Sochi Hotel Debacle Indicates Systemic Problems in Russia

An unfinished hotel in Sochi. Ryan Koopmans/Polaris

An unfinished hotel in Sochi. Ryan Koopmans/Polaris

Sochi appears to be a huge management and PR disappointment. Journalists arriving to the Olympic Games are reporting major problems with the hotels, such as broken elevators and a lack of hot water and heat.

This is indicative of broader, systemic problems — and it’s not shocking, as hospitality service in the former Soviet Union was notoriously horrendous. In fact, many Western fast food providers and hotel operators in Russia refused to hire anybody with previous Soviet experience in food and hospitality industries. Russia lacks a tradition in service industries, suffers from opaque business practices, and is riddled corruption– all factors which led to the fiasco we see now.

Some building contracts in Sochi were given to companies without bidding, and construction projects had very little public scrutiny. Even though 100 percent of the Sochi Olympics is state-funded, there is no public disclosure of the expenditures. The main contracts went to the brothers Rotenberg – Russian President Vladimir Putin’s childhood friends – and to two other Russian companies affiliated with people in charge of the Olympic projects.

Western hospitality companies were not hired in sufficient strength, and quality control of the built infrastructures and services is obviously lacking. Corruption, systematic violation of building codes, and the use of unskilled migrant labor resulted in poorly constructed facilities that may pose a danger to the athletes and others in Sochi. Unfortunately, this may be a sign of broader malfeasance. If similar failures and glitches appear in the security perimeter imposed on Sochi, terrorists may take advantage of it.

Corruption in Sochi is indicative of broader corruption throughout Russia. The initial price tag for the Olympic Games of $12 billion has grown to $50 billion, more than was spent on all the previous Winter Olympics combined. About 50 to 60 percent of the entire Olympic budget has been stolen by Russian officials. This would explain some of the massive costs associated with many of the Olympic-related construction projects. For example, the cost of building just one 30-mile-long highway in Sochi was three-and-a-half times the cost of the American Mars program.

The reputation of Russia and its leader is riding on Sochi, not just as a competitor in sports events, but as a competitive venue in major global economic undertakings, including large-scale and complex investment projects. The issue is transparency and compliance, and the performance is much to be desired.

Russia has to address its problems of corruption and its ineffective hospitality industry to improve its reputation as a desirable large scale investment target. It needs to allow – by law — fair bidding by Western companies in its construction projects, which would benefit the Russian economy and provide a huge business opportunity for Western companies as well. By curbing its rampant corruption, Russia would not only create a better business environment but attract foreign investment. It should also address the safety violations during the construction of its infrastructure. Finally, the hospitality services are in need of drastic improvement, and the best way to address that issue is by inviting professionals from other countries to provide training and expertise in this field.

http://blog.heritage.org/2014/02/06/sochi-hotel-debacle-indicates-systemic-problems-russia/

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