How The Sochi Olympics Became A $51 Billion Quagmire

The Sochi Olympic games will be the most expensive ever held, by an egregious amount. $51 billion in total, and since Winter Olympics are smaller than Summer games, the Russian government is spending an average of $520 million per event—four times as much as the previous record-holder, China. Where is all the money going? Into various pockets, naturally.

We will never know the full extent of the corruption, but Joshua Yaffa in Bloomberg Businessweek provides one of the best big-picture looks at the mess that Sochi has become. The "how" varies, but the "why" is remarkably simple: Since Moscow openly views these games as a prestige project to bring about the economic revitalization of the Caucasus region, private and government contractors knew they had a blank check to charge whatever they wanted—and Russia's pervasive tradition of kickbacks means no one was going to complain if they charged more than the projects actually cost.

For one example, two oligarch brothers who were childhood friends of Vladimir Putin received $7 billion worth of contracts. One was for an undersea pipeline, the final cost of which broke down to about $5.5 million per kilometer, or almost four times as much as the European average.

In another case, a 31-mile rail and road link to the site of the ski and snowboard events cost $8.7 billion, more than the entire cost of the last Winter Olympics. For that price tag, one Russian magazine calculated, the road could have been paved with a centimeter of beluga caviar.

Where the money goes is easy enough. Yaffa speaks to multiple subcontractors who lay out the racket: Costs are artificially inflated, and both sides claim their shares from the government's coffers.

Another person in the construction business says he was offered a contract, potentially worth millions of dollars, to lay a water line at an Olympic site. The officials at the state body awarding the contract weren't interested in whether he had the necessary resources for such a large job or would do quality work—the only question was whether he was willing to pay 20 percent back to them. A third construction boss says he was invited to carry out work on transport infrastructure. As the officials offering the job spelled it out, the contract would be worth 250 million rubles ($7.7 million) on paper, but he would only actually receive 170 million rubles—the officials, presumably, would pocket the difference.

There has been one high-profile prosecution for corruption, of the man in charge of the ski jump facility, where cost estimates skyrocketed from $40 million to $265 million, but he's likely a scapegoat for the government to show it's doing something. There's an expectation that more criminal charges will be brought, but only once the games are long past and the international media's no longer paying attention. One Russian official reportedly said, "When all the celebrations are over, then the prosecutors come in."

But even if you accept kickbacks and $39 billion in budget overruns as the cost of doing business in Russia—and nearly everybody in this story does—it's hard to shake the idea that the Winter Olympics have no business in Sochi in the first place. This is a beachside resort city; it's not known for its snow. The actual city of Sochi sits on a slope—the only land flat enough to build an Olympic village and stadiums is 20 miles away, on a small slide of flood-prone soil.

And flood it has. A new cargo port was destroyed in storms, causing millions in damage and delays, after officials failed to heed scientists' warnings that the site was vulnerable. Underground streams have caused an embankment near the Olympic park to collapse and be rebuilt multiple times. The ski jump was constructed without geologic testing, and construction crews cleared trees whose roots stabilized the muddy soil. A major landslide occurred in 2012.

All this goes to explain why Sochi's cost overrun is 500 percent, well above the Olympic average of 180 percent. But just five weeks away, the venues will be ready. (This says nothing of the possibility of terrorism or protests or any of the assorted wild cards that pop up at any Olympics.) The Russians decided they wanted to host the Games at any cost, and that's exactly what they got. As an official with the Russian Geographic Society told Businessweek, the thinking in Moscow was simple: "We have a lot of money, we'll build it somehow."

The Waste and Corruption of Vladimir Putin's 2014 Winter Olympics [Bloomberg Businessweek]