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Bloomberg: Russia’s Skiing Oligarchs Boost Putin’s Olympics Bid

EXTRACT: Last October, environmental inspectors threatened to cancel permits for a Royal Dutch Shell Plc project on Sakhalin Island in Russia’s far east. Two months later, Shell and its Japanese partners agreed to cede control of the project to Moscow-based Gazprom, the world’s largest gas producer. Partly because of the Sakhalin takeover, Russia was ranked 63rd of 70 countries in a survey of property rights released March 6 by the Washington-based Property Rights Alliance. The study placed Russia between Pakistan and Nigeria.

THE ARTICLE

By James Brooke

March 22 (Bloomberg) — Russian President Vladimir Putin schussed down a trail at the new Psekhako Ridge ski area in the Caucasus Mountains last month to promote the region’s bid for the 2014 Winter Olympics. In case photographers missed the shot, a snowmobile towed him back up the hill for another run.

State-controlled OAO Gazprom is investing $375 million in Psekhako Ridge, above the Black Sea city of Sochi. One peak away, billionaire Vladimir Potanin is plowing $262 million into another resort. Aluminum mogul Oleg Deripaska plans to spend $1.5 billion on the international airport and Olympic village in Sochi.

While the proposed venues are 850 miles south of Moscow, they are a microcosm of development in Russia today. In a capitalist version of the 10-year plan, the Kremlin picks projects and then marshals public and private investment. The market takes a back seat, retarding growth, says Rory MacFarquhar, a Moscow-based economist at Goldman Sachs Group Inc.

“This is being decided from top down,” he says. “Investment is being channeled into priorities identified by the leadership, which may or may not be the optimal ones for the country.”

With Russia’s 1998 debt default a fading memory, the nation has embarked on a program of investments not seen since the Brezhnev-era of the late 1970s. Record oil and gas prices have swelled Russia’s reserves to $317.3 billion, surpassed only by Japan and China. To cushion any drop in prices, the government maintains a “stabilization fund,” now at $103.6 billion.

Nationwide, about $450 billion of public and private investments are planned over the next 15 years, according to figures released by Economy Minister German Gref. Creating a modern road system will cost an additional $323 billion by 2025, says Sergei Ivanov, first deputy prime minister and a leading candidate to succeed Putin, who steps down next year.

‘Culture of Nyet’

Defenders of the top-down model say that only the locomotive of a Kremlin-led project, endorsed by the president, is enough to break through Russia’s bureaucratic “culture of nyet.”

Russia’s newly restored pride is driving the effort to beat South Korea and Austria for the Winter Olympics, much the way China is using the 2008 Summer Games in Beijing to announce its arrival as a world power. The International Olympic Committee will select the winner July 4 in Guatemala City.

Against the backdrop of Black Sea beaches and snow-covered peaks, Russia’s bid faces the same hurdles as projects in other parts of the country: property rights that are among the weakest in the world, and a Soviet-era power grid that can leave developers without electricity.

Potanin, Deripaska

In Sochi and the mountain village of Krasnaya Polana, these forces are playing out in an 8-year, $12 billion plan to create a world-class winter resort in a region that now has a single line of slow-moving chairlifts to carry skiers up one peak.

Potanin, owner of OAO GMK Norilsk Nickel, is building the Rose Khutor ski area, with three gondolas, 20 trails and five restaurants. Deripaska, chairman of OAO Russian Aluminium, in November bought the half-completed Sochi international airport for $206 million.

“This is not a presidential project,” says Potanin, who regularly skis in Courchevel in the French Alps. “It will go on under the next president, the next president and the next president.”

Russia’s so-called oligarchs, who wield both political and economic power, know the price for crossing the Kremlin can be as steep as the new double black diamond runs that are being opened on the 2,000-meter (6,600-foot) peaks outside Sochi.

In 2003, Mikhail Khodorkovsky, co-owner of OAO Yukos Oil Co., topped the Forbes list of Russian billionaires. Today, he’s in a Russian prison serving eight years for fraud and tax evasion. His lawyers say the sentence is punishment for challenging Putin.

Lifts Shut

Alpika Service, Krasnaya Polana’s only working ski area, may be crushed by Russia’s Olympic ambitions.

The company shut down its chairlift for two days on Jan. 22, after government inspectors sealed a warehouse containing spare parts, says President Pyotr Fedin. Skiers interviewed in January said police stopped buses to check passenger documents.

Fedin says local officials are trying to push him off the mountain after 15 years of a 50-year lease.

They “want to bankrupt and close Alpika Service,” Fedin says. “Since Jan. 19, we have had more than 30 visits by different kinds of inspectors — medical inspections, fire department inspections, tax inspections, ecology, tourism.”

Vladimir Prigoda, a spokesman for the Krasnodar regional government, on March 16 declined to comment. In January, when the inspections began, Krasnodar officials said they were trying to improve safety at the ski area.

Property Rights

The Alpika Service crackdown isn’t the first time government inspectors have raised regulatory issues with a private investor.

Last October, environmental inspectors threatened to cancel permits for a Royal Dutch Shell Plc project on Sakhalin Island in Russia’s far east. Two months later, Shell and its Japanese partners agreed to cede control of the project to Moscow-based Gazprom, the world’s largest gas producer.

Partly because of the Sakhalin takeover, Russia was ranked 63rd of 70 countries in a survey of property rights released March 6 by the Washington-based Property Rights Alliance. The study placed Russia between Pakistan and Nigeria.

Another challenge to the Olympic bid is energy.

Just before a team of IOC inspectors visited last month, the power went out in Sochi.

Anatoly Chubais, chairman of national power monopoly OAO Unified Energy System, says Russia needs to invest $30 billion of public and private money in the electricity grid every year through 2010. On Feb. 17, UES agreed to invest $3.2 billion for power plants and distribution lines for the Sochi region.

Energy Crisis

“All this Soviet-era energy infrastructure has been allowed to amortize for a decade and a half, and now we are paying the price for that,” MacFarquhar says. “It is very difficult for new green-field companies to be attached to the grid, to receive power, to receive gas.”

A total of $1.1 billion is going into four ski resorts around Krasnaya Polana, a 40-minute drive from Sochi’s airport.

With seven gondolas planned for the area, Krasnaya Polana represents the largest concentration of ski industry investment in the world today, says Paul Mathews, president of Ecosign Mountain Resorts Planners Ltd., a Whistler, Canada-based company that is designing Rosa Khutor.

Gref says the goal is to build the region into a year-round attraction, with skating rinks and ski slopes to compete with the Alps, and spa hotels to rival Turkey’s beach resorts.

Sochi’s subtropical resorts, once a haven for the Soviet elite, have been neglected since the collapse of the Soviet Union in 1991. When communism ended so did travel restrictions and Russians flocked to Egypt, Turkey and Thailand instead.

New Flights

To bring tourists to Russia’s southernmost corner, flights from Frankfurt, Dubai and Istanbul began arriving in Sochi this winter. The new terminal at Sochi International Airport is scheduled to open next year, part of a plan triple the number of incoming passengers to 3.4 million by 2014.

Investment is creating a boomtown in Krasnaya Polana. On back streets, where roosters crow and wood smoke hangs in the air, battered houses with plastic sheets tacked over the windows stand next to blonde-wood ski chalets whose driveways are filled with sport-utility vehicles bearing Moscow license plates.

“Real estate prices are doubling every year,” says Tom Rawlins, a 36-year-old British real estate developer who is building almost 600 apartments and cottages and a Tudor-style brew pub. “The people here now are the pioneers.”

International Visitors

Some are skeptical. “The only Russians who will come here to ski are the ones who can’t get visas for Europe,” Yulia Filipova, 25, a marketing consultant from Moscow, says after riding Alpika’s battered double chairlift, which can only carry 1,000 skiers a day.

The region’s three new resorts are scheduled to be open by 2010, with 125 miles of trails and lifts for 33,500 skiers a day.

Investors in the Caucasus may be working against the clock to create a resort that can compete with the best of Europe. Russia and the European Union have set a goal of achieving visa- free travel by 2011.

Travel to Europe is already increasing. In January, Russians spent 89,300 nights in Switzerland, up 32 percent from the same month last year, the Swiss government reported March 12.

Still, the money keeps flowing to Sochi. Mathews, who has designed 225 ski areas around the world, says the boom is similar to one that corporations such as Sony Corp., Yamaha Corp. and East Japan Railway Co. financed in Japan during the 1980s.

“The difference is that now it’s Russian oligarchs,” he says. “They all want the president to ski their area.”

To contact the reporter on this story: James Brooke in Moscow at [email protected]

Last Updated: March 22, 2007 02:28 EDT

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