Oligarchs unload Sochi Olympics assets to recoup investment

Published February 5, 2015 11:15AM (EST)

SOCHI, Russia (AP) — The ski jump sits shrouded in mist, its coat of snow undisturbed by any athletes hurtling down to take off into the air.

A year ago, the jump bustled with activity at the Sochi Olympics. But it made unwanted history as well, becoming a symbol of how some of the plans for President Vladimir Putin's $51 billion Winter Games went terribly wrong.

The cost of the facility soared from $40 million to nearly $300 million — an overrun that caused the businessman involved to flee a corruption investigation.

Russia had vowed to pay for what became the most expensive Olympics of all time by getting super-rich private investors to take the cost from the state. Instead, as the first anniversary of the games approaches, at least two of those oligarchs are quietly dumping their toxic assets on the state — forcing taxpayers to pick up the bill.

For the oligarchs, it's a way to recoup billions of dollars as they struggle in an economy battered by plunging oil prices and Western sanctions. For Putin's critics, it's evidence of the crony capitalism that shields powerful businessmen from economic pain.

Two key investors have unloaded properties built for the Olympics at a combined cost of $3 billion, a spokesman to Russia's deputy prime minister confirmed to The Associated Press. The issue is a major headache for Putin, who needs to pay off the oligarchs to keep them happy, while preventing the deals from triggering popular unrest.

The risks for Putin are magnified as the country enters recession and rainy-day funds dwindle, even as Russia prepares for staging the 2018 World Cup.

In addition, other oligarchs may now be waiting for the right moment to demand their reward or compensation for taking on Sochi projects.

"They don't have any good options here," Sam Greene, director of King's Russia Institute at King's College London, said of the Kremlin. "They either have to take the public hit, or they have to take the opposition of the oligarchs."

For now, Greene said a tacit understanding appears to be emerging between Putin and the oligarchs.

"The government will help the titans of the economy," he said. "In return for that, they remain quiet, they remain loyal."

The ski jump and nearby ski resort became a notorious example of Sochi's excesses in 2013 when Putin visited the construction site and dressed down officials for allowing tycoon Akhmed Bilalov to incur massive cost overruns: "Well done!" Putin burst out with sarcasm. "You're doing a good job!"

Bilalov fled Russia days later, after prosecutors launched a corruption investigation into the ballooning costs. His case has not yet reached court, and he remains in exile in an unknown country.

Sberbank, which is Russia's largest bank and is run by close Putin ally German Gref, stepped in to buy the ski jump and resort at the government's request. It took out a $1.7 billion loan to fund more than 70 percent of the project. Today, the project loses money and the bank remains saddled with the debt.

For Sberbank, the solution has been to obtain Kremlin authorization to swap its Olympic project, which cost nearly $2.7 billion at the time, for the Sochi Games' media center, owned by the regional government. Ilya Dzhus, a spokesman for Deputy Prime Minister Dmitry Kozak, confirmed the deal to the AP.

It's not clear how much the media center would fetch if sold on the market. But the key is that by giving the ski jump and the ski resort to the regional government, Sberbank is washing its hands of the loan. Sberbank, which has the state as its majority stakeholder, did not respond to calls and emails seeking comment.

"Giving away assets ... is a way to cut costs in a crisis situation," Mikhail Kasyanov, Russia's prime minister from 2000-2004, said in an interview. According to Kasyanov, the thinking goes: "I'd rather lose what I have invested, my own 15-30 percent, but I would not have to pay out the rest in loans."

In another Sochi project, Viktor Vekselberg invested half a billion dollars to build two hotels next to the Olympic Park.

With the Sochi hotel market saturated, Vekselberg decided to hand over one hotel to the state. That amounts to dumping the $450 million loan he took out from VEB bank — which covered 90 percent of the cost of the hotels — onto the state as well. Vekselberg's investment vehicle Renova has not announced the deal, and its representative was unavailable for comment, but Dzhus, the government spokesman, confirmed the sale.

Meanwhile, residents of Sochi have seen few economic benefits from hosting the Olympics. Promises that the games would solve problems such as poor transportation and electricity remain unfulfilled.

A much-touted $8.5 billion rail link between the Black Sea coast and the mountains is all but suspended, due to a dispute over who will pay for maintenance.

The legacy of Sochi's busted budget is causing concern about Russia's ability to pull off the World Cup.

Unlike Sochi, the World Cup will largely be funded directly by the Kremlin, with only a few oligarchs in the mix. A plunging ruble also means the price of building materials will soar, causing the World Cup to far exceed its original budget of $20 billion.

Soccer stadiums are only a tiny part of overall World Cup construction. Eleven host cities will require new highways, airport expansions, train links, metro lines and hotels.

Despite uncertainty, a recent opinion poll conducted in Russia by the AP and NORC Center for Public Affairs Research showed that half the respondents expect the World Cup to be good for the economy. The survey of 2,008 Russian adults was conducted between Nov. 22 and Dec. 7, 2014; it had a margin of error of plus or minus 2.4 percentage points.

And despite Sochi's problems, the poll also found that 51 percent believe the Olympics were an economic boon.

By Nataliya Vasilyeva

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