How Sochi 2014 Became the Most Expensive Olympics Ever

How Sochi 2014 Became the Most Expensive Olympics Ever

Vladimir Putin
Vladimir Putin - http://commons.wikimedia.org/wiki/File:Vladimir_Putin_12020.jpg

Sochi’s spectacular Winter Olympics is now all but over, but was it worth the $52 billion price tag?  We take a closer look at the extraordinary costs associated with the event, where the money came from, and who benefited the most.

The most expensive Olympics in history

The Sochi Winter Games was the most expensive Olympics ever, despite having fewer events than the Summer Olympics (98 vs. 302), fewer athletes (2,500 vs. 11,000), and fewer venues (15 vs. 40). The 2-week event was estimated to cost $52 billion, smashing the previous record held by China for the 2008 Beijing Olympics ($40 billion) – which had three times the events.

So how did Sochi’s budget for the Olympics escalate to such proportions? Locals blame inflated prices for labour and materials, with approximately 95,000 workers brought in to help with construction projects. Other critics attribute much of the cost to corruption within the Russian construction industry.

Where did the money go?

Opposition figures, Leonid Martynyuk and Boris Nemtsov, claimed in a report released in May 2013 that up to $30 billion of the Olympic Games budget had gone missing in “kickbacks and embezzlement” to close associates of Russian President, Vladimir Putin.

www.kremlin.ru - Vladimir Putin's interview about Olympics in Sochi (2014-01-17) 10

While other countries to have hosted the Olympics have overwhelmingly used public funds to pay for the construction of new venues and needed infrastructure, Russia assigned more than half of these projects to giant firms, either directly owned by the government, or run by billionaires on close terms with the Kremlin. Sochi may have been trying to avoid past mistakes by cities like Montreal, whose 1976 Olympics was almost 100 percent municipally funded, racking up $1 billion in debt, and taking residents until 2006 to pay off.

Despite Russia’s best efforts to keep costs in check, the price tag for the Sochi Games sky rocketed. In their report, Martynyuk and Nemtsov compared the costs of Olympic construction in Sochi with several previous Olympic games, and found that building anything in Russia typically cost about three times more than a similar road, stadium, or athletic facility anywhere else in the world.

A successful future in Russia rests on an active involvement in Sochi

Despite the fact that most of Sochi’s Olympic projects are not profitable, plenty of private companies stepped forward to help with construction.

Mikhail Kasyanov, a former prime minister under Putin, described the participation from business magnates 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,” Mr Kasyanov, now an opposition leader, told The Associated Press. 

Who benefited?

Maintaining good relations with the Kremlin does have its advantages.

According Nemtsov and Martynyuk’s report, two of the most likely people to have benefited from the Sochi Games are brothers Arkady and Boris Rotenberg, childhood friends of Putin’s from St. Petersburg who have become wealthy industrialists over the past decade. According to The Times, they received 21 Olympic contracts, worth around $7 billion (14 percent of all spending for the Sochi Games). 

One of these contracts involved the Mostotrest company, of which Arkady Rotenberg holds nearly a 39 percent share. Mostotrest was commissioned to build nearly all of the highways in the Sochi area, including a $1.6 billion bypass, and tunnels, bridges and railroads for a total of at least $3.4 billion.

Another one of the Rotenbergs’ companies, Stroygazmontazh, was commissioned by Gazprom to build a 177-kilometre (110-mile) pipeline from Dzhugba to Sochi. The total contract amounted to more than €4 million ($5.5 million) per kilometre – much higher than the European average.

In another example, Interros, headed by Vladimir Putin’s good friend Vladimir Potanin, was commissioned to build Rosa Khutor, which hosted several alpine events during the Games. Potanin said he decided to invest while on a skiing trip with Putin in Austria.

Reigning in the corruption

In a nation that ranks 127 out of 177 on the Corruption Perceptions Index, investigators made some efforts to try and combat the corruption.

In June 2012, charges were filed against contractors building the main Fisht Olympic Stadium, where the opening and closing ceremonies took place, and the bobsled course. The suits alleged that the contractors inflated costs by filing false or unjustified project estimates. The alleged losses to the state budget totalled nearly $245 million.

In February 2013, Putin himself fired Akhmed Bilalov, vice president of the Russian Olympic Committee, for cost overruns and delays with the RusSki Gorki Olympic ski jump complex, which was seven times over budget. 

“It would be funny, if it wasn’t happening with our money.”

Although many Olympic contracts were awarded to private companies, around 70 percent of their investment was still financed in credit by Vnesheconombank, or VEB, a state-owned development bank. Large state-owned institutions have increased their domination in the Russian financial sector, outweighing domestic private and foreign banks.

“VEB is used by the government as a second budget,” says Sergei Aleksashenko, a former deputy chair of Russia’s Central Bank. The state gives funds to the bank, which then lends as it chooses. “The position of the state is that VEB money is not really budget money, but of course it is,” Aleksashenko said.

By law, the supervisory board of the bank is headed by Russia’s prime minister—who at the time when many Sochi-related loans were handed out was Putin. VEB is believed to have lent over $7.4 billion to finance venues and apartments in the Caucasus Mountains and along Sochi’s seacoast.

Basic Element, which oversaw around $2.4 billion of Olympic-related projects, used about $1 billion of loans from VEB. Among them: a $778 million Olympic athletes’ village; a $186 million cargo port; and a $440 million overhaul of Sochi International Airport.

Other loan recipients have included companies controlled by Vladimir Potanin; Alexey Miller, CEO of state-controlled gas producer Gazprom; and German Gref, CEO of state-controlled OAO Sberbank, Russia’s largest bank.

However, sky rocketing costs and restrictions on commercial activities have meant these companies risk losses on their investments unless the government helps. In March 2013, they called for extended tax breaks and subsidies on the interest payments they owe VEB for Sochi assets. In November 2013, The Moscow Times reported that 9 out of 20 loans given by VEB for the Winter Olympics needed to be restructured. The nine “problematic” loans account for 79 percent of the total volume of Olympic loans. A VEB official estimates the bank’s losses to be around 175 billion rubles (US$5.13 billion). 

Security doesn’t come cheap

One thing that certainly contributed to Sochi’s $52 billion price tag was the cost of security. With terrorist attacks and high-profile public protests making headlines in the lead up to the event, around 40,000 security personnel were called in for the Games. The cost was estimated to be around $2 billion – that’s double the security forces of the 2012 London Olympics, and double the cost of security for the 2010 Vancouver Olympics.

Despite the controversy that has surrounded the event, Sochi’s Olympic Games can be heralded a success. We congratulate all the athletes, coaches, staff, and volunteers involved, and hope that Sochi’s presence will be well remembered in years to come.