Putin’s Olympic Shame

In a blockbuster report released today, Russian opposition leader Alexei Navalny details the waste, fraud, and mismanagement behind the most expensive Olympics ever

It was inevitable that Alexey Navalny would do something big with the Olympics. The opposition leader famous for his anti-graft muckraking — and put on show trial for bogus “embezzlement” charges — couldn’t let the biggest racket in Russian history pass without his own peal-back of corporate cronyism, cost inflation, and outright criminality. The upcoming 2014 Winter Games in Sochi is now estimated to have cost more than $50 billion, a price tag higher than the last 21 Winter Games combined and more expensive than any Summer Games ever held. (The fact that Russia, a country associated with arctic temperatures, would hold an ice-and-snow competition in its warmest climate was a bit of an early giveaway of future book-cooking.)
Today, Navalny’s Foundation for Fighting Corruption has launched an interactive website — which my magazine, The Interpreter, translated into English — outlining some of the juicier bits of Sochi waste and mismanagement. The names and figures behind each building, hotel, media center, and ski slope are detailed: who did the building, who paid for it, who really paid for it, and who got fired or indicted.

But the Foundation’s real service is adding meat on the bones of what most Russians already suspected. A poll taken last year found that two-thirds of the country is convinced that much of the money allocated for Sochi was either misused or “simply stolen.”
An Olympic media center, for instance, which will house 8,000 journalists, was built by Inzhtransstroy Corp. Ltd., a company 51 percent-co-owned, through a subsidiary, by Arkady Rotenberg, Vladimir Putin’s old friend and judo partner—and, naturally, a billionaire. Opposition figures Boris Nemtsov and Leonid Martynyuk, who have produced their own report on Sochi corruption (also translated by The Interpreter) say that enterprises owned or affiliated with Arkady and his brother Boris, who’s also matey with Putin, were the second-highest recipients of state funding for Sochi, following only Olimpstroy, the state corporation overseeing all preparations for Sochi, and just ahead of Yakunin’s Russian Railways. “They have received 21 contracts for Olympics constructions at a cost of 229 billion rubles ($7 billion),” Nemtsov and Martynyuk write.

“The names and figures behind each building, hotel, media center, and ski slope are detailed: who did the building, who paid for it, who really paid for it, and who got fired or indicted.”

Arkady Rotenberg divested from Izhtransstroy in February 2013, likely owing to inside information that the building hadn’t passed government inspections and would thus lead to lawsuits. They did. In September 2013, the companies involved in the project were slapped with claims for damages in excess of a billion rubles. In October 2013, Roman Kuznetsov, a builder hired by a sub-contractor to work on the media center, sewed his mouth shut in protest of uncollected back wages; Kuznetsov, along with a 100 or so other workers, had been hired without a labor contract, then was stiffed by the sub-contractor. A criminal case has been opened against Inzhtransstroy, the other prominent owners of which are Efrim Basin and his son Oleg — Efim being the former Russian Minister of Construction. Appropriately enough, the Basin family crest bears the motto “boldness and inspiration.”

Or consider the Shayba ice rink, where the figure skating competitions will be held. The rink cost $98.5 million, making it more than one and a half times more expensive than other Olympic equivalents. It’s also wholly funded by private wealth — in this case, that of Iskander Makhmudov, an oligarch close to Vladimir Yakunin, who heads the stage agency Russian Railways, the general partner of the Sochi Games. Indeed, Makhmudov made much of his multibillion dollar fortune through cozy dealmaking with the powerful train and freight company, which itself has been implicated a high-profile Sochi scandal after it built a waste dump and quarries in the Akhshtyr village in the course of laying down the Adler-Krasnaya Polyana rail-and-motorway, built to ferry people to and from the Games. The construction disrupted the villagers’ water supply—from 2009 on, residents got their water from tanks hauled in once a week. Protests were met with promises by Sochi’s Mayor Anatoly Pakhomov to have a water line installed, but he now says that won’t happen until after the Olympics. And garbage from this massive infrastructure project was also poured into the Mzymta River, causing an ecological hazard. Russian Railways was fined a mere $3,000, while the rail-and-motorway is estimated to have cost $8.7 billion, making it more expensive than the total cost of the 2010 Vancouver Winter Games. Russian Esquire suggested that for that price, the automotive portion of this transport strip might as well have been paved with Beluga caviar.
Makhmudov invested through the UGMK Holding Company, of which he’s the president and co-owner, knowing it would never see a return on the investment: “We look at the investment in this facility not from the perspective of its return and its attractiveness to investors in the usual understanding of this term,” said Sergei Yerypalov, deputy general director for investment and development at UGMK Holding. Makhmudov’s motive, according to the Foundation, was to pocket the cost of construction in order to continue receiving state purchase orders from Yakunin’s Russian Railways. The “person who really made money on the construction of the arena,” the report finds, “is the contractor, Igor Nayvalt,” chairman of the board and one of the co-founders of the Baltic Construction Company. But even more interesting is Nayvalt’s personal background.

In the 1990s, he was a member of the so-called Ozero Cooperative, a lakeside housing resort in St. Petersburg, whose residents included Putin, Yakunin, Yurk Kovalchuk, the main shareholder of Rossiya Bank, Andrei Fursenko, the current Minister of Education, and Yelena Petrova, the wife of Gennady Petrov. Petrov was the leader of the Tambov Gang, one of Russia’s largest organized crime syndicates, whose members were accused in 2001 by Russia’s then-interior minister of owning over 100 companies in and around St. Petersburg. A specialized side business of the Gang is offshore money-laundering, with Bulgaria, Estonia, Cyprus, Dubai, and Hong Kong being sought-after financial ports of call. Petrov was arrested in Spain in 2008, then placed under house arrest after paying bail in 2010. The independent newspaper Novaya Gazeta has reported that Petrov and Nayvalt were business associates in early 90s.

Mafiosos crawling into bed with industrialists is hardly unconventional for Russia. As disclosed in a U.S. State Department cable published by WikiLeaks, at least one Spanish prosecutor, José Grinda González, who presciently described Russia, Belarus, Chechnya, and Ukraine as “virtual mafia states,” believed that Petrov, known as vor v zakone — “thief in law” — was working with the collusion of state officials. Grinda alleged that Russia’s transnational organized crime networks seek “to be a complement to state structures” and that the Kremlin’s strategy was to use the mob “to do whatever [it] cannot acceptably do as a government.”

But what it can do is still quite a lot. Consider Olimpstroy, which tendered the contract to UGMK Holding, and in possession of $9.4 billion of Russian taxpayer money after gradually increasing its budget from an original sum granted in 2007. Created as the state agency to manage preparation for the Games, Olimpstroy has gone through four different directors in its brief six year existence, each one’s resignation (or firing) succeeded by the opening of a criminal investigation into embezzlement, corruption, or overstepping one’s authority. Not a single trial has yet commenced, and though rumors circulating amongst Western diplomats suggest that after the closing ceremonies in February, prosecutors will finally be given permission to pursue their quarry—Olimpstroy’s impunity may be permanent. It has so far defeated parliamentary attempts to oversee or audit its operations, which Putin’s United Russia party defeated. Instead, Olimpstroy’s accounts are known only to the Audit Chamber, which doesn’t disclose its findings to the public, though has made accusations of “unwarranted increases” in the agency’s expenditures.

Still another fun example produced by the Foundation is that of Ice Cube, the 3,000-seat curling arena, built by a smallish company called Slavoblast ICC LLC (ICC stands for “investment construction company”). This enterprise is 80 percent-owned by a man named Alexander Svishchev, who has no real public profile in Russia save for one conspicuous detail: his son Dmitry is a deputy in the Duma under the fascistic Liberal Democratic Party — a pseudo-opposition faction long suspected of being the wholesale creation of the KGB — as well as the president of the Russian Curling Federation. The Federation is, as the Foundation writes, the “main and only partner of Slavoblast.” And while Svishchev fils has praised pere’s work as “unique…without any analogue in the world,” some of the sub-contractors Alexander has hired don’t quite see it the same way. One of these, Mostovik, filed suit against Slavoblast for $5.7 million over non-compensation for labor. (Mostovik, owned by a billionaire named Oleg Shishov, a deputy from United Russia in the Omsk legislative assembly, built the bobsled tracks at Sochi at such a high cost that the company was indicted for price inflation in 2012.)

Slavoblast certainly had the money to pay its farmed-out help. In fact, its role as “private investor” in Ice Cube is itself rather complicated because the majority of the arena’s construction has been financed through loans issued by Vnesheconombank (VEB), one of the largest state-owned banks in Russia. VEB also smelled a rat in the Slavoblast deal; in the autumn of 2013, it declared its own loans to the company “bad” and predicted it would never see them repaid. Not to worry, however: in the event of Slavoblast default, VEB would automatically be covered by the federal budget.
So how much did Slavoblast spend on Ice Cube? Around $8.7 million, with VEB picking up the rest of the $19 million—or roughly a third of the total.

No doubt it helped that Dmitry Svishchev is the first deputy chairman of the State Duma Committee on Physical Education, Sports, and Youth Affairs, which has preoccupied itself over the last seven years with preparations for Sochi. “This post automatically endows him,” the Foundation wrote, “with the powers to influence Olympics legislation in the most effective way. During the course of the current, 6th session of the State Duma, Svishchev was among the co-authors of three laws on the Olympics and sports.”

Alexander Svishchev also founded two more sporting companies which have also received lucrative state contracts. Yet his ability to throw a cool $19 million into a major national project in the Caucasus is as yet unaccounted for. Ditto his son’s many real estate and automotive properties. Dmitry’s official annual income as a member of parliament is $58,000. But he and/or his wife have variously owned a Bentley Continental, an Infinity QX, and an Audi Q5 — the price tags on all either approaching or exceeding his annual salary as a Duma deputy.

Probably the most flagrant case of Sochi corruption concerns the Mountain Carousel, a sprawling ski jump complex and media village, if only because it’s resulted in criminal investigations of the men behind it. The Carousel was built by Magomed Bilalov, the brother of Akhmed Bilalov, who was vice president of the Russian Olympics Committee and the family’s government liaison. In 2007, Akhmed became the vice speaker in the Krasnodar Territory’s regional assembly (tantamount to a state legislature) and formed a close friendship with the governor of the territory, Alexander Tkachev, while Magomed was busy owning hotels and energy companies in Krasnodar. It was Tkachev who introduced Akhmed to Leonid Tyagachev, president of the Olympics Committee. Why the introduction mattered owed to Krasnodar’s significance in Sochi.

In 2001, Krasnodar formed a partnership with Sochi to build a year-round ski resort in the latter. That partnership was solidified through the creation of Krasnaya Polyana, OJSC, an entity in which Krasnodar’s stake was gradually reduced throughout the ensuing decade through sales to a series of offshore companies belonging to the Bilalov brothers. As of 2013, Krasnodar’s stake in Krasnaya Polyana, OJSC was a mere 1.05 percent. So when it was announced in 2007 that Sochi would be hosting the Winter Olympics, the Bilalovs found themselves in the perfect position to be the recipient of government construction contracts. By the end of 2007, Krasnaya Polyana, OJSC got the tender to build the media village and the K-125 and K-95 ski jumps. The costs proceeded to sky-rocket, from an original $36 million in 2007 to $130 million in 2012. But again, private enterprise’s saving grace was the state’s unlimited lending power through VEB. In 2009, the bank leant $17.9 million to Krasnaya Polyana, OJSC, but the price-tag on this, too, kept increasing. By December 2012, the loan was engorged to $1.5 billion, offset slightly by the more than $781 million leant from yet another state-owned bank, Sberbank. So despite claims of private investment, the Carousel’s total cost, $2.3 billion, has therefore been underwritten by Russian tax dollars.

But the taxpayer hasn’t exactly gotten value for ruble, as accusations of shoddy workmanship on the ski jumps became national headlines. VEB’s chairman, Anatoly Ballo, accused Krasnaya Polyana of “violations in the hardening of the concrete mixture, as a result of which tracks are forming; there are splits in the construction; the metal constructions have unprimed components, corrosion of the metal is occurring… A deformation of the construction of the building was also noted during construction.”
This might have just been another day in the wonderful world of Russian infrastructure but for a visit that Putin paid to the jumps in February 2013. He was unimpressed, taking occasion to publicly rebuke Magomed Bilalov for ramping up costs and missing deadlines. The KGB-czar even off-the-cuffed a “heckuva job, Brownie” line to Magomed, who was subsequently was sacked from the site, while Akhmed lose all of his lofty postings, including the vice presidency of the Olympic Committee. Both brothers then wisely fled Russia.

A criminal investigation was opened against Akhmed — and made public in April 2013 —for abuse of office, including using corporate funds to finance personal trips abroad. He spent an alleged $2.3 million on chartered flights and, during the London 2012 Games, he’s said to have frittered away another $57,954 on hotels and transportation. A second case was opened against Magomed, this one alleging that he misappropriated $28 million from the Sberbank loan to invest in a privately owned bank of which he himself was board chairman. This was to arrange for Krasnaya Polyana to take out additional loans from that bank at an inflated, 12.5 percent rate of interest. Magomed illicitly made $1.3 million from this bridge loan scheme. “What’s interesting,” the Foundation notes, “is that such operations could not have occurred without the knowledge of Sberbank, whose representatives at that time were on the board of directors and voted for the signing of the loan agreements. However, such public claims to Sberbank were not made by President Putin; moreover, Stanislav Kuznetsov, appointed by Sberbank, the chairman of the board of directors at the time, continues to hold his post.”
Forty-two percent of the Bilalovs’ shares in Krasnaya Polyana were then purchased by oligarch Mikhail Gutseriev for $20 million, a cost that Kommersant newspaper claims was approximately five times lower than the shares’ actual worth. Gutseriev has since sold the shares to Sberbank—both the mug and accomplice in this tale of self-enrichment, giving the bank more than 90 percent ownership of Krasnaya Polyana. The Bilalovs remain at large.

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The Sochi Olympics has garnered more anxious global press coverage for the increasing likelihood of Islamist terrorism, against which all the various Russian security services are set to deploy a staggering 100,000 personnel throughout Sochi and its outlying territory to protect an estimated 4.4 million tourists. “You’ve got people from different departments of different agencies sent from all over the country,” said Andrei Soldatov, an expert on Russia’s intelligence organs. “They might be of some deterrent effect, but they know nothing about how to identify a suicide bomber.” At least five “black widows”— female suicide bombers — are now thought to be planning an attack, with one possibly already inside the “ring of steel” that more resembles a DMZ around Sochi, which is just a quick trip away from the North Caucasus regions where jihad and brutal state responses to it are daily phenomena.

Rather ominously, as Soldatov told me, “there was no statement from any security officials in Sochi regarding this issue about female suicide bombers.” Moreover, news of the black widows didn’t come from the Russian press, it came from the Western press, which the former then recycled. Putin is sounding his usual macho and bombastic self, but the State Department has issued a travel warning to Americans during the Games, and Defense Secretary Chuck Hagel said Friday, “If we need to extract our citizens, we will have appropriate arrangements with the Russians to do this.”
But what if terrorism isn’t the real threat to the Olympics?

Hosting the Winter Games was a privilege personally secured by Vladimir Putin six years ago in Guatemala, making this herald of national pride and prestige akin to the White Sea Canal in the age of “managed democracy”: gargantuan, touted, and unjustifiable. Calamity here could also lead to the political demise of a far less secure dictator than Stalin.

Leon Aron of the American Enterprise Institute recently wondered if Sochi could “become Russia’s moment of truth, prompting national soul-searching and spurring the movement for democratization?” Aron compared Sochi to the 2010 Commonwealth Games in New Delhi, a travesty of fallen bridges and “uninhabitable” athletic villages which rippled into a wave of successful anti-corruption politics and the election of a new opposition party in four Indian states. Even if Russia doesn’t have an equally free and fair electoral system, the domestic backlash from a major international humiliation must loom large in Putin’s mind. After all, what if some poorly erected arena or housing complex, built at great public expense to enrich one of Putin’s friends, and deemed unfit for purpose by an ignored government body, collapses under the weight of never-before-seen crowds? Even a power outage, of which there have been many in Sochi already, could see the lights go off in the middle of a slalom or double-axel. In that event, only one man will be held accountable — and it’ll all have been his own fault.