And the Gold Goes To…

Sochi, a small resort town on the Black Sea with only a single mountainous access road, was never going to be the least expensive site to host the Olympic Games.  To Russia’s credit, the infrastructure for the games has been duly constructed – new roads, light rail, power plants to service the guests and stadiums, housing for athletes and spectators, and arenas for the events themselves.  Digging into Russia’s credit, all this has cost 51 billion dollars.

This is more than four times the twelve billion dollars promised by Russian President Vladimir Putin in Sochi’s bid for the Olympics.  The past two Winter Olympics in Vancouver, Canada and Turin, Italy cost 4.1 billion and 1.3 billion respectively.  The second-most expensive Olympic Games have been the Beijing games in 2008 at 43 billion dollars.  But the comparison is less fair here, as the Summer games held in Beijing had 302 events to prepare for, while Sochi has only 98 events.

Image courtesy of World Economic Forum,  © 2009, some rights reserved.
Image courtesy of World Economic Forum, © 2009, some rights reserved.

So just where have all these rubles been going?  Corruption is one answer.  An Olympic official believes that a third of the rubles spent have been stolen, while opposition leaders’ claims run even higher.  The owner of a Russian construction firm now living in London has reported that he was asked to give a twelve percent kickback in exchange for his contract, to artificially inflate costs, and to use particular, well-connected subcontractors.

The importance of connections goes all the way to the top.  Companies belonging to the Rotenberg brothers, childhood friends of President Putin, have won contracts worth 7.4 billion dollars.  The brother of Akmed Bilalov, vice president of the Olympic Committee was in charge of building the ski jumping complex, which promptly went seven times over budget.  This proved too much, President Putin publicly scolded him on television with a sarcastic, “Well done!” during a tour of the facility.  Bilalov was then fired from all posts, and both brothers fled the country, allegedly for medical reasons.

Waste and shoddy building standards are also major problems.  Sochi residents tell horror stories of roads being paved, only to be dug up and repaved at the expense of the state.  Bilalov’s ski slope was riddled with problems.  The site had underground caverns, but none of the necessary geologic tests were carried out.  Instead trees that stabilized the landscape were cleared, resulting in a landslide that swept away the ski jump, burying a tractor and parts of the surrounding forests.  Warnings that a recently built cargo port for construction materials was susceptible to flooding were ignored.  Millions of dollars’ worth of equipment was submerged after a strong storm.

Some of the overruns stem from the Putin administration’s intense desire to turn this Winter Olympics into a showcase of just how far the country has come since the turbulent 1990s.  Sometimes these prestige projects begin to seem ridiculous.  For example, the $6 billion construction of an artificial archipelago in the shape of Russia and the last minute addition of a roof to the main stadium, which left the building team scrambling to find the necessary steel.

Russia’s administration, in response to concerns about the immense costs, said that most of the expenditure on Sochi would have been spent on investment in the region anyway.  However, it is unlikely that projects like a thirty-one mile, $8.7 billion railway over the surrounding mountains would have been completed without the impetus of the Sochi Olympics.  The government has also begun to take a closer look at how money is being spent – the Audit Chamber, Russia’s budgetary oversight committee, identified $506 million as having been misspent.  However, its report did not identify any specific wrongdoers.  This, and Putin’s chewing out of Bilalov, is more likely done to assuage public opinion than to offer genuine change.

Some of the sum spent on the Sochi games has hopefully been recouped by international spectators’ spending.  Unfortunately for Russia, many have stayed away – 70% of ticket sales through January were to Russians.  Objections range from Russia’s hostility to gays to the high cost of lodging and airfare.

Could the massive outlay for Sochi turn out to be a good deal in the long run?  Plans have already been drawn up for hosting the Russian Grand Prix in the city after the Olympics.   The resort city has certainly experienced a boost in global name recognition, and the improved regional and international transportation can only help it grow.  Being able to zoom down the slopes once ridden by the greatest athletes in the world is a powerful draw.  Yet the Olympics have proven risks for Russian tourism as well; a bungled ceremony (four Olympic rings lit rather than five), infrastructure foul-ups (terrible hotels), and stray dogs everywhere.  Even in the best case scenario, where Sochi’s costly residences sell more than ever before, regional growth increases, billions of rubles will have been wasted.  However, Putin is more concerned with international prestige than making a profit financially – with the massive price tag to show for it.

It’s a testament to Russian oil and natural gas wealth that despite spending 51 billion dollars on the Olympics, the country is still in decent financial shape.  The budget deficit for 2012 was only around .1% of GDP, and the overall national debt just 11% of GDP.  The country has a foreign reserve of $500 billion, which could serve as a buffer if Russia is struck with a sudden economic downturn.  But Russia’s economic issues are more insidious; the shale gas boom in America has lowered the prices of its main exports.  Productivity gains are weak, and growth has slowed to a paltry 1.5% a year.  Russia is in no shape to indulge in another spending bonanza.  The country should be ready for one regardless; Russia is hosting the World Cup in 2018.

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