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Putin's Run for Gold

At $50 billion and counting, the 2014 Winter Olympics, in Sochi, will be the most expensive Olympic Games ever. Intended to showcase the power of Vladimir Putin’s Russia, they may instead highlight its problems: organized crime, state corruption, and the terrorist threat within its borders

A peacock pranced on the roof of Amshenski Dvor, a restaurant outside the town of Sochi, on Russia’s Black Sea coast. A couple of friends, Yaraslau Zauharodni and Konstantsiya Leschenko, had joined me for a dinner of grilled meat and sweet Caucasian wine. Yaraslau is the chief of the hockey competition for the Winter Olympics. Konstantsiya works for the Olympics, too, in information technology. I had met them both in Minsk, the capital of Belarus, a few years before. Stagnant Belarus is not a place of upward mobility. My friends had new energy now, working for the Olympics.

I had to confess a feeling of unease about what may lie in store for Sochi when the Winter Olympics begin, in February. The traffic may be terrible. The power may fail, as it has already done hundreds of times in the last year. There may not be enough snow. Russian president Vladimir Putin’s anti-gay campaign may provoke street attacks, possibly riots. Islamic terrorists may do their worst. So much money has been siphoned into criminal and political enterprises during construction that some structures, badly designed and built, may themselves become a cause of disruption.

Yaraslau and Konstantsiya were having none of it—to me, it looked as if they had bought into the Olympic ideal of international brotherhood. They were wearing cheery blue “Sochi 2014” Olympic gear. They were enjoying their surroundings. “We like Sochi,” Konstantsiya said. “In Soviet times, it was theplace to go for a holiday.” Indeed it was, since choices were limited. Sochi had been a seaside resort since the days of the czars, and before the 1990s its sanatoriums were reserved for the Soviet elite. Yaraslau reminded me of an old saying, a proverb from the gambling world: “If I had known what cards I was going to be dealt, I would be living in Sochi.” We laughed.

Sochi is about as far south as one can get in Russia. The city lies on the eastern side of the Black Sea, in the shadow of the Caucasus Mountains, and sprawls along the coast. I think of it as Russia’s Key West, a place apart, though without the carefree appeal. If Russia typically conjures images of birch forests and snowdrifts, Sochi is a place of warm water and palm trees. To be sure, some aspects of the city resemble the Russia of imagination. The city’s moldering landmark hotel, the hulking Zhemchuzhina, or Pearl, is a creaky rat’s warren of rooms done in unrenovated Soviet style. The city itself is easygoing and tolerant; rival ethnic groups from the region’s demographic mixed salad get along without conflict. Yet human perfection is not a concept that comes readily to mind in Sochi’s cafes and hotels, which combine Moscow rates and the kind of service that does not inspire a return trip. In summer, the third-class cabins of overnight trains disgorge their human cargo, and bodies unsuited to skimpy Lycra crowd the beaches, which arc made of stones.

Still, under the influence of my friends, and maybe of the wine, I was beginning to see Sochi’s possibilities. Two fingers tapped my shoulder. Turning in my seat, I looked into a face streaked with grime. “You are from America?” the man asked. There were two others in his party, sitting conspiratorially at a neighboring table. The man extended a hand, which was dirty, and I shook it. “I love America,” he said. His companion across the table said, “America is cool.” Here it was: an example of that irrepressible Olympic brotherhood. But then the man moved in close and whispered in my ear: “They know me in all the jails in America.”

I didn’t ask for details, and I knew he wasn’t kidding. The Sochi Olympics have become a magnet for criminal elements drawn from all over, the kind of people whose reach extends even to the United States. Russia’s most powerful crime bosses have traditionally hailed from this very region, the northern Caucasus. Ded Khasan, long the acknowledged head of Russian organized crime, was an ethnic Kurd from Georgia. Khasan, whose real name was Aslan Usoyan, traced his criminal origins to the Soviet Union of the 1960s. With the help of political and police connections, the Khasan organization facilitated the Afghan heroin trade, laundered money abroad, and traded in stolen goods, eliminating rivals as necessary. Khasan oversaw his network—part of an international organized-crime presence that may number 300,000 soldiers—from adjoining Caucasian shashlik restaurants in Moscow, Stary Phaeton (the Old Phaeton) and Karetny Dvor (the Carriage House). Khasan knew Sochi well—he had survived an attempted hit there 16 years earlier, when a gunman aimed at him and missed.

The Olympics have poured money into Sochi, and organized crime has been there all along the way. When the International Olympic Committee (I.O.C.) awarded the 2014 Winter Olympics to Russia, on July 4, 2007, billions of dollars began moving to the North Caucasus. Khasan assigned one of his lieutenants, an Armenian named Alik Minalyan, to shake down construction firms that had won Olympic contracts. Khasan’s network also took a cut from labor agreements, real-estate transactions, and goods flowing through the seaport.

The only problem for Khasan was a fight-for-supremacy feud with a fellow Georgian, Tariel Oniani, known as Taro. In February 2009, Khasan’s man Alik was gunned down in Moscow—presumably on Taro’s orders. In July of that year, members of the two factions met on Taro’s yacht on the Moscow River, seeking to hammer out their differences. Tipped off, police went into action. Commandos in balaclavas descended from a helicopter onto the yacht’s roof. Authorities arrested 37 men in all. So much for the peace conference. In 2010, Eduard “the Carp” Kakosyan, Alik’s successor as head of Khasan’s Olympic racketeering business, was shot to death in central Sochi.

Khasan continued to operate from the two Moscow restaurants. One afternoon last January, as he entered Stary Phaeton, a sniper’s bullet hit him in the neck. Another struck him in the back. He was dead within minutes. It is widely assumed that Taro ordered the hit, though Khasan did not suffer from a lack of rivals. With Khasan out of the way, and control of Sochi loosened, a host of criminal networks have worked their way into the Olympic bazaar.

In the six and a half years since the I.O.C. awarded the 2014 Winter Olympics to Russia, the state has disbursed more than $50 billion to prepare Sochi and its surroundings for the Games. Most of that money is being paid directly from the federal budget to various contractors. Billions go through Olympstroy, the state Olympic construction authority, which has had four directors in six years. These will be the most expensive Olympic Games ever mounted. (The Games in Vancouver, site of the previous Winter Olympics, cost only $7 billion.) How much of Russia’s $50 billion has gone to fund Olympics-related activity and how much covers kickbacks, bribes, and shakedowns is anyone’s guess. Basic bookkeeping is not prioritized. A Moscow friend, a foreigner who has worked as a senior manager for several Olympics, says, “I have never seen a budget in Sochi.”

The path to Sochi’s successful bid started on a trip to Austria in 2002, when Vladimir Potanin, one of Russia’s most influential oligarchs, joined Russian president Vladimir Putin and Austrian chancellor Wolfgang Schtissel for an afternoon of skiing during a World Cup competition. Taking in their Alpine surroundings, Potanin and Putin asked themselves why Russia lacked a ski resort of Austrian quality. Potanin’s firm, Interros, hired Paul Mathews, an American who lives on the slopes of the Whistler resort, outside Vancouver, to look into the options. Mathews is one of the most respected winter-resort designers in the world, and he had scouted the North Caucasus before. The area is about the size of the Alps, with elevations to match, but its history of strife and economic depression has left it underdeveloped. Mathews focused on Krasnaya Polyana, a mountain village where a flank of the Caucasus rises steeply from the Mzymta River, 30 miles from the Black Sea coast. Potanin announced the start of construction on his ski resort, which would be called Rosa Khutor, or Rose Farm, at a Moscow press conference in 2005. By February 2007, I.O.C. representatives had arrived in Krasnaya Polyana on an inspection tour, and Mathews was prepping Russian Olympic authorities. “I told them it would be good if we picked up the garbage on the road from Sochi to Krasnaya Polyana,” Mathews says. “And it would be good if the road had a white line down the middle of it.”

Olympic venues are often spread across numerous towns hundreds of miles apart. Sochi will have just two sites. The skating competitions will play out in Adler, a coastal district south of central Sochi. The skiing events will take place in Krasnaya Polyana, on or near the Aibga Ridge of the northwestern Caucasus. Most of the venues have been ready for a year or more. But some, particularly the Olympic stadium, have experienced a series of setbacks that have left construction far behind schedule.

Sochi is a one-lane town with grave logistical challenges—an example of the I.O.C. making an “interesting” choice under the cover of spreading its message, while currying political favor with a country that is not afraid to spend. Herein lies the meaning of these Olympics. In the Russian state’s continuing drive to prove a point—namely, that Russia is a player—it will attempt to demonstrate that mounting the Winter Olympics in a subtropical city is an impossibility that it can achieve. During the Putin years, Russia has been preoccupied with doing things “the Russian way,” whether the Russian way makes sense in a particular situation or not.

Beneath every modern Russian achievement lies a hidden story that may be more telling. In Sochi, the hidden story is about Putin, and about the small circle around him, who have profited handsomely from the construction. The winners are a tight group, with a history going back to early careers in St. Petersburg. Russian prime minister Dmitry Medvedev was once the C.E.O. of Gazprom, the world’s largest extractor of natural gas and Russia’s biggest company. In the 1990s, he and Alexey Miller, the current C.E.O. of Gazprom, worked in the St. Petersburg city administration, along with the young Vladimir Putin. In St. Petersburg, they met Boris and Arkady Rotenberg. The Rotenberg brothers once instructed Putin in Sambo, a martial art developed in the 1930s to aid Soviet infantrymen in close-quarters combat. The Rotenbergs made their first fortune in the gas-pipeline business, as Gazprom’s principal supplier. They also control the largest thermal-generation company in the world, a Moscow-based firm called TEK Mosenergo, a subsidiary of Gazprom. Mosenergo won the contract to build a new power plant in Adler, meant to feed the electricity needs of the Olympic skating venues. All told, Rotenberg-controlled companies have won Olympics-related contracts worth $7.4 billion. In the last two years, according to a report compiled by Russian political opposition figures Boris Nemtsov and Leonid Martynyuk, the Rotenbergs’ personal fortune has increased by $2.5 billion.

The bus to Krasnaya Polyana wound through a craggy gorge and up into the clouds. Construction crews worked far below on a new rail line. When the clouds fell away, I could see the snowcapped peaks of the mountains looming far above. At the bobsled track in the town, Russian skeleton athletes trained on a run that produces speeds of up to 84 miles per hour. Farther up the valley, at the Laura ski resort, owned by Gazprom, several dozen military officers in camouflage fatigues emerged from a conference and filtered through the pro shop. Looking across the Mzymta River, I could see Potanin’s sprawling Rosa Khutor resort; should there be no snow at all during the Olympics, there are storage facilities at Rosa Khutor for 700,000 cubic meters of it.

I was unable to visit the ski jump, whose history has been troubled. A year ago, Vladimir Putin came to Sochi and inspected several projects that were running behind schedule. The ski jump came under particular scrutiny. Engineers had had to shift the jump’s placement several times, after it was discovered that initial sites were geologically unstable. Then a new road had to be built up into the mountains, at a cost of $200 million. Akhmed Bilalov, a vice president of the Russian Olympic Committee, was in charge of all this. Bilalov was also the president of Northern Caucasus Resorts, a state-owned company responsible for building tourist facilities in the region. Putin put on a show for the cameras, asking his assistants for the amount of the original budget: $40 million. When Putin’s lieutenants then informed him that the ski jump’s cost had reached $265 million, Putin arched his eyebrows. “Nice work,” he said. The following day, Bilalov was relieved of his duties, and he apparently fled the country. Northern Caucasus Resorts is now controlled by Sberbank, a state-owned financial institution. Sberbank’s chairman is German Gref, who, needless to say, had worked with Putin in the St. Petersburg city administration.

Demotions, Bilalov-style, are common in Russia, where the whimsy of power may undercut anyone’s standing, anytime. On the menu at the Platan Yuzhny Hotel, in Krasnodar, the administrative capital of the region that includes Sochi, there is an item called “Disgraced Oligarch Salad” (grilled scallops, with mixed lettuce and extra-virgin olive oil).

The Sochi Internal Affairs department has conducted numerous investigations into Olympstroy and filed criminal complaints, alleging that the Olympic agency and its contractors operated a kickback scheme related to the construction of the Olympic stadium, the main hockey rink, and various other properties. The total in stolen funds, according to prosecutors, approaches $800 million. Not a single case related to Sochi development has made its way into court. There is speculation that, when the Olympics are over, the state wifi launch a series of court cases designed to transfer the ownership of several large construction companies to people close to the Kremlin. This type of state-sponsored theft is routine in Russia.

Sochi had bid for the Olympics twice before, in 1998 and 2002. These were not serious efforts, and they foundered on the fundamental challenge of creating a suitable transport link between the coastline and the mountains. There was an existing road, but it could not accommodate Olympic traffic. Paul Mathews remembers looking over some of the early bid plans. “They had a gondola running for 50 miles across the sky,” he told me. “It looked like a child had drawn them.”

This time, taking the problem seriously, Russian officials devised a combined rail line and highway link to connect Adler and Krasnaya Polyana. It is a complex undertaking, requiring 45 bridges and 12 tunnels, along challenging mountain and river terrain. This would become the largest construction contract in Russian history—initially estimated at $2.85 billion and now pegged at $9.4 billion— a lot of money for a 30-mile road that in all likelihood will rarely be used once the Olympics are over. Naturally, Russian Railways, the state railroad monopoly, would lead the project. The president of Russian Railways, Vladimir Yakunin, had once been the first secretary of the Soviet Mission to the U.N. In 1991 he entered private business in St. Petersburg, where he bought a dacha next door to one owned by Putin, beginning a long association. Yakunin returned to government only when public life had proved itself to be a reliable path to wealth. There has been speculation that he will succeed Putin as Russian president.

Russian Railways is the second-longest railway network in the world, with announced assets of roughly $100 billion. This total could likely be much higher, as Russian Railways is a model of corruption and kickbacks, with company cash flowing to personal accounts offshore. When the decision was made to build the Adler-Krasnaya Polyana link, officials did not extend an open bid for general contractors. The work was given to two companies: Transyuzhstroy, a builder of railway facilities, and SK Most, which builds railroad bridges and tunnels. Transyuzhstroy’s founders include Oleg Toni, a Yakunin lieutenant and the vice president for construction of Russian Railways. Yakunin’s wife, Natalia, sits on the board of directors of a bank owned by the majority stakeholders of SK Most. Gennady Timchenko, another St. Petersburg ally of Putin’s and the co-founder of Gunvor, one of the world’s largest oil-trading firms, holds a 25 percent stake in SK Most. It doesn’t take an expert in construction to understand that haste or thrill, or both, were applied to the building of the new Krasnaya Polyana train station. Ceiling slats are too short to cover their allotted space. Whoever installed the floor tiles failed to measure before beginning the task.

Only Russians know how difficult it is to persist in Russia. If things get too difficult for the rest of us, we can simply leave. Once the Rosa Khutor resort was past the halfway mark, Vladimir Potanin realized that he needed an experienced professional to finish the job. In April 2007, he hired Roger McCarthy, the co-president of the mountain division at Vail Resorts. Some of McCarthy’s colleagues couldn’t understand why he was leaving his cushy position at Vail to work for the Russians. McCarthy had a ready answer. “I’d tell them, ‘Don’t forget who put the first man in space.’ And he went round and round. He didn’t just go up and come down.” (A portrait of cosmonaut Yuri Gagarin hangs in the Russian Railways office in Krasnaya Polyana, as if to offer inspiration.) In 2008, McCarthy left Rosa Khutor. “The stuff I really wanted to do had been done,” he says. “The Russians did their own things inside the buildings—steep stairs with short treads and big risers—just dumb shit, things that were frustrating. So in the end, between family and the ease of working in North America, the choice wasn’t that tough.”

Even as construction began on the rail-highway link, builders broke ground on a private compound outside Moscow. The property was registered to a Cypriot company owned by one of Vladimir Yakunin’s sons. The compound, on 170 acres, includes three chateaux built of limestone imported from Germany, clad in Italian marble. A worker told Russian media that in one of the chateaux there was an immense refrigerator designed to store fur coats.

Vladimir Putin himself keeps two dachas in the Sochi region. One sits near Medvedev’s own dacha on the property of the Gazprom resort. To learn about his second dacha, I visited Trikoni, a restaurant situated along Krasnaya Polyana’s main artery, Protectors of the Caucasus Street. Trikoni is a locals’ hangout, existing long before any I.O.C. official ever mispronounced the name of this village as “Pollyanna.” I met a contact, whom I’ll call Roman, a builder who supplied labor for Putin’s second dacha. He told me that it is called Lunnaya Polyana, or Moon Field, a reference to the barren landscape upon which it sits. Lunnaya Polyana is located within Sochi National Park, which is part of a UNESCO World Heritage Site. In 2004, Honka, a Finnish company that specializes in high-end wooden homes, supplied building materials for Putin’s dacha. (Honka declined to comment about the project.) It is protected by some of the 30,000 Spetsnaz special-forces troops that the Russian military has dispersed into the mountains, there to live in tents until the Olympics are over. Putin has built himself two massive chalets, two helipads, a power station, and two ski lifts, servicing surrounding peaks. According to UNESCO, the Russian state built a private dacha on a UNESCO site under the guise of conducting meteorological research.

The Spetsnaz forces were up in the mountains not just to protect Putin. Disrupting the Sochi Olympics is the stated goal of the Islamic insurgency that is headquartered just over the mountains, in the towns and villages of North Ossetia, Chechnya, and Dagestan. The police are accustomed to the ways of organized crime—many of them are on its payroll, after all—but terrorism is the Olympic wild card. On the veranda of the Four Peaks Hotel restaurant, in Krasnaya Polyana, Igor Bogatov lit a cigarette, joining me for a conversation. Bogatov is a major in the body that handles Russia’s internal policing.

We discussed the events of February 18, 2011. A bomb exploded on a ski lift on Mount Elbrus, the tallest peak in Europe, located 150 miles southeast of Krasnaya Polyana, in Russia’s restive Kabardino-Balkaria region. Several cable cars fell to the ground. No one was hurt. But earlier that day a group of militants opened fire on a car of tourists, killing three people.

On September 9, 2013, a bomb exploded underneath the car of Dmitry Vishernev, first secretary of the Russian Embassy in Abkhazia, which borders Krasnaya Polyana. (In the course of the 2008 Russia-Georgia war, the region of Abkhazia broke away from Georgia, establishing a pseudo-sovereign entity recognized by Russia and only four other countries.) The bomb failed to do the job. An assailant approached the car. He shot Vishernev and his wife, Olga, killing them both—Vishernev died immediately, Olga a few days later. The Russian authorities will close the border to Abkhazia for the Olympics. They will restrict access to Sochi to cars carrying local plates. Russians do security well, and they do it all the way. But they are still worried. “There are too many new people around here,” Bogatov told me, crushing a cigarette under his boot.

As the Olympics approach, corporate sponsors arc beginning to think twice. Executives at Marriott, which had planned to open three hotels on Olympic territory, stated in May that they were canceling the company’s involvement with Sochi. They were unsure whether the real-estate developments of which their hotels were a paid would be finished in time for the Games. They also had to be concerned about the questionable post-Olympics market. Marriot remains in business there, but it won’t comment in any detail. Olympic organizers have arranged for several cruise ships to dock at Sochi’s port, should there be a shortage of hotel rooms. “The boats might be the best places to stay,” a luxury-tour operator told me in Moscow. “They will be staffed with Filipinos, and the service will be international-standard. You’ll step off the boat and have terrible service in Sochi.”

I joined the local press when Russian prime minister Dmitry Medvedev arrived to tour the new power plant in Adler. He was joined by Alexey Miller, the Gazprom C.E.O. During the four years he did Putin the favor of occupying the Russian presidency, Medvedev projected the demeanor of a man who longs for a party invitation that never arrives. Putin was the one who craved these Olympics—for the ability to rouse nationalist feeling, to signify his rule, and to demonstrate Russia’s ability to execute complex projects. Those closest to Putin craved the Olympics for reasons of gain. Ordinary Russians cannot be blamed for hoping that some profit might also come their way.

A plant worker had a question for the prime minister. “I am a mother of two children,” she said, “and I can’t find a place in a kindergarten. What should I do?” Medvedev blurted out a reply: “We are on the way to resolving this problem.” A man from his retinue quickly stepped forward and whispered in his ear. Medvedev listened intently, attempting to maintain eye contact with his questioner. While he did this, a hockey puck skittered across an LCD screen behind him. The puck morphed into a turbine, which then powered a digitally rendered electrical station. Medvedev returned his attention to the power-plant worker, whose face was expectant. The aide had apparently supplied Medvedev with no data that could alleviate the woman’s concerns. The prime minister fell back on words that many Russians under Putin have heard all too often. “Please,” Medvedev told her. “Wait a little.”

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