Olympic Investors Trying to Avoid Default

December 24, 2013

The Sochi Winter Olympics have been plagued by corruption, which is helping to drive the price of the game up. An investigation led by Boris Nemtsov found that the Olympic price tag could top $50 billion, though there are likely many more hidden costs like security. In comparison, the total cost of the Winter Olympics in Vancouver was between $1.7 and $9.2 billion.

This article posted by Kommersant suggests that investors are worried that they may not make their money back after the Olympics. — Ed.

Federal authorities are trying to figure out how to avoid default by investors who built the Olympic facilities in Sochi. As the “Ъ” found out, in order to fully utilize the infrastructure built in the Black Sea resort, Prime Minister Dmitry Medvedev suggested turning Sochi into a gambling zone and creating special tourist areas.

Dmitry Kozak, a Deputy Prime Minister responsible for the preparation for the Winter Olympics in Sochi, may be put in charge of a commission that would have to come up with measures to support the Olympic investors. This was the outcome of the meeting that the Prime Minister Dmitry Medvedev held on Monday in Sochi. This information Kommersant received from two top managers of companies building the Olympic facilities, and from a federal official who participated in the meeting. According to a “Ъ” source, the Prime Minister has instructed the newly established commission to consider setting up a tourist-recreational special economic zone (SEZ) in Sochi covering the area where the necessary facilities has been built for the Olympics, as well as a gambling zone in Krasnaya Polyana. Dmitry Kozak’s representative Ilya Juice confirmed, that the commission was established, but did not specify the orders it received.

Since July 2009, gambling has been banned throughout Russia, except for four specially created gambling zones – in Kaliningrad region, Altai and Primorsky regions and the joint zone in Krasnodar Territory and Rostov Region. The Rostov part of the gambling zone, Azov City, was shut down by government decree in 2011.

In October 2013, they opened the third casino, “Nirvana”, at the original site, Azov City, in the Scherbinovskiy district of Krasnodar region. That casino is owned by a Krasnodar businessman, Maxim Smolentsev. He also owns “Shambala”, the second casino opened in the Azov City back in 2010. The first one, “Oracle”, was opened a little earlier by Rashid Taymassov’s Kazan “Royal Time Group”. In other gambling zones there are no completed facilities, although last September Primorye regional authorities made an agreement with Lawrence Ho, a gambling tycoon from Macau, who can invest in the resort that includes the gaming zone up to $700 million.

Back in March 2013, the idea to move the gambling zone from Anapa to Sochi was unveiled by Alexander Shokhin, the head of the Russian Union of Industrialists and Entrepreneurs. But Krasnodar Territory Governor Alexander Tkachev rejected such proposals. Yesterday, Anna Min’kova, the head of the Information Policy Division for the region, said that Alexander Tkachev was not unavailable for comment because of his busy schedule.

Equally negative was the regional administration response to the creation of an SEZ in Sochi. Initially, that proposal was tabled in February 2012 by Ahmed Bilalov, the now disgraced former head of the state company “North Caucasus Resorts” (NCR). The expectation was that the NCR would be put in charge of managing the SEZ. But the Economy Ministry insisted that the zones should be under the control of the Olympstroy corporation that supervised the Olympic. After that the Olympic investors asked the federal government to create the zone so that the SEZ residents could get the tax benefits they were entitled to. But these preferences may lead to revenue shortfalls for the regional budget. This amount may exceed 10 billion rubles a year, as “Ъ” was told earlier by several Krasnodar officials.

In addition, the Olympic investors asked authorities to develop a mechanism to use the Sochi infrastructure after the Olympics, including hotels and sports facilities. Dmitry Medvedev instructed the Commission to launch a worldwide campaign to promote Sochi as a year-round resort, according to a “Ъ” source, who participated in the last meeting in Sochi. To do this, he says, the Prime Minister instructed to consider the possibility to make Sochi part of an “open skies” area, and to include it in the list of resort destinations with discounted fares for air and rail travel.

The “open skies” regime means that any foreign carrier can fly in and out of Sochi airport almost without any restrictions, regardless of the terms of any agreements on air travel between its country and Russia. However, the Transportation Minister Maxim Sokolov commented on the idea without much enthusiasm. “It’s always a blow to the industry, we must see what our counterparts have to offer in this case,” he said. A “Ъ” source in the airline industry argues that a number of airlines have already expressed interest. Air Moldova, Turkish Airlines, Pegasus have already established direct flights from Sochi, bypassing Moscow.

Meanwhile, the experience of other cities, that hosted the Winter Games, shows that the number of tourists does not increase significantly after the Olympics. According to Statistics Canada, after the recent 2010 Vancouver Games in British Columbia, the number of tourists actually decreased: in 2011, 4.174 million people visited the area, and in 2012 – 4.22 million, which is far below the level of 2006-2008.