Sochi fears a flameout
SOCHI, Russia — Now comes the hard part.
After Sunday night’s closing ceremony, Sochi must confront life after the Olympics and the impact of a building boom that, for a time, made it the world’s largest construction site. The area is now home to more than 40,000 hotel rooms, four ski resorts, dozens of restaurants and retailers, five sports arenas, one stadium, and enough roads and railways to handle 20,000 visitors an hour.
That made sense during the games, but what will happen when fans and athletes leave? This question faces every Olym- pic city, but it seems acutely problematic in Sochi, experts say, in part because the scale of overbuilding vastly exceeds what occurred in Vancouver, London and elsewhere, and in part because the area will face competition from resort towns in other countries.
It also seems that few people in the upper echelons of the Russian government have given the future of Sochi much thought.
“I don’t think anyone is sure what to do with it,” said Sufian Zhemukhov, co-author of a coming book on the Sochi Games. “I say that because President [Vladimir] Putin and Prime Minister [Dmitry] Medvedev have changed the concept many times. First, it was going to become a kind of capital of southern Russia. Then they talked about dismantling the arenas and taking them north. A few months ago, Medvedev said they were going to open casinos there.”
Virtually everything about the Sochi Games has been improvised, it seems, and their aftermath will not be any different. Russia’s primary goal in 2007 was to submit the winning bid to the International Olympic Committee, and one of the appeals of Sochi to the IOC was that the area was largely undeveloped, meaning that Russia would have to produce lots of spiffy new buildings and infrastructure.
The country delivered. Ultimately, more than 220 miles of roads and bridges and 700 sports grounds were built, along with overhauls and renovations to the power grid, the airport and the sewage system.
The committee got its wish, Russia got its games and now Sochi is at risk of becoming a gold-rush town that just ran out of gold. A recent report by Moody’s Investors Service said that the area would need to double its flow of visitors, to at least 5 million a year, to keep the hotels full. That is highly unlikely. Real estate companies estimate that occupancy rates could fall between 35 percent and 40 percent after the games, the report said.
It is unclear where additional tourists will come from. Like many hoteliers here, Brian Gleeson, the general manager of the Radisson Blue Beach Resort and Spa, is not looking to the U.S. market, and he has written off Europeans for at least a year. Americans and Europeans have vacation options closer to home, in countries that will not require them to obtain a visa to enter.
“What we need to do is focus on getting the home market up and running,” Gleeson said on a recent afternoon. “That’s 145 million people, and we need to get very creative about giving those people a reason to choose Sochi.”
During the summer, Sochi’s traditional peak, it competes for upper-class rubles with beach towns like Cesme, Turkey. As for the middle and lower classes, they may be priced out of Sochi, where one-star hotels start at about $140 a night.
The strange truth about these Olympics is that little has been built with longterm profits in mind, said Martin Muller, a professor of geography at the University of Zurich, who spent five years studying the area. At the start of the planning of the games, private investment was meant to contribute more than half of the costs. As more projects turned out to be unprofitable, the Russian government stepped in.
Adding to the sense that Sochi was not built for longterm prosperity are the doz- ens of businessmen who won contracts for other projects, large and small. Muller said that profits in these cases were often pocketed soon after bids were won.
“You inflate the price tag of the project, give part of the money back to the official who awarded you the project, then subcontract out as much of the work as possible, and hide the money you took out,” he said. “That’s a much easier way to earn a profit than drafting a long-term business plan and taking the risk associated with trying to bring in guests and having to invest in maintenance.”
One upshot is that many of the buildings here were constructed on the cheap. Muller said that he met with engineers in charge of quality assurance and that “they told me there is no quality to assure.”
“Quality wasn’t an issue,” Muller said. “It wasn’t demanded by investors, and nobody asked for it. Builders would sometimes even try to bribe their way through the quality assessment phase. This is not uncommon as a business practice in Russia.”
That means many of these hotels will incur huge upkeep costs far sooner than well-built structures. Add in the problem of overcapacity of hotel rooms, and it is understandable why Muller is predicting losses and bankruptcies.
Not everything here was built with such seemingly limited ambitions. A ski resort called Rosa Khutor, which hosted downhill events like aerials and half pipe, has 18 ski lifts, 48 miles of slopes, six hotels in operation and four others near completion. Take one look at it — a cross between an Alpine nirvana and a chaletthemed strip mall — it is clear that this is supposed to be a destination with legs.
Rosa Khutor is owned by the metals magnate Vladimir Potanin, whose net worth was estimated at $14.3 billion by Forbes last year. He conceived the idea before the Olympic bid had been won, then expanded his vision for the place.
“We have no doubt whatsoever that this resort will ultimately survive and will stay a ski resort,” Sergei Belikov, a Rosa Khutor representative, said recently at a news conference. “Not everything happens overnight, especially if we take into consideration the sheer scope of investments that were channeled toward building such a massive resort.”
But Rosa Khutor is only one part of Sochi. For the place to thrive more broadly, many here believe that the Russian government needs to promote it, often and loudly. That does not seem to be happening.
“The government has the intention to promote Sochi as a destination, but there is no specific plan about how to do that,” Ekaterina Shadskaya, a director at the Russian Union of Travel Industry, said in an email. “President Vladimir Putin declared that Sochi will not be included in the government program of tourist development in Russia, because all the infrastructure is already implemented.”