Oligarchs unload Sochi Olympics assets to recoup investment

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

A year ago, the jump bustled with activity at the Sochi Olympics as the world's best ski jumpers - including women, for the first time - competed for gold. But it made some unwanted history as well, becoming a stark 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 during construction from $40 million to nearly $300 million. The overrun embarrassed the Kremlin, which publicly shamed the businessman involved, and he fled the country in the face of 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 those games approaches, at least two of those oligarchs are quietly dumping their increasingly toxic assets on the state - forcing Russian 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 Russia's rich and 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 murky deals from triggering a wave of popular unrest.

The risks for Putin are magnified as the country enters recession and its rainy-day funds dwindle, even as Russia prepares for staging yet another major international sports event: the 2018 World Cup.

In addition, other oligarchs may now be waiting for the right moment to demand their reward or compensation for coming to the government's rescue by taking on what became unprofitable 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 it appears that Putin is opting for coddling the oligarchs.

"There seems to be something of an emerging understanding ... that the government will help the titans of the economy to maintain the liquidity they need to stay in business," he said. "In return for that, they remain quiet, they remain loyal, but they also maintain employment and they keep moving money through the economy."

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

Bilalov fled Russia days later, after prosecutors launched a corruption investigation into why the cost of the ski jump had ballooned from original estimates of 1.2 billion rubles to 8 billion (then worth nearly $300 million). 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 ski resort at the government's request. It took out a $1.7 billion loan to fund more than 70 percent of the infrastructure project. Today, the project loses money and the bank remains saddled with the massive 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, which was 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 - similar to a large convention complex - would fetch if sold on the market. But the key to the deal is that by giving the ski jump, which is still used by the Russian national team, and the ski resort to the regional government, Sberbank is washing its hands of the $1.7 billion loan. Sberbank, which has the state as its majority stakeholder, did not respond to numerous 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, their 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 - estimated by Forbes magazine to be Russia's third-richest man - invested half a billion dollars to build two giant hotels next to the Olympic Park.

With the hotel market saturated in Sochi, 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 two hotels - onto the state as well. Vekselberg's investment vehicle Renova has not officially announced the deal, and its representative was unavailable for comment by email and telephone, but Dzhus, the government spokesman, confirmed the ongoing sale.

Meanwhile, residents of Sochi - long a resort destination for Russian vacationers - have seen few economic benefits from hosting the Olympics. Promises that the games would solve perennial problems such as poor transportation and electricity remain unfulfilled one year afterward.

A much-touted $8.5 billion rail link between the Black Sea coast and the mountains is all but suspended. A dispute between the local administration and the monopoly Russian Railways over who will pay for the costly maintenance of the Olympics' most expensive project has threatened to shut it down.

Tourists who came to Sochi this winter to ski found only six trains a day running between the coast and the mountains, and no trains running between the airport and central Sochi. During the Olympics, there were trains rolling along the picturesque ravines of the mountain resorts every 15 minutes.

Back in Sochi, a company called Basic Element, which is owned by billionaire Oleg Deripaska, is trying to sell seaside condos that housed the Olympic athletes. The company spent $1.4 billion building Olympic infrastructure, but is not among those seeking to unload their assets to the state. Instead, it is trying to restructure its loans with a state-owned bank while holding onto its investment.

Its deputy director general, Andrei Elinson, said the company "never considered these projects as some sort of charity or sponsorship."

"We believe that we have delivered what we were asked for. Now we want them (the government) to give us a simple return on our investment," Elinson told the AP.

The legacy of Sochi's busted budget is causing concern about Russia's ability to pull off the World Cup in three years, now that the ruble has lost more half of its value and the economy is struggling under the brunt of Western sanctions over the crisis in Ukraine and the collapse of the price of oil.

The soccer stadiums are only a tiny part of the overall construction for the World Cup. There are 11 host cities that will require new highways, airport expansions, train links, metro lines and giant hotels that are unlikely to be used again.

Unlike Sochi, the World Cup will largely be funded directly by the Kremlin, either through the federal budget or through state-owned companies, with only a few oligarchs in the mix.

The ruble's plunge also means the price of building materials will soar, causing the World Cup to far exceed its original budget of $20 billion.

As a way to battle galloping inflation, Sports Minister Vitaly Mutko said in January that Russia will be looking to simplify the design of the World Cup venues without compromising the requirements of soccer's governing body, FIFA. He also said the government would be looking to attract private donors, although he would not say who these might be.

In the Olympics, the government produced a detailed plan of infrastructure to be built - from arenas to new sewage works. By contrast, it's unclear what projects will be commissioned for the World Cup, apart from the stadiums. Plans for the most expensive World Cup infrastructure - rail lines estimated to be worth $14 billion at the time - have been repeatedly revised and are likely to be reviewed further.

Despite such 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.

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Oligarchs unload Sochi Olympics assets to recoup investment
Vladislav Tretiak holds the olympic flame and runs with Irina Rodnina during the opening ceremony of the 2014 Winter Olympics in Sochi, Russia, Friday, Feb. 7, 2014. (AP Photo/Vadim Ghirda)
Canada players pose for pictures after they beat Sweden 3-0 in the men's ice hockey gold medal game at the 2014 Winter Olympics, Sunday, Feb. 23, 2014, in Sochi, Russia. (AP Photo/Mark Humphrey)
This photo provided by bobsledder Johnny Quinn of the United States shows a door he broke through after realizing he was locked in a bathroom inside the athlete's village, during the 2014 Winter Olympics, in Sochi, Russia. An unknown during stints in the NFL with Green Bay and Buffalo, Quinn literally burst onto the world's stage last week after he tweeted the photo on Feb. 8, 2014. (AP Photo/Johnny Quinn)
SOCHI, RUSSIA - FEBRUARY 05: A volunteer feeds some stray dogs ahead of the Sochi 2014 Winter Olympics on February 5, 2014 in Sochi, Russia. (Photo by Pascal Le Segretain/Getty Images)
FILE - This Nov. 16, 2013 file photo shows Jimmy Kimmel at the 4th Annual Variety's Power of Comedy Event in Los Angeles. Kimmel said Thursday, Feb. 20, 2014, he cooperated with luger Kate Hansen to post a fake video of a wolf wandering the hall outside the athlete's room in Sochi. Instead, Kimmel's staff rented a wolf and built a set in Los Angeles that was a replica of the dorm and filmed the animal walking around (Richard Shotwell/Invision/AP, File)
Russian President Vladimir Putin, left, awards Russian Olympic champion in figure skating Tatyana Volosozhar after Sochi 2014 Winter Olympics on Monday, Feb. 24, 2014, in Sochi, Russia. (AP Photo/RIA Novosti Kremlin, Mikhail Klimentyev, Presidential Press Service)
In a photo provided by NBC Olympics, NBC's Bob Costas prepares for broadcast at an anchor desk in Sochi, Russia, Sunday, Feb. 16, 2014. Costas plans to make his return to NBC on Monday after being off the air for a week with an eye infection. (AP Photo/NBC Olympics)
Ice dance figure skating gold medalists Meryl Davis and Charlie White of the United States, center, wave as silver medalists Tessa Virtue and Scott Moir of Canada, left, and bronze medalists Elena Ilinykh and Nikita Katsalapov of Russia applaud during their medals ceremony at the 2014 Winter Olympics, Tuesday, Feb. 18, 2014, in Sochi, Russia. (AP Photo/Morry Gash)
SOCHI, RUSSIA - FEBRUARY 13: Evgeny Plyushchenko of Russia withdraws from the competition after warming up due to injury during the Men's Figure Skating Short Program on day 6 of the Sochi 2014 Winter Olympics at the at Iceberg Skating Palace on February 13, 2014 in Sochi, Russia. (Photo by Robert Cianflone/Getty Images)
Men's super-G joint bronze medal winner Bode Miller of the United States breaks down in tears during an interview at the Sochi 2014 Winter Olympics, Sunday, Feb. 16, 2014, in Krasnaya Polyana, Russia. (AP Photo/Christophe Ena)
Russia's Anton Gafarov falls with a broken ski during his men's semifinal of the cross-country sprint at the 2014 Winter Olympics, Tuesday, Feb. 11, 2014, in Krasnaya Polyana, Russia. (AP Photo/Matthias Schrader)
Members of the punk group Pussy Riot, including Nadezhda Tolokonnikova in the blue balaclava and Maria Alekhina in the pink balaclava, are attacked by Cossack militia in Sochi, Russia, on Wednesday, Feb. 19, 2014. The group had gathered in a downtown Sochi restaurant, about 30km (21miles) from where the Winter Olympics are being held. They ran out of the restaurant wearing brightly colored clothes and ski masks and were set upon by about a dozen Cossacks, who are used by police authorities in Russia to patrol the streets. (AP Photo/Morry Gash)
(L-R) Russia's silver medalist Maxim Vyleghzanin, Russia's gold medalist Alexander Legkov and Russia's bronze medalist Ilia Chernousov pose on the podium during the Men's Cross-Country Skiing 50km Mass Start Free Victory Ceremony at the Closing Ceremony of the Sochi Winter Olympics on February 23, 2014. AFP PHOTO / PETER PARKS (Photo credit should read PETER PARKS/AFP/Getty Images)
SOCHI, RUSSIA - FEBRUARY 23: Athlete Kate Hansen dances at the closing party after the 2014 Sochi Winter Olympics Closing Ceremony at Fisht Olympic Stadium on February 23, 2014 in Sochi, Russia. (Photo by Ryan Pierse/Getty Images)
Performers recreate the ring that did not open during the opening ceremony during the closing ceremony of the 2014 Winter Olympics, Sunday, Feb. 23, 2014, in Sochi, Russia(AP Photo/Ivan Sekretarev)
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