Dmitry Sergeev of Trust Investment Bank -

The nation in which the Olympic Games are held has a strong impetus to develop the host region's economy, as well as a desire to raise its image on the world stage. If Russia wins the right to host the 2014 winter games in Sochi, total investment in regional development would amount to $12bn. While Sochi isn't favourite to be picked, being a candidate city has already made it a winner, as investment into infrastructure, tourism facilities, energy and other sectors is set to be almost $5bn, whether or not the city ultimately hosts the games.

Sochi is one of three contenders to host the 2014 Winter Olympics. Also vying for the Olympics are Salzburg, Austria and PyeongChang, South Korea. The International Olympic Committee will decide the winner at their meeting on July 4, in Guatemala.

To make Sochi a competitive candidate, the Russian Ministry of Economic Development and the Sochi 2014 Application Committee created the federal programme "Development of Sochi as a Mountain Resort 2006-2014", which envisages $12.2bn of infrastructure projects. This makes Sochi potentially one of the most expensive Winter Olympics and compares with the $12bn that Greece spent on its summer games, which are more costly than the winter games. Total expenditure on the 2008 Olympics in Beijing is forecast at $37bn.

Sochi's application is being supported at the highest levels in Russia. The Russian federal budget is expected to be the main source of financing for the 2014 Olympics in Sochi. The Foundation to support Russian Olympic team was created in 2005 with support from the Russian government. The founders of the organization were the heads of leading Russian enterprises. The Foundation supports the Russian Olympic team, and many of the companies listed below are involved in infrastructure projects in Sochi.

The federal programme is designed for two scenarios: financing programme for Sochi as host of the Olympics; and financing programme of a lesser amount if Sochi is not selected to host the Olympics.

Distribution of investment by sector

1) Transportation:

Plans for transportation improvements include the construction of more than 100 kilometres of roads in Sochi, a new bridge over the Sochi River, a federal highway and new railways. Major repairs to the Sochi-Adler and Sochi-Krasnaya Polyana motorways are also planned, as well the purchase of buses.

Novokuznetsky Metal Works, part of Evraz Group, is the leading producer of rails in Russia. The company produces 75% of all rails in Russia and is the exclusive provider to Russian Railways. The investment programme foresees the construction of a railway to the Sochi airport; the cost of this project is valued at $60m. Evraz Group's 2006 revenues were $8.2bn.

Metal services company Inprom, which is planning to conduct an IPO of 30% of its shares in third quarter of 2007, is already actively participating in the construction of the Dzhugba-Sochi Road. The company won the tender for delivery of metalworks for construction and repair of the Black Sea Coast Road in Sochi. Inprom has already delivered metalworks in the amount of $1.63m under this contract. Modernizing a 1,027 km section of the Dzhugba-Sochi Road envisages the construction of three tunnels and six bridges.

Reconstruction of the Adler-Krasnaya Polyana Road foresees construction of a 2,400-metre auto tunnel and two bridges. Work on the Dzhugba-Sochi and Adler-Krasnaya Polyana Roads is being conducted by Tunnel Unit-44, which is a subsidiary company of Transstroi. Construction of tunnels and bridges is regular part of its orders portfolio. Tunnel Unit-44 has experience in various infrastructure projects including construction of the Sochi Thermal Power Plant and hydro-technical structures for power stations. Bamtonnelstroi is another company involved into tunnel and road infrastructure construction in the region.

The investment programme has allocated $125m for purchase of new buses. With the average bus price at $100,000, the purchase of 1,250 buses is planned. Pavlovsky Bus and GAZ are the main bus manufacturers in Russia. However, it is possible that the contract for buses could go to one or more foreign producers.

2) Power sector:

Power supply in Sochi is handled by Krasnopolyanskaya Hydro Power, which has a capacity of 28.9 MW. It is part of Kubanskaya Generation Company, which, along with Sochi Thermal Power Plant (78 MW capacity), will become part of TGK-8 as the result of energy reforms.

Energy consumption growth in the Sochi Power District over the last 10 years has been around 5%, which is substantially higher than the surrounding Krasnodar Region. Currently, the Sochi Power District's maximum load is 390 MW. If it Evraz Group may benefit from construction activity in Krasnodar Region continues its 5% average annual growth, then Sochi's total power consumption by the end of 2015 could reach 600 MW. The Olympics would require additional 175 MW, with reserves of 25 MW on top of it, according to the standards of International Olympic Committee.

Plans for increasing power generation include: Construction of the Adler Thermal Power Plant; construction of a second Sochi Thermal Power Plant; and construction of the Cascade Hydroelectric Plant in the Mzimta Region.

3) Construction:

If Sochi hosts the Games, 15 Olympic facilities will be built: a biathlon complex ($10m); ski complex ($6.6m); mountain skiing complex ($130m); bobsled track ($165m); a small ice hockey arena ($40m); large ice hockey arena ($220m); ice arena ($55m); ice-skating centre ($42m), central stadium ($12m), curling area ($17m), main Olympic village ($110m); medical-rehabilitation centre ($56m); K-120 and K-90 ski jumps ($48m); snowboarding park ($16.5m) and free-style centre ($16.5m).

Without the Olympics, six sports facilities are still planned to be built: biathlon complex ($10m); ski complex ($6.6m); mountain skiing complex ($130m); bobsled track ($165m); large ice hockey arena ($220m); medical-rehabilitation centre ($56m); and an Olympic village ($110m).

Interros began development of the Rosa Khutor mountain ski resort in Krasnaya Polyana in 2003. $300m will be invested in its construction.

Construction contracts for several facilities could be received by two publicly traded companies: Open Investments, part of the Interros group; and Sistema-Hals. Open Investments already has a Sochi hotel recreation complex in its portfolio.

4) Telecommunications

A well-developed mobile phone network and excellent internet access are core factors for carrying out any kind of major sporting event, especially the Olympics. If Sochi hosts the games, $580m will be directed to improving local telecommunications. In particular, connections will need to be secured for press centres, call centres, Olympic facilities and international television centres. Screens will also need to be installed for public viewing of the Games. The region will receive $157m in telecommunications improvements even without the Olympics.

By July 2007, four telecommunications projects totalling more than $115m will have been designed. This includes creating the infrastructure for digital television ($42m); 700 km of fibre-optic cables ($36m); a TETRA network for government facilities ($35m); and electronic mail networks in Krasnaya Polyana and the two Olympic villages ($6m). Southern Telecom is the main landline telecoms operator in Sochi with 100,000 customers. One of the company's priorities is further development of broadband internet access. In 2006, these services accounted for 12% of its revenues. The company plans to increase this share to 25%, and to increase its users to 800,000.

There are several alternate telecommunications providers in Sochi, including Comstar - United Telesystems, which serves around 1,200 major clients in the area and has built several Wi-Fi zones. Comstar is planning to participate in the construction of the press centres, internet centres and call centres.

Conclusion

It is, of course, difficult to determine the winner of the Olympics race in advance. However, it is no secret that the favourite is Salzburg, Austria, with its well-developed sports infrastructure and favourable location in Central Europe. However, even without hosting the Olympic Games, investment into the Sochi area to 2014 will be about $4.7bn, which will ultimately increase the investment attractiveness of the city and Krasnodar Region overall.

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