About the Sochi Bacchanalia in the Western Press

Author: Jon Hellevig February 3, 2014
 

The author Jon Hellevig is the Managing Partner of Awara Group Llc and observer of Russian economy and social development

The Western press is once again brimming with a fresh wave of anti-Sochi slander. This round is dedicated to the supposed skyrocketing costs of organizing the Olympic Games, or the "bacchanalia of waste and corruption" as Steven Lee Myers of the New York Times so poetically expresses it 1. Fresh ammunition was provided by a new propaganda report concocted by the anti-Putin darling of the Western press, Alexey Navalny 2. Navalny is one of 10 to 20 Russian figures who, depending on the interviewer, is being called the "leader of the Russian opposition." Navalny's report is actually nothing less than a rehash of a report that Boris Nemtsov, another of the 10 or so "opposition leaders" (a lot of opposition around here), already published a half a year ago 3. Navalny is adept at finding plagiarism in other people's work, so let's see if Nemtsov will accuse Navalny of using his words and ideas without giving credit.

Myers from the NYT accepts the Navalny/Nemtsov claim that the cost of organizing the event amounts to 48 billion USD (Nemtsov's figure was 51 billion). However, Myers fails to make a distinction between the costs of organizing of the event and the concomitant heavy investment in Sochi's infrastructure. Nevertheless, Myers correctly relates that "President Vladimir V. Putin stoked the debate when he recently told a group of television anchors that Russia had spent only 214 billion rubles, or roughly $7 billion, to erect the sporting venues for the games. And less than half of that, he maintained, was government spending." Myers was right in quoting Putin that was the price for 'erecting sporting venues' (add to that also other running costs for hosting the guests etc.), but he then goes on to confuse investments in the urban infrastructure of Sochi with costs for "erecting sporting venues."

Putin in Sotchi

The cost of organizing the games indeed equals roughly 7 billion dollars, which is about the same amount that Vancouver spent on the previous winter Olympics. But at the same time, the Russian government, state companies and private investors have made gigantic investments in the permanent infrastructure, adding up to about 40-45 billion dollars to the bill. It is, of course, a deliberate tactic on the part of the "opposition leaders" and an unrestrained press, who disseminate propaganda that misleads the public into thinking these infrastructure investments form part of the "organizing costs". These concoctions create the impression that "Sochi has turned into an unaffordable personal vanity project, intended to cement Mr. Putin's legacy," as Mr. Myers puts it. The New York Times journalist persists with this lie, although his preceding discussion demonstrates that he has in fact understood the difference.

The Olympics could well have gone ahead without any additional investment in infrastructure, but the Putin government wanted to seize this Olympic opportunity to motivate all the players in the project to develop and put Sochi firmly on the map as a first class resort of international importance.

Being a regular visitor to Sochi, I am extremely impressed with the results. With 40 billion dollars, Sochi has been transformed into a modern holiday resort, which transcends the seasons and is uniquely both a winter and a summer resort. When the games are over and the snow has melted, the infrastructure will still be there. With these funds they have built, among other things, 30 new hotels and renovated 35 old ones, endowing the city with 12,000 new international-level hotel rooms. This is a significant number, and for the sake of comparison, look at Finland's capital, Helsinki, which has built 50 hotels with 8,000 rooms during its entire history so far. That is to say, Sochi has built 1.5 times more hotel rooms in just two years than one of Europe's capitals managed in 200 years.

In addition to international level hotels, Sochi already had a stock of 450 other hotels with some 40,000 rooms. The Russian daily, Vedomosti, ridicules the fact that there now are more hotel rooms in Sochi than in the whole of Moscow. This is true, but the reporter is no hotel industry expert even though he rather boastfully shares his low opinions about it. He fails to grasp that there are hotels and hotels; there are hotels conforming to international standards (3, 4 and 5 stars) and hotels that do not live up to these requirements. In Moscow, there are approximately 30,000 international-level hotel rooms, which is about three times more than in Sochi, even after the construction of new hotels. And Moscow is not a beach resort where tourists stay in hotels for weeks on end. Sochi is visited by approximately 3.2 million tourists annually, who on average stay six to eight nights per visit, which amounts to about 20 million nights per year. This can be compared to the figure of 3.5 million in Helsinki. So, the number of hotel rooms in Sochi does not seem exaggerated in relation to the number of visitors. Furthermore, it should be understood that Sochi's 3.2 million tourists mostly come from families of below average income level (the so-called "lower middle class"). The reason for this, notwithstanding its wonderful climate, superb natural landscapes and parks, is that previously there were no high-quality hotels in Sochi. (Earlier the only hotel conforming to international standards was a Radisson establishment with 200 rooms.). Therefore it has not been a destination of choice for the more affluent Russians, who, instead, travelled to Turkey, Spain, Cyprus and other European and overseas destinations. Now this state of affairs has been corrected, and Sochi will be able to attract tourists who are used to higher quality standards, and are prepared to pay more. These new hotels will be run by the world's premium hotel chains, such as Marriot, Accor and Swisshotels. Most people would surely agree that these businesses haven't set up shop in Sochi just to yield to Putin's commands. Following these investments, the total number of tourists is projected to increase by one to two million in the next few years, which will also bring significant additional income to the city. At the same time, private money has been used to build an enormous number of holiday apartment buildings, well situated throughout Sochi's areas of abundant natural beauty. The number of tourists visiting Anapa, a resort located on the same Black Sea coast just a few hundred kilometers away, rose from 2.6 million in 2010 to 4 million in 2012. No doubt, there will be significant demand for Sochi's new hotels.

Sotchi

If it were not for the concerted propaganda campaign against Russia and Putin, this huge investment in real estate and infrastructure would be admired the same way people applaud gigantic projects in for example China and places like Dubai. What is more, the Western press and economists are constantly deriding Putin and Russia for supposedly not diversifying the economy; they say it's all about oil and gas. Now, displaying a truly volte-face, they critize Russia's major investment in its tourism industry.

To enhance real estate developments, serious investments have also been made in Sochi's urban infrastructure. The Krasnaya Polyana ski resort in the mountains has been connected to the coastal town of Sochi by a new 50-km combined motorway and railway line running through the mountains, including 12 tunnels (29 km in total), 45 bridges and 4 train stations. According to Boris Nemtsov, this has cost 9.4 billion dollars. Nemtsov "knows" (cause he claims he knows everything) that the actual price would have been 6.1 billion dollars, putting the difference at some 30 percent. Those who don't follow Russian politics need to be reminded that Nemtsov has dedicated his life to invective against Putin, and that he does all he can to defame the president, this fabricated report on Sochi's expenses being just one of his defamatory strikes. Also it's worth remembering that Nemtsov served as First Deputy Prime Minister of the Russian government in 1998 when the Russian state went bankrupt and defaulted on its debts. So this fellow does not exactly inspire confidence as an economic expert, does he? Still, even Nemtsov, despite all his spleen, has not been able to come up with a greater difference than 30 percent between the "actual cost" and "Putin's cost." I would not be a bit surprised if the Swiss, to whom Nemtsov assigns his benchmark figure, would be able to build these kinds of mountain roads a great deal more cost-effectively than the Russians, whose experience is limited in these kinds of projects.

Sotchi

Navalny tops Nemtsov's bid. He retains Nemtsov's figure of the construction cost, about 9 billion dollars, but Navalny has lowered the benchmark cost. According to Navalny, the "real cost" should have been about 4.7 billion dollars. Navalny boasts that his benchmarking method is far superior to Nemtsov's. He says that he did not just compare the cost with one existing road (as the nincompoop Nemtsov did); instead, he says he divided the road into parts and compared the cost of each part separately to yield his total benchmark cost. It turns out Navalny is not only a gifted lawyer, blogger, activist and opposition leader, but he is also an efficient and able engineering consultant and auditor, who was able to come up with such an analysis in just a week with his team of volunteers.

What else has been built? Let's enumerate: a new elevated road passing through the whole city of Sochi; an extension of the Sochi ring road; several multi-level junctions; a seaport, an airport, several railway stations, among them the Adler station which is one of the biggest in Russia (not known for its miniscule rail stations); pedestrian promenades; barrier-free accessibility to public and commercial buildings for disabled persons, making Sochi the first barrier-free city in Russia; a sewage system (before that most of the crap apparently circulated freely); an electric power plant and distribution network; renovation of a huge amount of residential houses and areas, etcetera and etcetera. All the above will, of course, remain in Sochi after the Olympics. They won't be dismantled and tucked away after the Games as the brothers-in-arm, Nemtsov and Navalny, and their cheerleaders in the Western press claim. They will be there for the some 5 million visitors and the population of Sochi itself, which is about 400,000 and approaching half a million.

Amid insinuations of corruption, whistleblowers Nemtsov & Navalny are earnestly seeking to claim that all these new buildings and facilities will only serve the 2-week duration of the Olympics. Navalny has even included investments in the adjacent Formula 1 racing track, a new theme park, and even a church in his costs "for organizing the Olympics". I am puzzled by the constant claims about the supposed corruption related to Sochi, which Myers so dutifully reminds us about. I assume that there is corruption in a majority of the world's infrastructure projects, but Myers's conclusion that it is somehow on a greater scale in Sochi is somewhat mystifying, until you understand the sources for his ideas: oh, yes, Nemtsov and Navalny! But even if it were true, why should Myers and the Western media be so troubled with it? It is not taken out of their pocket, for heaven's sake! At the same time, the Navalny and Nemtsov double act are at pains to remind us that many of Russia's oligarchs have made some bad investments in Sochi. Alright, let's suppose that Putin has "advised" them to invest in Sochi: would that also harm Myers, or the Russian taxpayers? On the contrary, it could only be considered a tax, a tax to compensate for the wealth these oligarchs laid their hands on so cheaply in connection with privatization measures orchestrated by Nemtsov and his buddies. At the end of the day, all the infrastructure is now in place for all us to enjoy for some time to come, including Mr. Myers from the New York Times.


1 http://www.nytimes.com/2014/01/27/world/europe/russians-debate-sticker-price-of-sochi-games.html?hpw&rref=sports&_r=0

2http://abcnews.go.com/Sports/wireStory/russian-campaigner-publishes-sochi-corruption-file-22161544 3http://www.interpretermag.com/winter-olympics-in-the-sub-tropics-corruption-and-abuse-in-sochi/

 

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Jon Hellevig

Jon Hellevig has worked with Russian law immediately since the start of market reforms in early 1990's. Having gained 5 years' experience as lawyer and CFO for American-Russian joint venture and subsequently worked as lawyer and CFO for Armstrong World Industries (Central and East Europe). Hellevig was the founding partner of what is now Hellevig, Klein & Usov, part of Awara Group.
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