Kings of the Olympic Contracts

In six years, the budget for the Sochi Olympics quadrupled.

An astronomical 1.136 trillion rubles ($36.4 billion) has already been spent on the 2014 Olympics in Sochi. In the 305 days remaining until the opening of the Games, another plus or minus 390 billion rubles will be spent. Mainly companies close to Vladimir Putin are appropriating these billions, claims Boris Nemtsov, one of the opposition leaders. Nemtsov conducted his own investigation and prepared a report which will be published in May.*

Myth of myths: Olympic facilities are being constructed at the expense of private investors. In fact, this winter Olympics in the tropics is being staged either at the expense of the state budget, or state corporations, or joint-stock corporations which are owned or under the control of the government. There are only two major private investors here, businessmen Oleg Deripaska and Vladimir Potanin. In fact, regarding private investments, a rule has operated according to which 70% of the investments are covered by loans from Vneshekonombank (a state corporation), and 30% consist of private investments. By late 2012, however, the authorities had already admitted that virtually all the Olympic facilities without exception were at a loss, and none of them would turn a profit. “The investors began to look more critically at the market risks of implementing the projects. The question of their profitability arose,” was how Vneshekonombank put it. And the interests on the loans from Vneshekonombank increased up to 90%.

Thus, the overall amount of government capital investment in the program to prepare the Games is 96%.

Troika of Champions

The largest investor in construction of Olympic facilities is the state corporation Olimpstroy. It manages 303.9 billion rubles of state budget money. In fact, at first there was talk of 143 billion rubles. But in 2011, the government unexpectedly doubled its contribution to Olimpstroy. In an explanatory memo at the time, the Ministry of Regional Development did not even consider it necessary to explain why the increase in expenses was required, but did indicate that these costs had already been anticipated by the federal budget.

Thus, 20% of the Olympics budget has gone to Olimpstroy. The company is responsible for the construction of stadiums at the Imeret Lowlands, the chief Olympic Village in the whole project, and also for coordinating the general preparation for the Olympics. Since its creation in 2007, Olimpstroy has run through three directors: Semyon Vaynshtok, Viktor Kolodyzhny, and Taymuraz Bolloyev, and now the company is led by Sergei Gaplikov. The personnel shuffling is an indication of the chaos and disorder in the state corporation responsible for the Olympics. At the same time, each personnel shift in the leadership of Olimpstroy has been accompanied by the opening of criminal cases on embezzlement charges, corruption and abuse of official powers: after Bolloyev’s resignation in 2011 alone, 27 criminal cases were launched. Not a single one of them reached trial.

Although back in 2007, it was announced that parliamentary oversight would be established over Olympic construction, Olimpstroy was never included in the list of companies that were supposed to account for their activity to the State Duma. An attempt by the Communist deputies in 2011 to change this failed, although three factions supported this initiative. Deputies from United Russia all voted against it—now we can understand why.

The second largest manager of state budget funds is the Russian Railroad Open Joint-Stock Company (OJSC). It is a 100% state-owned company. The head is Vladimir Yakunin, a friend of Putin’s from the Ozero Cooperative. Russian Railroad is responsible for building the highways and railroads (including the most expensive Olympic project, the highway from Adler to Krasnaya Polyana, which cost more than 200 billion rubles); the reconstruction of the Tuapse-Adler rail line; construction and modernization of the train stations (in Adler, Dagomys, Matsest, Khost and Sochi); and the creation of cargo yards. In all, according to the company’s annual reports, it is about 300 billion rubles, which constitutes about 20% of the Olympic funds, which come out of the state budget and are obtained by raising the rail tariff — that is, at the tax payers’ expense. In 2008 alone, the Olympic tariff hike was 1% on all forms of freight throughout the country.

Completing the troika of leaders are companies affiliated with the Rotenberg brothers, Arkady and Boris, childhood friends of Vladimir Putin. They have built a pipeline, roads, an airport, the Adler Thermal Power Plant, the cargo and sea port and other infrastructure facilities. The overall amount of the budget funds and Gazprom funds which these companies received is about 229 billion rubles — 15% of the entire Olympics budget. That is, every seventh Olympic ruble has been taken by the Rotenbergs.

Taxpayers

The remaining major participants of the Olympic construction projects have appropriated between 4% to 10% of the funds allocated by the budget. On the whole, these companies are partially or completely controlled by the government.

Gazprom OJSC, whose chairman, Alexei Miller, is the friend and former subordinate of Putin at the Mayor’s Office in St. Petersburg, was busy working on four facilities with a total cost of 160 billion rubles. These funds are going to build the Dzhubga-Sochi pipeline, the contract for which was received by Rotenberg (see above); the Adler Thermal Power Plant (also built by Rotenberg); the mountain tourist center and the Laura skiing and biathlon complex with a village.

The administration of the Krasnodar Krai, headed by Alexander Tkachev, infamous for scandals in Kushchevka and Krymsk, is spending on Olympic facilities, according to a general budget of expenses, more than 109 billion rubles (according to figures for January 1, 2013, more than 77.7 billion rubles have already been spent). This concerns investments in the infrastructure of the city of Sochi, including the building of roads, utilities, and housing.

The Olympic budget of Kubanenergo** and the Federal Network Company (FSK)***, according to analysts’ calculations is a minimum of 50 billion rubles. The money is spent on the development of network management, including modernization of the high-voltage transmission lines for delivering energy to Sochi for the period of the Games. Moreover, before the end of October 2013, under a contract with Olimpstroy, FSK will send nine mobile gas turbine electric stations to Sochi to provide the Olympics with electricity.

Finally, there is OJSC Sberbank Rossii, whose board chairman is German Gref, a long-time comrade-at-arms of Putin’s since his St. Petersburg days. Sberbank is building a complex of ski jumps and Mountain Carousel, a sports and tourist resort, the center of which will be Hills City with Olympic media villages. The total amount of capital investment in these projects, according to Vedomosti, rose from 16 to 75-to-80 billion rubles during implementation in 2012.

Besides the aforementioned main clients and contractors of the Olympics, also taking part in the preparation of Sochi to the Games are Inter RAO (modernization of the Sochi Thermal Power Plant); ALROSA; the Office of the President and other state companies and organizations. They make up about 13-15% of the Olympic budget.

Private Persons

Vladimir Potanin’s Interros and subsidiaries of Oleg Deripaska’s Bazel are playing a role in the Olympics as private investors.

Potanin’s Interros has put 68.6 billion rubles into the construction of the Roza Khutor skiing resort. Of these, 55.7 billion rubles are a loan from Vneshekonombank.

In 2007, Oleg Deripaska planned to spend about 45 billion rubles. Today, his investment is in the neighborhood of 40 billion for the Olympic Village on the Imeret Lowlands; the cargo port, and the Sochi airport. Deripaska’s companies also participated in the construction of Kurortny bypass. They also obtained a line of credit from Vneshekonombank [VEB] of 22 billion rubles. In February of this year, it became known that VEB no longer knew what to do with at least one loan handed to Deripaska: the bank gave a 4 billion ruble loan to build the cargo port in 2009, and now, according to information from Kommersant, views this loan as hopeless — the port turned out to be unprofitable.

Favorites

The situation of the participants in the construction of the Olympics differs radically. Potanin and Deripaska are forced to invest their funds and take loans, risking that the projects will never pay for themselves. Sberbank and Gazprom view their participation in the Olympics construction as an encumbrance imposed on them by the president. The Russian Railroad is building at the expense of the state budget and raising tariffs on rail cargo, but Olimpstroy is “appropriating” the government’s billions while remaining a state corporation. As the analysis and calculations of experts has shown, only the Rotenbergs are making fantastic profits on Olympic construction. For example, the yield from the company Stroygazmontazh for 2011 alone rose by a factor of 1.5: from 154 billion to 241.4 billion, and pure profit increased by a factor of 4.5 — from 3.7 billion to 17 billion. Moreover, their private companies receive this profit: accountability by contrast with state corporations and private investors is reduced to zero, since the facilities they are building are transferred to the government’s assets.

The Rotenbergs’ corporations have received 21 contracts for Olympic construction projects costing 229 billion rubles or about $7 billion. This is more than the expenses for the entire Olympics in Vancouver ($6 billion).

Here are some concrete examples.

In 2009, their company Stroygazmontazh received from Gazprom a no-bid contract for building the Dzhubga-Sochi gas pipeline, at a cost of 32.6 billion rubles. A year earlier, however, the state corporation announced the construction of the pipeline for 8-10 billion rubles. For the Rotenbergs, the price nearly quadrupled. That is, exactly as much as the entire budget for the Olympics rose in six years.

The dimensions of the Dzhubga-Sochi gas pipeline are as follows: the diameter is 530 millimeters and the length is 177 kilometers, at a cost of €4.6 million per km. A large portion of the pipeline passed along the bottom of the Black Sea. Therefore, it is natural to take for comparison the gas pipeline Northstream, which was laid along the Baltic Sea bed. Stroygazmontazh took part in its construction as well. Two branches of 1,224 km each in length cost €8.8 billion, that is the cost for one kilometer of one branch is €3.6 million. Thus, the Olympic gas pipeline, even given that its capacity is seven times less than the capacity of one line of Northstream cost €1 million more than a kilometer of the Baltic pipeline. And this is despite the fact that the average cost of the construction of Northstream itself was more than triple that of the European line which caused a storm of outrage in the European press. The cost of the Olympic gas pipeline is five times the average cost of the European. And this is the first Olympic cost record, but not the only one set by the Rotenbergs.

The scandalous competitions for getting the contract to build the Kurortny bypass in Sochi ended with the victory of several investors. Deripaska won the right to build the first line of the bypass, but a contract for the second and third in October 2011 was obtained by Mostotrest OJSC in October 2010. This happened literally several days after it became known that the controlling interest of the company had been acquired by Arkady Rotenberg’s corporations. The total length of the second and third lines of the Kurortny bypass is 10.8 km and the cost of the contract is 59.36 billion rubles. Thus, one km of the Kurortny bypass costs more than 5 billion rubles, or $170 million.

The bypass is a complex of roads, tunnels and bridges. Even if you proceed from the premise that the bypass is a total tunnel (and that is the most expensive item of construction) and also from the average price of a kilometer of tunnel in Europe ($120 million), we see the increase of cost to be one-and-a-half times the European equivalent. But the super-price has not prevented accidents: in March of this year, the tunnel on the third line collapsed, and the ground caved in, along with the building standing above it.

Finally, there is the Adler Thermal Power Plant (TPP). The contract for its construction in 2009 was given to Gazprom to TEK Mosenergo controlled by the Rotenbergs. In 2010, Putin announced that the cost of the construction of Adler TPP would be 28 billion rubles with a capacity of 360 megawatts. Thus, the price of the station calculated per kilowatt is $2,600, which is two or three times higher than the average world price for gas thermal electrical stations.

For Internal Use

The multi-billion costs for the Olympics have already become a topic of widespread public discussion. The Accounts Chamber, required by law to oversee state expenditures, including budget expenditures, prepares such reports quarterly. However, they are all under the stamp “for internal use”. In February 2013, the Accounts Chamber published only information about how Olimpstroy approved an increase of 15.5 million rubles for Olympic facilities. The figure is enormous, of course, but it is only 1% of the Olympics budget. It is impossible to believe that the scale of abuses in the sub-contracting of the Olympic budgets was only 1%.

But even these reports, and also concrete violations allowed during construction, are being hidden by authorities. On 19 February 2013, Dmitry Gudkov, deputy of the State Duma, sent an inquiry to the Accounts Chamber addressed to its chairman, Sergei Stepashin, with a request to provide information about the results of inspections of the Olympic construction sites. On 1 April, the reply came back: materials on the results of inspections conducted have been sent to the State Duma, and we will not send them a second time. Essentially, he was told to go look for them there. Dmitry Gudkov has been looking for them for more than a week.

Meanwhile, an answer will likely never be had about criminal cases No. 326956 and 326493 which were opened in June 2012 by the investigative unit of the Investigative Department of the Internal Affairs Directorate for the city of Sochi on evidence of a crime, under Art. 30, section 3 and Art. 159, section 4 of the RF Criminal Code (embezzlement). The investigation believes that Olimpstroy and its contractor Mostovik Scientific Production Association Limited Liability Corporation have deliberately inflated the cost of the construction of the Olympic buildings in the amount of 2,520,000,000 rubles and 22, 973,830,000 rubles, respectively. According to media reports citing law-enforcement officials, these cases were ready to be sent to the court. But they never reached it.

Now it can be said: one record for the Olympics in Sochi has already been set — the record for sub-contracting and kickbacks, the size of which the Olympic movement apparently has never known.

*This article continues a report from The New Times No. 5 18 February 2013

**A company under the control of MRSK Holding OJSC, the chief shareholder of which is Rosimushchestvo [ Federal Agency for State Property Management]

***The chief shareholder is Rosimushchestvo

Rotenberg Brothers Olympic Construction Projects

Mostotrest

Construction of Sochi central highway Kurortny Ave. Bypass 2, 3 lines 59.36

Sources:

Mostotrest 2011 Annual Report

Sochi-24

Building of section of M-27 Dzhubga-Sochi highway (Adler-Vesyoloye) 5.78

Source: Mostotrest 2010 Annual Report

Construction of central Sochi highway, Kurortny Avenue Bypass, 1st line 5.5