The sparkling-new Roza Khutor ski resort, host to the Alpine events at the Sochi Olympics, looks magnificent on television, its neatly groomed runs plunging steeply between the forbidding peaks of the Caucasus Mountains. But Vladimir Potanin, the Russian billionaire who built and owns Roza Khutor, can look on with only mixed satisfaction. He has already made clear that once the Games are over, the $2.5 billion complex will be financially distressed.
Coverage of Sochis inordinate costs the priciest Olympics in history by far, with in excess of $50 billion expended has focused on the Russian states extravagance and the wealth of contracts doled out to old friends of Vladimir Putin, such as his onetime judo partner, energy and steel magnate Arkady Rotenberg. But Potanin, the CEO of Moscow-headquartered mining giant Norilsk Nickel, whose net worth according to Forbes is $14.3 billion, is just one leading oligarch who took on key Sochi-related projects in his own name, if not exactly on his own dime.
Aside from Roza Khutor, Potanin invested a reported 13.8 billion rubles ($389 million) in the Russian International Olympic University, which is intended to become a global center of sports business education for former athletes. Oleg Deripaska, majority owner and CEO of Moscow-headquartered aluminum producer United Co. Rusal and, as of March 2013, having a personal net worth of $8.5 billion, spent via his conglomerate, Basic Element, a combined 39.5 billion rubles providing the Olympic Village, refurbishing Sochis airport and building a new seaport to take delivery of heavy Olympic cargoes. Viktor Vekselberg, whose $15 billion fortune includes a minority stake in Rusal and $1.5 billion he received in 2013 for his share in oil company TNK-BP, sank 8 billion rubles into a five-star hotel in downtown Sochi.
What all these projects have in common is that the backers received most of their financing from the Russian state development bank Vnesheconombank (VEB) and they are expected to have trouble paying back their loans. We consider that [Roza Khutor] will be a commercially successful project under the condition that we get a certain measure of support from the state, at least during the first stages after the Olympics, Potanin told Russian news web site gazeta.ru during the run-up to Sochi. In all, 190 billion of the 240 billion rubles VEB loaned for Sochi-related projects may have to be restructured, according to a November report in financial newspaper Vedomosti. So while skiers, snowboarders and skaters have been vying for the gold in front of the cameras, behind the scenes three billionaires are quietly facing off with the Kremlin on how to keep their signature Olympic projects afloat once everyone goes home.
To the oligarchs who conceived them, the projects were a handy way to combine patriotism and profit by providing Sochi with Olympics infrastructure and post-Games luxury tourism facilities. Potanin bragged at one point that while skiing with Putin in Austria in 2002, he had dreamed up Roza Khutor as a rival to Alpine resorts like Kitzbühel and Chamonix, but with the wild beauty of southwestern Russia. When the International Olympic Committee (IOC) gave the nod to Sochi in 2007, an open spigot of state financing, with no interest due until the Olympics were over, turned this fantasy into reality. VEB bankrolled at least 85 percent of all the oligarchs ventures, according to Vedomosti and the Anti-Corruption Foundation, a research project organized by Russian blogger and opposition politician Alexei Navalny.
But the private sector tycoons became infected by the grandiose spirit that saw Russias total Olympic outlays balloon sevenfold from the $7 billion originally set aside by Putin. The Kremlin easily surpassed the previous record of $40 billion that China spent on the 2008 Beijing Summer Games, even though that event involved many more sports and competitors.
The budget for Roza Khutor started out at $800 million, but Potanin and the government decided to add a mountain Olympic village at a cost of an additional $1 billion. Glavstroy, a subsidiary of Deripaskas holding company, spent $256,000 per bed at the main Olympic Village, according to the Anti-Corruption Foundation, compared with $45,000 ($58,272, when adjusted for inflation) for the 2002 Winter Olympics in Salt Lake City, Utah, which were organized by Mitt Romney, the 2012 Republican presidential candidate. Navalnys group calculated that Deripaska would have to resell the units as condos at prices comparable to prime Moscow real estate to recoup his 22.3 billion ruble investment.
In their own defense, the billionaires have pointed to requirements from both Moscow and the IOC that added significant costs. During a pre-Olympic inspection in December by Prime Minister Dmitry Medvedev, Glavstroys boss told the premier in front of reporters that extra security demands tacked an unplanned 3 billion rubles onto his budget, and that the Kremlin ordered twice as many apartments as necessary for Olympic officials. An aide to Potanin told Vedomosti that IOC disabled-accessibility regulations expanded costs at Roza Khutor by 14 billion rubles. Even with VEB delaying interest payments until after the Games, interest has been accruing all the while, reportedly at a commercial rate of 12 percent.
The states evolving response to the oligarchs Sochi problems mixes leniency with severity. At the close of Medvedevs December visit, Dmitry Kozak, the deputy prime minister overseeing Olympic preparations, announced that the interest holiday on VEB loans would be extended until January 2016 (payments were originally scheduled to start in the second quarter of 2014). We took this decision to give the investors the possibility of working with VEB and watching their cash flows, Kozak told journalists.
But the government has so far resisted the oligarchs push for longer-term tax breaks on the Sochi investments. And in October 2012 VEB sued the smallest of Deripaskas Olympic projects, the cargo port company Port Sochi Imeretinsky, to recover 5 billion rubles (for a loan in 2009 of 3.8 billion rubles, plus accrued interest). Deripaskas holding company, Basic Element, countersued, claiming the Games organizers had sent most of their planned seaborne cargoes by road or rail instead, so the port had no means to pay back the credits. Deripaska intends to convert the cargo port into a yacht marina, to go with the developments luxury condos, but he has said he needs an additional 3 billion rubles to finance the transformation.
It would be embarrassing and likely counterproductive for the state bank to foreclose on marquee projects connected to the grandiose Games, Kremlin watchers say. So VEB will likely continue its flexible approach toward the indebted oligarchs. Yet with Russias economic growth slowing to 1.3 percent in 2013, according to Finance Ministry figures, and budgets growing accordingly tighter, Kremlin largesse to overspending billionaires will have its limits. The 2014 Winter Games might be winding down this weekend, but the Sochi financial games are just beginning.
For more about investment in the 2014 Sochi Winter Olympics, see the article U.S. Investors Press Olympic Sponsors on Russian Antigay Stance.