Bloomberg News

Putin Buddy Gets $7 Billion of Deals for Sochi Olympics

March 19, 2013

President Vladimir Putin

President Vladimir Putin gestures as he visits the Winter Olympics facilities in Sochi in February. Photographer: Alexsey Druginyn/RIA Novosti via Bloomberg

Arkady Rotenberg, the boyhood friend and former judo partner of black-belt President Vladimir Putin, already is collecting his winnings from what promises to be the most expensive Winter Olympics ever next year.

Rotenberg’s companies have been awarded at least 227 billion rubles ($7.4 billion) of contracts for the 2014 Sochi Games, according to figures compiled from corporate and government filings. That’s more than the entire budget for the 2010 Vancouver Olympics, though it represents just 15 percent of Russia’s latest estimate for the Sochi event.

Those contracts, which number at least 21, include a share of an $8.3 billion transport link between Sochi and ski resorts in the neighboring Caucasus Mountains, a $2.1 billion highway along Sochi’s Black Sea coast, a $387 million media center, and a $133 million stretch of venue-linking tarmac that will double as Russia’s first Formula One track.

“This is a monumental waste of public money,” Stefan Szymanski, a sports economist at the University of Michigan who tracks Olympic spending, said by phone from Ann Arbor. “A small number of people at the top have control of resources and there is no accountability.”

$50 Billion

Rotenberg, 61, is among a handful of men Putin has known since childhood or from his days in the KGB or St. Petersburg government who’ve amassed riches and power during his 13-year rule. Their fortunes have come at times at the expense of men who flourished under his predecessor, Boris Yeltsin, and the consequences of the differing wealth pedigrees are on display in Putin’s $50 billion push to prepare Russia for its first Winter Games. The country is considered the most corrupt of the Group of 20 economies by Berlin-based Transparency International.

While Rotenberg and longtime Putin associates such as Gennady Timchenko, co-founder of oil trader Gunvor, and OAO Russian Railways Chief Executive Officer Vladimir Yakunin, stand to gain from Russia’s Olympian largesse, Yeltsin-era tycoons led by Vladimir Potanin and Oleg Deripaska say they’re getting squeezed.

Potanin and Deripaska, the CEOs and largest owners of OAO GMK Norilsk Nickel (GMKN) and United Co. Rusal, respectively the world’s largest producers of nickel and aluminum, have been handed projects that may not turn a profit for years, if ever. Potanin is spending $2.2 billion on the resort where most of the skiing events will take place, while Deripaska is putting $1.5 billion into revamping the local airport and constructing a port and one of two Olympic Villages to house athletes and officials.

‘Commercially Useless’

Rosa Khutor, Potanin’s facility, has missed 14 billion rubles of interest payments on loans from state development bank VEB because it’s been closed to tourists for parts of three peak seasons for test competitions, Sergei Bachin, the head of the project, said in an interview in Moscow on March 12.

The resort, serviced by state-of-the-art ski lifts from Doppelmayr of Austria, was all but deserted on a sunny March 7 because the slopes were cleared for a para-alpine World Cup championship. Rosa Khutor will need to spend another $130 million after the Olympics to convert the facility into a fully commercial operation, Bachin said.

“A lot has been built for the Olympics that is commercially useless before the games and after,” Potanin said last month during a tour of his project with Putin and Jacques Rogge, president of the International Olympic Committee. “The money has been spent and interest is accumulating.”

Basic Element

The $200 million port Deripaska’s Basic Element constructed to dispatch Olympic building materials is handling as little as one-fifth of the planned volumes because freight traffic has been redirected to railways and roads, making the venture unprofitable, according to the company.

“If investors don’t get any return or government support and in effect lose a large part of the funds they’ve invested in the Olympics, it won’t have a positive impact on our investment climate,” Basic Element Deputy General Director Andrey Elinson said during a March 12 interview in Moscow.

Olympstroy, the state company overseeing Sochi’s transformation, declined to detail the costs of its individual projects. Olympstroy has had four general directors in six years.

The bulk of Rotenberg’s Olympic contracts are held by OAO Mostotrest (MSTT), a Moscow-based company set up under Josef Stalin in 1930 to build bridges across the Soviet Union, according to its website. Rotenberg and partners, including his son Igor, gained control of Mostotrest in 2010, just before the company raised $388 million in an initial public offering.

Putin Link

Rotenberg’s aide said he was unable to comment on his work on the Olympics. Officials at Mostotrest didn’t respond to requests for comment by e-mail and phone, nor did Stroygazmontazh, another Rotenberg company with state contracts.

Rotenberg told the Financial Times in an interview published in November that while he values Putin’s friendship, he’d never abuse it for personal gain.

“I have great respect for this person and I consider that this is a person sent to our country from God,” the newspaper cited Rotenberg as saying about Putin.

Dmitry Peskov, Putin’s spokesman, said Rotenberg’s success is unrelated to his ties with Putin.

“No friendship can grant you access to Olympics projects, which are very difficult to get because they’re hard to implement and aren’t as profitable as many other construction contracts,” Peskov said by phone on March 15.

Gazprom Pipelines

Rotenberg gained his fortune by selling pipes and building pipelines for state-run OAO Gazprom (GAZP), the world’s largest gas producer. Stroygazmontazh, which Rotenberg owns with his brother Boris, built a gas link to boost supplies to Sochi for 32.6 billion rubles, five times more than first budgeted, according to Olympstroy and government data.

The Rotenberg brothers are now worth $2.97 billion each, more than all but 35 Russians, Moscow-based CEO magazine estimated last month. That’s up from $1.75 billion each in 2011.

The controlling stake in Mostotrest (MSTT) that the Rotenbergs held via their 68.5 percent interest in Cyprus-based Marc O’Polo Investments Ltd. declined to 38.6 percent after the IPO, according to the company.

Mostotrest “somewhat disappoints investors with its annual performance forecasts,” said Elena Sakhnova of Moscow-based VTB Capital. Even so, Sakhnova is one of 12 analysts with a “buy” rating on the company’s stock, according to data compiled by Bloomberg. “Mostotrest gets very good contracts, not without Rotenberg’s help,” she said.

Shares Rise

Mostotrest shares closed up 0.1 percent at 136.83 rubles in Moscow, after gaining as much as 1.9 percent on the benchmark ruble-denominated Micex Index.

The largest single Olympic contract for the $8.3 billion rail-highway link went to state-run Russian Railways, which then hired Mostotrest and a company now part-owned by Putin ally Timchenko, SK MOST, among other contractors. Russian Railways’ pension fund owns 25 percent of Mostotrest.

Putin, 60, has fought to host global events to raise Russia’s international profile and boost growth through state and privately funded infrastructure projects, including last year’s Asia-Pacific Economic Cooperation summit in Vladivostok.

The Audit Chamber, Russia’s budget watchdog, last November said it found that about $490 million of the $20 billion Russia allocated for the APEC summit was “improperly spent.” About $506 million has been misspent in Sochi thus far, the watchdog said this month, declining to be more specific.

‘Rough Estimate’

Russia in September doubled its forecast for spending on the 2018 soccer World Cup to almost $20 billion, a figure Sports Minister Vitaly Mutko called a “rough estimate,” according to state news service RIA Novosti. Brazil’s Sports Ministry last year said it planned to spend 30 billion reais ($15.1 billion) on projects linked to its staging of the 2014 World Cup.

Putin, who has repeatedly vowed to crack down on corruption, last month fired the vice president of the Russian Olympic Committee, Akhmed Bilalov, saying his brother’s company, which had the contract for the ski-jumping complex, was over budget by a factor of seven and behind schedule.

“The main issue is to be sure nobody steals anything,” Putin said Feb. 6 before the announcement of Bilalov’s dismissal.

Three days earlier, Rotenberg’s Mostotrest said it would seek to sell its Engtransstroy unit, which has at least four unfinished Olympics contracts, including the Formula One track.

Road Contracts

Bilalov, who has since left Russia, started having trouble in 2011, when organizers told him to spend what would amount to $200 million on roads and other works that weren’t in the contract once held by his family’s company, according to his representative in Moscow. Bilalov denies costs jumped sevenfold, saying they only increased 60 percent, according to the representative, who asked not to be identified because of the sensitivity of the matter.

Police have announced one major case of financial fraud related to the Olympics. That was last August, when the Interior Ministry put out a brief statement saying investigators had foiled a plot to embezzle 8 billion rubles. No details were provided. The ministry and the Prosecutor General’s Office in Moscow didn’t respond to requests for comment on corruption in Sochi.

“The cost overruns are due to corruption, the clan system and a lack of competition,” said Sochi native Boris Nemtsov, a deputy prime minister under Yeltsin and a political opposition leader who tracks government spending. “All the main contractors in the Olympics are people close to Putin.”

Cost Overruns

Sochi Mayor Anatoly Pakhomov, who defeated Nemtsov in his 2009 election with 77 percent of the vote versus 14 percent, said spending concerns are unfounded because any “wrongdoing” is quickly discovered and halted by authorities.

“Some people have latched onto the rising costs, but that can happen because of unforeseen circumstances,” Pakhomov said in an interview in his office March 6. “There won’t be any witch hunts after the Olympics.”

Money wasn’t an issue later that night at the Blue Sea, a trendy Sochi eatery where vintage Louis Roederer Cristal Rose champagne goes for $1,600 a bottle and a basic crab dish can set you back $300. The seafront restaurant was packed with well-coiffed women laden with furs and gems, a reflection of the extravagance transforming this former Soviet city of 343,000. Outside, trucks full of materials continued to inch toward their Olympic destinations, spreading clouds of dust.

For Gurban Babayev, though, there’s nothing to celebrate. Babayev, who operates a small fleet of motorized cranes, says he’s been chasing Olympics subcontractors for $65,000 in unpaid bills for more than a year, including $6,500 from a unit of Rotenberg’s Mostotrest.

Even with a court ruling, seen by Bloomberg, ordering one of the subcontractors to pay up, Babayev said he still can’t find anyone in authority to help him collect.

“You can’t go against a presidential project,” Babayev said. “This is so bitter for my soul. I earned this money with my blood.”

To contact the reporters on this story: Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net; Henry Meyer in Moscow at hmeyer4@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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