarus RUSSIA RUSSIA number of errors and inaccuracies were Mountain allowed, which had to be worked out dur- Ukraine cluster Kazakhstan ing construction,” the company said in a statement. Sochi Deripaska, whose wealth is estimated at Sochi Black Black Sea Sea $8.8 billion, wants to recover $50 million of un- oa Georgia expected costs, according to court documents. Coastal cluster GEORGIA “We want to work out officially in the Turkey 10 km courts the difference between the volume of work in the initial project phase, which Click here to view the interactive was put up for bidding, and the project that was changed by the customer during the employing large numbers of sub-contractors was not an issue. process of construction,” the company said. the risk of hidden or inflated expenses goes “We are not running into those kinds of The first hearing at the Moscow up. On a visit to Sochi earlier this month, problems in construction of our resort Rosa Arbitration Court is scheduled for today. Putin said that corruption pushes up prices, Khutor,” he said. At the same time Olympstroy has filed though he did not point the finger at any Some Sochi contractors take a similar a lawsuit against Transstroy, claiming, ac- particular group. “The main thing is that no view to Putin on the damaging effect of cording to investigators quoted by news- one steals anything, so there are no unex- corruption. One contractor said that in- paper Kommersant, that Deripaska’s com- plained increases in costs,” he was quoted as flated price tags are sometimes caused by pany broke a contract by using cheap filling saying by Russian news agencies. kickbacks and can often lead to shoddy material to support the ground under con- A spokeswoman for Deripaska’s building jobs. struction sites. Transstroy said his companies were not Officially the government says Olympic “We believe that the criminal case opened aware of any corruption in their con- preparations are on time. Kozak, the deputy by Olympstroy is only the result of a misun- struction projects. A spokeswoman for prime minister, chaired a meeting earlier derstanding, nothing more,” said Transstroy Deripaska himself declined to answer this month with government officials re- spokeswoman Elena Guryanova. questions. Potanin did comment, but said sponsible for the games and said construc- Contractors say cost overruns are often in his interview on Ren TV that he had tion had reached its final phase. caused by the byzantine structure of deals. By been dealt with fairly and that corruption “I want to remind you about something that

SPECIAL REPORT 4 RUSSIA Putin’s $50 billion Olympic gamble

we have spoken about more than once - that the Olympics should begin on Feb. 7, 2014, exactly at 20:00, and not a minute later,” he said in a statement on the government’s website. But locals complain of power cuts, and building is still underway at many of the Olympic venues. Numerous hotels have yet to be finished along the city’s coastline, where 75,000 guests are expected. Though Putin declared during a visit GIANT LEAP: Austrian Daniela Iraschko during the women’s Sochi Ski Jumping World Cup last to Sochi this month that the Olympic fa- December. REUTERS/Michael Dalder cilities would be ready on time, he also dismissed the vice-’s Olympic Committee, Akhmed Bilalov, af- million Russian infrastructure fund for instead to go to more cosmopolitan and so- ter learning that the ski-jumping venue was Renaissance Asset Managers and believes phisticated European capitals, the Alps or behind schedule and over-budget. that what is really needed are reforms to the Mediterranean. Bilalov declined to be interviewed. protect investors. Locals in Sochi say that chemicals used Nor has everything has gone smoothly Potanin told Reuters last year that he in Olympic construction have polluted the for Olympstroy, which has had four chiefs wanted to sell the hotels he was building water and damaged the prospect of the city since it was created in 2007. before the games to maximise his return, turning into a major Russian tourist des- Comparing Sochi’s price tag with that but felt pressure to hold onto them until tination any time soon. A spokeswoman of previous Games, , a for- later without specificying where that pres- for Deripaska’s Transstroy said the beaches mer deputy prime minister of Russia and sure came from. are still popular among residents, and that current opposition leader, believes those in- “It is understandable that they will be tourists are not being discouraged by envi- volved in the Olympics have stolen billions in demand during the Olympics, but after ronmental damage. earmarked for construction. that everything will diminish in about three But some visitors disagree. to four years,” he said. “You don’t want to swim in the water here. GRAND PRIX HOPE Potanin is likely to continue running the It’s not safe,” said Luisa Kamcharova, a tourist For the president the pay-off for all this Rosa Khutor ski resort after the Olympics. from Moscow visiting Sochi recently. “Even comes partly in projecting an image of a The resort said it received 40,000 visitors in the locals have stopped swimming here.” mighty Russia to voters and the wider world. the 2010-11 season, and more than 100,000 The Sochi games will begin with the longest in 2011-12. Its daily capacity is expected Additional reporting by Polina Devitt and torch relay ever staged for a winter games - to rise to 10,500 visitors by the Olympics Alexei Anishchuk in Moscow, Editing By over 123 days the torch will travel through from a current 6,000, but a spokeswoman Richard Woods and Simon Robinson 2,900 towns across all Russia’s regions before for the company said there were no avail- arriving for the opening ceremony. able forecasts of likely future numbers. FOR MORE INFORMATION Beyond that, Putin is also hoping to Some of Deripaska’s investments may Thomas Grove, Moscow Correspondent stage a Formula I grand prix at Sochi and also struggle to generate revenue after the [email protected] to use the facilities for the soccer World Games. Sochi airport and other airports Richard Woods, Enterprise and Cup in 2018. But analysts say it is unclear in the region may deliver him profits, said Investigations, EMEA whether or not the Olympics and later Tchertchian. But his plans to invest $50-100 [email protected] events will make the city a lasting success. million to turn a major new port near Sochi Simon Robinson, Enterprise Editor, “I think in terms of using (the Olympic into a marina are less certain to make money. Europe, Middle East and Africa venues) as a skiing resort, it will be a suc- Many Russians say the country’s rich [email protected] cess, but the Grand Prix - I’m not so sure,” and powerful are unlikely to frequent Michael Williams, Global Enterprise Editor said Takouhi Tchertchian, who runs a $110 the resort after the Olympics, preferring [email protected]

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SPECIAL REPORT 5