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In another question about the Sochi Olympics (Who picked up the cost of the massive cost overruns for the Sochi Olympics?), Justin Dragna links to a great article in Business Week that explains the Sochi budget overruns. Excerpts:(Note: I added boldface formatting)How the Sochi Games grew so expensive is a tale of Putin-era Russia in microcosm: a story of ambition, hubris, and greed leading to fabulous extravagance on the shores of the Black Sea.Back in 2007, when Russia was bidding to host the 2014 Winter Olympics, the huge amounts it was willing to spend were a point of pride, an enticement meant to win over officials at the International Olympic Committee. Putin traveled to Guatemala City to give a rare speech in English, with even a touch of French, to the assembled IOC delegates, promising to turn Sochi into “a world-class resort” for a “new Russia” and the rest of the world. His pledge to spend $12 billion in Sochi dwarfed the bids of the other finalists from South Korea and Austria.But since then, as costs have increased, Russian officials have grown less eager to boast about the size of the final bill. “In the beginning, money was a reason and argument for Russia to win the right to host the Olympics,” says Igor Nikolaev, director of strategic analysis at FBK, an audit and consulting firm in Moscow. “But it turned out we spent so much that everybody is trying not to talk about it anymore.” Dmitry Kozak, deputy prime minister in charge of Olympic preparations, has argued that the $51 billion number is misleading. Only $6 billion of that is directly Olympics-related, he says; the rest has gone to infrastructure and regional development the state would have carried out anyway. That may be true, though it’s hard to imagine the Russian government building an $8.7 billion road and railway up to the mountains without the Games.Putin never saw the Sochi Olympics as a mere sporting event, or even a one-of-a-kind public-relations opportunity. Rather, he viewed the Games as a way to rejuvenate the entire Caucasus region. Once Russian officials settled on Sochi as a host city, however, they guaranteed themselves a costly engineering challenge, since organizers didn’t have much choice as to where to put Olympic venues. Sochi, once a place of recuperation for Soviet workers under Stalin, sits on a narrow slope of land between the mountains and the sea, with no wide, flat space for large stadiums and arenas. The only feasible site was the Imereti Valley, a patch of flood-prone lowlands 20 miles from the center of Sochi. Jane Buchanan, a researcher for Human Rights Watch who has authored several reports on Sochi in recent years, says, “At the beginning there was very little infrastructure there, certainly nothing close to the scale needed to host a Winter Olympics. Just a little mountain road that dead-ended in a national park.” Russia would have to build everything from scratch.Construction teams encountered problems from the start. According to Yulia Naberezhnaya, the deputy scientific secretary of the Sochi branch of the Russian Geographic Society, there was “no integration of the scientific approach” in building Olympic venues and infrastructure. Instead, she said, officials thought, “we have a lot of money, we’ll build it somehow.” According to Naberezhnaya, state planners did not properly take into account the underground streams that run beneath the Imereti Valley. Recurring flooding, she says, has meant the embankment near the Olympic Park collapsed and had to be rebuilt several times over. In December 2009, a powerful storm hit Sochi’s new cargo port, which had been built to accommodate shipments of construction materials for the Olympic venues. Scientists had warned the port was vulnerable to underwater currents and surging waves. Millions of dollars in equipment were destroyed or damaged, while deliveries of building materials for Olympic venues were delayed or rerouted at considerable expense.Not that anyone was necessarily counting each ruble, or at least not that carefully. Government officials, big construction firms, local subcontractors—everyone knew the Sochi Games were a matter of state prestige and of great personal importance to Putin and his legacy. “For the state, the Olympics are something holy,” FBK’s Nikolaev says, which means those responsible for staging the Games “were not shy about asking for more money.” Among the few criminal cases opened by police into possible corruption involving the Olympic sites, investigators in Sochi in June 2012 filed charges against contractors at two venues—the main Fisht Olympic Stadium, which will only be used for the opening and closing ceremonies, and the bobsled course. The suits alleged the contractors inflated costs by filing false or unjustified project estimates. The alleged losses to the state budget totaled nearly $170 million at the stadium and $75 million at the bobsledding venue. Around Sochi, developers and contractors pushed to have any project, no matter how tenuous, deemed “Olympic”—such a designation would not only ensure reliable funding but also allow them to skirt existing zoning and building regulations. One owner of a local construction firm joked to me that every new toilet in town was Olympic.Putin’s vow to spare no expense provided cover for sloppiness and mistakes in construction. When a road leading up to Krasnaya Polyana wasn’t finished on time, for example, a helicopter had to deliver the cement needed to build ski lifts. At the same time, the government’s willingness to overspend encouraged organizers to indulge their grandest, most over-the-top visions. At one point the team responsible for the opening ceremonies decided it wanted a closed stadium at Fisht and not the retractable roof that had been originally planned. That left the construction team only three months to procure a quantity of steel that would have ordinarily taken a year to get on-site.Construction work was sometimes the end in itself. Alexander Popkov, a lawyer in Sochi, told me about never-ending roadwork in his neighborhood. “They’re digging up the road here, they’re digging up the road there,” he said. “The road gets sealed today, then dug up tomorrow. They put down asphalt and then in a week rip it up all over again.” He let out a laugh, then pulled his face tight. “It would be funny, if it wasn’t happening with our money.”Two kinds of private business interests are involved in Sochi: companies hired by state-owned corporations to carry out specific work and those who came on as investors, taking responsibility for various projects and putting up at least some of their own money. Among the first group, according to the Nemtsov and Martynyuk report and opposition magazine New Times, no one has gotten more money from Sochi than brothers Arkady and Boris Rotenberg, childhood friends of Putin’s from St. Petersburg who have become wealthy industrialists over the past decade. They received 21 contracts, according to the magazine, worth around $7 billion—more than the total cost of the Vancouver Olympics and around 14% of all spending for the Sochi Games.In one such deal, state-owned energy giant Gazprom commissioned one of the Rotenbergs’ companies, Stroygazmontazh, to build a 177-kilometer (110-mile) pipeline from Dzhugba to Sochi, part of which passes under the Black Sea. The total contract amounted to more than €4 million ($5.5 million) per kilometer. By comparison, the construction of the Nord Stream pipeline running under the Baltic Sea cost an average of €3.6 million per kilometer—a price that by some estimates was already three times higher than the European average.The main contracts awarded for construction of the $8.7 billion road to Krasnaya Polyana went to two companies: Transuzhstroy and SK Most, which before Sochi was perhaps best-known for winning a no-bid contract to build a $1 billion bridge in Vladivostok in advance of the Asia-Pacific Economic Cooperation Summit 2012. The Sochi contracts were awarded without a public tender; a Russian law that requires state companies to hold open tenders only came into force in 2012. Both companies appear to have ties with the top leadership of RZhD, including the railway agency’s Yakunin. Infrastructure company SK Most has a controlling stake in Millennium Bank, whose chairman is Oleg Toni, a vice president at RZhD in charge of Olympic projects. Natalia Yakunina, Yakunin’s wife, previously sat on the bank’s board. Toni is also one of the co-founders of Transuzhstroy, though he says that he has no financial stake in the company.The private investors helping fund Olympic construction are most likely motivated less by the pursuit of large profits than a tacit understanding that under Putin they have certain obligations to the Kremlin and the nation at large. “They got a call with a voice saying, ‘There exists the opinion that you should build this or that [project],’ ” says Sergei Aleksashenko, a former deputy chair of Russia’s Central Bank now a fellow at Georgetown University. Interros, a company owned by metals and mining tycoon Vladimir Potanin, is building Rosa Khutor, which will host alpine events during the Games; Potanin has said he decided to invest while skiing with Putin. Representatives from Basic Element, the holding company of billionaire Oleg Deripaska that has interests in everything from aluminum to hydropower, say they couldn’t remember how Deripaska decided to invest in Sochi. Andrey Elinson, who’s in charge of all of Basic Element’s Sochi projects—which include the renovation of the airport and building of the Olympic Village—insists its Olympic ventures are not of “a charitable nature,” and that the company never expected “supernatural” profits from its investments in Sochi.However the magnates and their companies came to the Olympic project, around 70% of their investment is financed by credit from Vnesheconombank, or VEB, a state development bank. “VEB is used by the government as a second budget,” says Aleksashenko, in that the state gives funds to the bank, which then lends as it chooses. By law, the supervisory board of the bank is headed by Russia’s prime minister—who, at the time many of the Sochi-related loans were being parceled out, was Putin. VEB will provide 85% of the financing for the skiing facility built by Interros; at the Olympic Village, a project of Deripaska’s Basic Element, it’s providing 88%. “The position of the state is that VEB money is not really budget money, but of course it is,” says Aleksashenko.Even so, the Games have created friction between the Kremlin and some of its billionaire allies. Investors gripe that the state has continually shifted its demands and added new requirements. Potanin has complained that he was forced to spend an additional $500 million for work at Rosa Khutor that should have been the state’s responsibility. At the same time, the resort has lost potential revenue while the facility was closed to tourists during Olympic test events.For its part, Basic Element has long planned to turn the Olympic Village after the Games into luxury condominiums with beachfront views as well as a yachting marina. But ever-changing demands from everyone from the Russian government to the IOC have pushed the project back and raised costs, adding what Elinson calls “additional burdens that aren’t very commercially attractive.” Although Basic Element had wanted to start selling condo units before the Olympics, VEB prevented the company from putting them on the market. “We are bearing the costs of creating these new properties, but it has not been possible to sell them,” Elinson says. (Basic Element expects apartment sales to begin early this year.) The marina, one of the centerpieces of the whole development, has been delayed by disputes over its financing and the ongoing need for the cargo port to supply materials for unfinished Olympics construction.It can be hard to determine at which point inefficient and repeated work becomes outright theft, but there seems to have been plenty of that in Sochi. One owner of a local construction company told me how contractors artificially inflated costs to make up for the kickbacks they sometimes had to pay state managers awarding the contracts. As he puts it, both sides—the contractors and the officials—understood the nature of the deal: The former needed to make a profit for their business, the latter wanted to take what they could from budget funds.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% 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.Of all the examples of Olympian excess, waste, and mismanagement, the most conspicuous is the ski jumping facility in Krasnaya Polyana. On Feb. 6, 2013, with exactly one year left until the opening of the Games, Putin visited Sochi for a personal inspection of Olympic venues. Dressed in a black overcoat, he arrived at the ski jump complex for a tour. The facility’s completion had been delayed by more than two years, and cost estimates had risen from $40 million to $265 million. Putin, clearly playing up his sense of surprise and outrage for the television cameras, was not pleased. He made a show of questioning Kozak, the deputy prime minister in charge of Olympic preparations, on cost overruns. Putin’s entourage shifted nervously. With icy sarcasm, he declared, “Well done! You are doing a good job,” and then walked off.The next day, Akhmed Bilalov, who had overseen construction of the ski jump and was a vice president of the Russian Olympic Committee, was fired from all his posts. The police subsequently opened a criminal case against him for allegedly abusing his position as head of a state-owned company. (Among other acts of fraud, he was accused of using state money to pay nearly $100,000 for luxury travel to London during the 2012 Summer Olympics.) He fled abroad along with his brother, briefly popping up at a clinic in Baden-Baden, Germany, where he claimed to be receiving treatment for mercury poisoning, and then settled in London.Source: The Waste and Corruption of Vladimir Putin's 2014 Winter Olympics